Chevron Corp. said Friday its third-quarter profit more than doubled on the back of record crude prices this summer, though worldwide production fell during the period.
The San Ramon, Calif.-based company, the second-largest U.S. oil company, said it made $7.89 billion, or $3.85 a share, in the three months ended Sept. 30, versus $3.72 billion, or $1.75 per share, at the same time last year.
Analysts were expecting average earnings of $3.25 per share based on a survey by Thomson Reuters.
Revenue shot up 43% to $78.87 billion from $55.2 billion.
Shares in premarket trading slipped 19 cents to $73.99.
Chevron (CVX, Fortune 500) capped off a continued string of robust quarterly profit reports from the world's major oil companies, including another U.S. corporate profit record for No. 1 Exxon Mobil Corp. (XOM, Fortune 500)
Crude prices peaked at $147 near the start of the quarter in mid-July before embarking on a dramatic slide that has continued into the fourth quarter. When the third quarter ended Sept. 30, benchmark crude prices were still around $100 a barrel. In early trading Friday, they slipped below $64 a barrel.
"Our disciplined capital spending and tight control over costs remain extremely important in today's uncertain economic climate," said Chevron chairman and chief executive Dave O'Reilly. "Our strong balance sheet enables Chevron to continue investing in attractive projects that increase the production of oil and gas and improve the efficiency of our refinery network."
Chevron said earnings from its exploration and production, or upstream, business rose about 80% in the quarter to $6.18 billion, buoyed by crude prices.
However, global production fell nearly 6% to an average of 2.44 million barrels of oil equivalent a day, hurt in part from late-summer hurricanes that shut down output in the Gulf of Mexico.
At its U.S. upstream arm, Chevron said the average sales price for a barrel of crude and natural gas liquids was $107 in the third quarter, up from $67 a year ago.
Friday, October 31, 2008
Sunday, October 26, 2008
Tough transition for new president
The next United States president won't have long to savor victory after Election Day.
Facing the worst economic storm since Franklin Delano Roosevelt won the 1932 election, this president-elect will have to quickly announce his key staffers and policy priorities to reassure both the nation and the world.
"The incoming president will be facing many bigger challenges than any president since Roosevelt," said John Kamensky, senior researcher at the IBM Center for The Business of Government, which focuses on public management. "The president will have to have a very organized transition to be able to address it."
Spokesmen for Senator Barack Obama's and Senator John McCain's campaigns declined to comment on the transition, which lasts 77 days. It is widely reported that former Clinton Chief of Staff John Podesta is working with Obama, while former Reagan Navy Secretary John Lehman Jr. is guiding McCain's team.
Presidential transitions are often tumultuous, but this incoming president is facing a host of pressing matters, not the least of which is the global financial crisis. Don't forget, he also must be prepared to address the wars in Iraq and Afghanistan, as well as national security, on Day One of his administration on Jan. 20.
Lining up the cabinet. Traditionally, the president-elect first assembles his key White House appointees, particularly the chief of staff, budget and personnel directors and counsel. The secretaries of State, Treasury and Defense, along with the attorney general, are next in line. The rest of the cabinet is usually in place by Christmas.
This year, however, the Treasury secretary pick is more important than ever. Henry Paulson, the current office holder, is leading the largest federal intervention into the financial sector since the Great Depression. His successor will inherit the effort, which is less than six weeks old and still very much under construction.
Also on the schedule is a global economic summit on Nov. 15 in Washington, D.C. World leaders will look to the incoming president and his economic team -- including the White House Council of Economic Advisers and the National Economic Council -- for guidance on his policy initiatives.
So will the American public, who are waiting to see how the next president addresses critical issues such as the tidal wave of foreclosures and the bailout of the financial system.
Some 71% of people surveyed in a recent USA Today/Gallup poll feel the next president faces more serious or much more serious challenges than any new president in the past 50 years. More than two-thirds feel that stabilizing the economy should be the next president's top priority, compared to 12% who say managing the wars overseas comes first, the poll found.
Experts agree.
