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

Auto bailout collapses in Senate

Auto bailout collapses in Senate

Negotiations to bring measure up for vote fall short, possibly dooming GM, Chrysler to bankruptcy.

By Chris Isidore, CNNMoney.com senior writer

Hopes for Congressional approval of a bailout of the U.S. auto industry appeared to fall apart late Thursday night as Senate leaders said Democrats and Republicans were unable to reach a deal that could get the bipartisan support needed to bring the measure for the vote.

The Senate voted 52-35 to bring the measure for a vote, but that was short of the 60 votes needed to advance the legislation. The failure followed the collapse of negotiations between Senate Democrats and Republicans seeking a compromise that all sides could accept.

This development could possibly doom General Motors (GM, Fortune 500) to a bankruptcy and closure in the coming weeks, with Chrysler LLC potentially following close behind.

While Ford Motor (F, Fortune 500) has more cash on hand to avoid an immediate crisis, its production could be disrupted by problems in the supplier base, as could the production of overseas automakers with U.S. plants such as Toyota Motor (TM) and Honda Motor (HMC).

The bill would have provided $14 billion in federal loans as a stopgap measure until the new Congress and the incoming Obama administration could reach a longer-term solution.

However, the Big Three could still wind up getting government funding. Bush officials warned wavering GOP senators earlier Thursday that if they didn’t support the legislation, the White House will likely be forced to tap funds from the Wall Street bailout to lend them money, two Republican congressional officials told CNN.

The White House has been strongly opposed to using any of the $700 billion in bank bailout funds to help the auto industry, but the Bush administration has also expressed that the Big Three must get some financial assistance soon.

White House Press Secretary Dana Perino said earlier Thursday that the economy is too weak right now to weather bankruptcies by one or more automakers.

Hopes for compromise quickly faded
Earlier in the evening, it appeared that the two sides were getting close to an agreement on the bailout. But just after 10 p.m., Senate Majority Leader Harry Reid, D-Nev., announced a failure to reach an agreement and that he would call for a procedural vote to test support for the measure.

“We have worked and worked and we can spend all night tonight, tomorrow, Saturday, and Sunday, and we’re not going to get to the finish line,” Reid said on the Senate floor before the vote. “That’s just the way it is. There’s too much difference between the two sides.”

Senate Minority Leader Mitch McConnell, R-Ky., said the sticking point was the United Auto Workers union’s refusal to put employees at U.S. auto manufacturers at “parity pay” with U.S. employees at nonunion plants operated by foreign automakers in the United States. 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

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

Detroit: Wait until after next year

Detroit: Wait until after next year

Congress wants the Big Three to produce a plan for profitability before it will approve a bailout. This could be within reach…but not until 2010.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — A profitable U.S. auto industry just around the corner? Given the crisis hitting the industry, it sounds about as realistic as flying cars.

Congressional leaders are demanding to see details by Dec. 2 about how U.S. automakers will start making money again before they’ll agree to even have a vote on the $25 billion federal loan package the industry is seeking.

Many critics of the bailout suggest that automakers have shown no indication of how they’ll return to profitability. Some argue the Big Three U.S. automakers are doomed to fail even if they get loans from the government.

But General Motors, Ford Motor and Chrysler have already made sizable cuts in production and staffing throughout the year. Additional cuts will come in the next few months, and some as soon as later this week.

While it’s tough to offer guarantees of profitability with so much uncertainty about the economy, if the automakers get the federal help they are asking for, the Big Three could be back in the black as soon as 2010.

With that in mind, here’s what GM, Ford and Chrysler are likely to point out in their business plan to Congress.
Lower employment costs

GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler have been downsizing for years and have all continued to make even deeper cuts this year which will save them billions of dollars.

GM plans to cut more than 7,000 salaried and contract employees this year as it aims to trim nonunion labor costs by 30%, or about $2 billion annually.

Those departures did not begin until this quarter and most of the remaining employees should leave by the end of the year. So some of the savings won’t take effect until next year. And the cost of the severance and retirement packages is causing steeper losses in this year.

Ford and Chrysler plan similar size cuts in their non-union staff. Chrysler plans to identify by Wednesday 5,000 salaried and contract staff who will leave the company, about 25% of that remaining workforce.more

Asian Markets Recover, European Shares Up Slightly

Asian Markets Recover, European Shares Up Slightly

By KEITH BRADSHER and BETTINA WASSENER
Published: November 20, 2008

HONG KONG