Wall Street focus: Autos and the Fed

Wall Street focus: Autos and the Fed

Investors consider the outlook for Detroit’s Big Three, a likely interest rate cut from the central bank and earnings from Goldman Sachs, Oracle and others.

By Alexandra Twin, CNNMoney.com senior writer

Investors return Monday for the last full trading week of what has been for many an unbelievable, and unbelievably difficult, year on Wall Street.

“I think, at the very least, the current stock market prices probably already reflect expectations of a depression or a type of recession that is worse than what we are likely to get,” said Ken Kam, portfolio manager of the Masters 100 (MOFQX) fund.

However, that doesn’t mean investors are ready yet to move back into the market more consistently, he said.

Reports are due this week on housing, manufacturing and consumer prices. Goldman Sachs, Best Buy and Oracle are among the companies expected to report weaker results than they did a year ago.

Also this week, the Federal Reserve is widely expected to cut the fed funds rate, a key short-term interest rate, by a half-percentage point to 0.5%. That would mark the 10th rate cut since 2007.

Amid the housing market collapse, credit market freeze and global recession, stocks have been hit hard.

As of Friday’s close, the S&P 500 is down 40% for the year and 44% since closing at an all-time high of 1565.15 in October 2007. The declines had been sharper though late November, with stocks hitting what some market analysts are calling a bear market bottom on Nov. 20.

After hitting that low, the S&P 500 rallied 21% in less than thee weeks. But last week it stalled, as a bailout for the beleaguered automakers hit government gridlock and corporations announced thousands of job cuts amid the recession. (For more details, click here)

Last week the Senate shot down a proposed $14 billion auto bailout bill. But the Treasury Department said it would be willing to give the automakers some of the $700 billion in the bank and Wall Street bailout already approved by Congress. Investors returning to work this week will likely have a better sense of where the automakers stand. And the removal of that uncertainty should help stocks in the short-term. (Full story).

Yet “beyond the automakers, we’re still dealing with a weak outlook for the economy,” said Bill Stone, chief Investment Strategist, PNC Financial Services Group

In the week ended Dec. 10, investors pulled roughly $2.8 billion out of equity mutual funds, after pulling $12.1 billion out of funds in the previous week. Investors have cashed out of equity mutual funds in 17 of the last 19 weeks.
Economy

Monday: The December NY Empire State index, a regional reading on manufacturing, is expected to improve modestly to a reading of minus 27 from a reading of minus 25 in November. The previous number was the weakest in the survey’s seven-year history.

The two-day Federal Reserve policy meeting begins.

Tuesday: Goldman Sachs and Best Buy report earnings before the start of trade. Goldman (GS, Fortune 500) is expected to have lost $3.51 per share versus a profit of $7.01 a share a year ago, according to Thomson Reuters estimates. Best Buy (BBY, Fortune 500) is expected to have earned 25 cents per share versus 53 cents a share a year ago.

Economic reports are due on housing and consumer inflation.

November housing starts are expected to slow to a 730,000 annual unit rate from a 791,000 rate in October. November building permits are expected to have slipped to a 700,000 annual unit rate from 708,000 in October. more

Deal on $15 billion auto bailout

Deal on $15 billion auto bailout

White House, congressional Democrats reach agreement that could bring quick vote on stopgap rescue plan.

The White House and leading congressional Democrats have reached an agreement on legislation to provide a stopgap bailout to U.S. automakers, according to officials from the administration and Congress.

White House Deputy Chief of Staff Joel Kaplan cautioned at a press briefing that he had not seen the final language of the bill but said that great progress had been made on bridging differences with congressional Democrats.

Kaplan said administration officials would push reluctant Republican lawmakers to support the deal.

A vote could take place in the House as soon as Wednesday.

While most House Republicans have been strongly opposed to the auto bailout from the beginning, multiple House Republican aides concede that the Michigan Republicans and perhaps others from the auto belt in the Midwest are expected to vote for the agreement, giving House Democrats the votes needed to pass the bill.

But chances for quick passage in the Senate are far more questionable due to rules that give the Republican minority more power to block the aid. It is possible vote there might not occur in until the weekend.

The move could provide the $15 billion cash that General Motors (GM, Fortune 500) and Chrysler LLC would need to avoid filing for bankruptcy later this month or early next year, allowing them to continue operations through the end of March and letting the new Congress and new administration reach an agreement on a longer-term solution. It also would give the companies time to negotiate with creditors and the United Auto Workers union on additional concessions needed to stem their ongoing losses.

