Basic material stocks also performed poorly, down 1.30%; energy shares lost 0.42%. Industrial, technology, and health-care shares led the board market higher.
We didn’t have much to trade on beyond the Detroit 3 bailout that was officially announced Friday morning. The news may have assuaged some short-term concerns over the issue, which likely provided stocks with a little boost – futures were pointing to a lower open, but reversed course when the news broke.
Market Activity for December 19, 2008
The Bush Administration’s decision to lend GM and Chrysler $17.4 billion so they can avoid bankruptcy was the big news of the day. (The two carmakers are virtually bankrupt as it is, as management has stated they can’t make it through year-end without the funds.) The deal will extend $13.4 billion now and another $4 billion in February. The car makers will provide the government with non-voting warrants, yet the exact amount was unclear.
Ford will not be included, I guess because they haven’t screwed up as royally as the other two. The company has stated its in good enough shape that they do not need this sort of financing. Maybe they’ll learn from this mistake. As former presidential candidate Fred Thompson has put it, “there are strict criteria to receiving taxpayer funds: you must screw up on a monumental scale.” Got that Ford? I’m sure they’ve learned their lesson; they won’t make that mistake again.
Ford is currently seeking a credit line from the government. Management says they may not need to tap it if the government meets this request. I’m guessing that assumes car sales rebound in quick order, which seems pretty unlikely.
Anyway, the deal with GM and Chrysler does have “stipulations.” The companies must show their viability by March 31 by reducing debt and current cash payments for future health care obligations. That’s pretty vague, for a reason I’m sure. In any event, it won’t matter because the stipulations are non-binding, which doesn’t really make them stipulations now does it. Apparently, Washington has re-defined another term for us. We thank them.
It is difficult to blame Bush too much for this decision. What’s the guy supposed to do with the labor market in the shape it is in? He’s kicking the issue down the road for the next administration, that’s when the real checks will begin to rip off.
What the Detroit 3 really need to become viable is to enter Chapter 11 bankruptcy (this is not Chapter 7 liquidation; it’s reorganization). This way they can streamline their primary workforce and dealerships. Currently the three have way too many assembly line workers, far too many dealerships and a layoff structure that makes competiveness impossible.
In term of the workforce and dealer outlets, the firms pretend as if they still enjoy 50% market share when in reality it is 18%.
In terms of the layoff compensation structure, GM pays the difference between their former wages and what jobless benefits pay. Then when the jobless benefits run out GM pays 95% of their wages for two years. Then, if you have the seniority, a former worker has a chance to enter what’s known as the jobs bank, which pay 95% of wages to do crossword puzzles etc., for years This is a joke and not a competitive business model. The government can write them checks until the cows come home, but until the aforementioned issues are dealt with they simply can’t be viable. If the government demands that the Detroit 3 make smaller and smaller cars, in place of producing what the market demands, they’ll simply become even more dependent on government financing. Unless, of course, the government mandates what cars consumers may buy, but that’s getting into another issue.
We’ve got a quiet Christmas-shortened week ahead of us and no economic data releases today.
Tomorrow we’ll get the final revision to Q3 GDP, which should show the economy declined 0.8% at an annual rate – the estimate is for the figure to remained unchanged from the previous estimate, -0.5%. No one will care about this release though as the Q4 reading will be the big one, likely to show the economy contracted at a 6.0-6.5% real annual rate, the worst reading since the spring of 1982.
Tomorrow we’ll also get new and existing home sales (November). Rarely are these released on the same day, but the holiday-shortened week has them crammed into one.
Pending homes sales remained dire in October, so existing sales were surely extremely weak last month, same will be true for new homes.
On Wednesday we get initial jobless claims (a day earlier than usual) and personal income and spending for November.
Have a great day!
Brent Vondera, Senior Analyst
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