Ford Motor (F, Fortune 500), which has more cash on hand than its U.S. rivals, is not expected to tap into this bailout, at least in the coming months.

The agreement came after Democrats dropped a provision in their previous draft of the bill that would have prohibited automakers from continuing their support of lawsuits against states that have drafted more stringent emission standards than current federal rules.

“We do not believe there was any chance the legislation would pass if that provision remained in,” said Kaplan, the White House aide.

Some Republicans have threatened a filibuster, which could delay and even potentially block a vote on the bill. more

Congress, White House Near Agreement on Auto Aid, Frank Says

Congress, White House Near Agreement on Auto Aid, Frank Says

Congress and President George W. Bush are negotiating the final details of a $15 billion measure to rescue domestic automakers without forcing the ouster of their chief executives, House Financial Services Chairman Barney Frank said.

By John Hughes

The measure will likely be approved by Congress and signed into law this week, Frank said on CNBC. About $10 billion more aid may be needed to keep the companies operating through March, and Bush should tap some of the $700 billion financial-rescue package for additional aid, Frank said.

U.S. Auto Chiefs Appeal to Congress for Emergency Aid

U.S. Auto Chiefs Appeal to Congress for Emergency Aid

The Big Three automakers renewed their plea for an emergency federal bailout, as the head of General Motors Corp. told a deadlocked Congress the industry has made some wrong turns and economic forces pushed it

Toyota Suffers First Credit Rating Cut in 10 Years

Toyota Suffers First Credit Rating Cut in 10 Years

Toyota Motor Corp.’s debt rating was cut by Fitch Ratings, the automaker’s first downgrade in 10 years, as the slump in U.S. car sales drags down earnings at the company with the industry’s best credit.

By Makiko Kitamura and Tetsuya Komatsu

Nov. 26 (Bloomberg) — Toyota Motor Corp.’s debt rating was cut by Fitch Ratings, the automaker’s first downgrade in 10 years, as the slump in U.S. car sales drags down earnings at the company with the industry’s best credit.

Fitch cut Toyota’s senior unsecured debt rating two levels to AA from AAA with a negative outlook on the company, it said in a report today. The shares dropped 4.6 percent, the most in two weeks, to close at 2,985 yen on the Tokyo Stock Exchange.

A lower debt rating raises borrowing costs for Toyota, potentially hindering its ability to offer interest-free loans to boost sales in the U.S. Toyota, set to topple General Motors Corp.’s 77-year reign as the world’s largest automaker this year, may also have its worst share performance since at least 1975.

“Toyota is suffering severely from the ongoing turmoil in the global automotive sector,” said Tatsuya Mizuno, director at Fitch Ratings, in the report. “The negative developments in the industry are so substantial and fundamental that even the strongest player — Toyota — can no longer support a `AAA’ rating.”

The rating cut is the company’s first since Moody’s Investors Service reduced its long-term debt rating from Aaa to Aa1 in 1998. Moody’s raised the company back up to Aaa in 2003. Standard & Poor’s has rated the carmaker AAA since 1985.

“We are closely monitoring Toyota and especially the U.S. market,” Moody’s analyst Junichi Yamaki said. He declined to say whether the rating may be revised. S & P analyst Osamu Kobayashi couldn’t be reached at his office.

Cash on Hand

Toyota had 1.85 trillion yen ($19.5 billion) in cash and near cash as of Sept. 30 and earned 169.5 billion yen ($1.79 billion) in operating profit in the three months ended Sept. 30. That compares with a $4.2 billion operating loss for GM, which said it may run out of cash by the end of the year.

“Toyota’s financial foundation is solid, and I don’t think there has been such a drastic change to warrant a two-level downgrade,” said Yasuhiro Matsumoto, senior credit analyst at Shinsei Securities Co. in Tokyo. “I don’t see an impact on the company’s new bond issues.”

Toyota has 289 billion yen in debt coming due this year, and owes 2.52 trillion yen next year, according to Bloomberg data.

Toyota’s 150 billion yen 1.33 percent bonds maturing in 2012 traded at 28 basis points above Japanese government debt yesterday, up from 20 basis points at the beginning of 2008, data compiled by Bloomberg show.

Share Performance

Toyota’s stock has dropped 51 percent this year, set for the worst annual performance since at least 1975. The company is still valued at 18 times GM and Ford Motor Co. combined. Toyota spokesman Hideaki Homma declined to comment on the rating change. more