"I would expect the Treasury secretary and other economic appointees to be the first priority," said John Burke, professor of political science at the University of Vermont. "The sooner they can announce the key appointments, the better."
Handling the transition. Both campaigns are already working on transition plans. This is the first time nominees can submit names for national security clearance before Election Day. Each camp has already given up to 100 names to the FBI, Kamensky said.
Paulson is briefing the candidates, and the White House has already started working on its transition plans to smooth the way for the next president, experts said.
Past presidents have moved swiftly during their transition periods. Ronald Reagan, for instance, named James Baker his chief of staff shortly after Election Day. Bill Clinton held an economic summit in Little Rock, Ark., and George W. Bush's White House staff met daily before taking office.
Still, the incoming commander-in-chief must remember that he is not yet in office, experts said. While he can name his appointees and discuss his priorities, he can't actually act.
"What can you really do as a president-elect?" asked Martha Joynt Kumar, director of the White House Transition Project, a research group made up of scholars and policy institutions. "It's a really fine line you have to walk because you have to do something but you aren't president."
Facing the worst economic storm since Franklin Delano Roosevelt won the 1932 election, this president-elect will have to quickly announce his key staffers and policy priorities to reassure both the nation and the world.
"The incoming president will be facing many bigger challenges than any president since Roosevelt," said John Kamensky, senior researcher at the IBM Center for The Business of Government, which focuses on public management. "The president will have to have a very organized transition to be able to address it."
Spokesmen for Senator Barack Obama's and Senator John McCain's campaigns declined to comment on the transition, which lasts 77 days. It is widely reported that former Clinton Chief of Staff John Podesta is working with Obama, while former Reagan Navy Secretary John Lehman Jr. is guiding McCain's team.
Presidential transitions are often tumultuous, but this incoming president is facing a host of pressing matters, not the least of which is the global financial crisis. Don't forget, he also must be prepared to address the wars in Iraq and Afghanistan, as well as national security, on Day One of his administration on Jan. 20.
Lining up the cabinet. Traditionally, the president-elect first assembles his key White House appointees, particularly the chief of staff, budget and personnel directors and counsel. The secretaries of State, Treasury and Defense, along with the attorney general, are next in line. The rest of the cabinet is usually in place by Christmas.
This year, however, the Treasury secretary pick is more important than ever. Henry Paulson, the current office holder, is leading the largest federal intervention into the financial sector since the Great Depression. His successor will inherit the effort, which is less than six weeks old and still very much under construction.
Also on the schedule is a global economic summit on Nov. 15 in Washington, D.C. World leaders will look to the incoming president and his economic team -- including the White House Council of Economic Advisers and the National Economic Council -- for guidance on his policy initiatives.
So will the American public, who are waiting to see how the next president addresses critical issues such as the tidal wave of foreclosures and the bailout of the financial system.
Some 71% of people surveyed in a recent USA Today/Gallup poll feel the next president faces more serious or much more serious challenges than any new president in the past 50 years. More than two-thirds feel that stabilizing the economy should be the next president's top priority, compared to 12% who say managing the wars overseas comes first, the poll found.
Experts agree.
"I would expect the Treasury secretary and other economic appointees to be the first priority," said John Burke, professor of political science at the University of Vermont. "The sooner they can announce the key appointments, the better."
Handling the transition. Both campaigns are already working on transition plans. This is the first time nominees can submit names for national security clearance before Election Day. Each camp has already given up to 100 names to the FBI, Kamensky said.
Paulson is briefing the candidates, and the White House has already started working on its transition plans to smooth the way for the next president, experts said.
Past presidents have moved swiftly during their transition periods. Ronald Reagan, for instance, named James Baker his chief of staff shortly after Election Day. Bill Clinton held an economic summit in Little Rock, Ark., and George W. Bush's White House staff met daily before taking office.
Still, the incoming commander-in-chief must remember that he is not yet in office, experts said. While he can name his appointees and discuss his priorities, he can't actually act.
"What can you really do as a president-elect?" asked Martha Joynt Kumar, director of the White House Transition Project, a research group made up of scholars and policy institutions. "It's a really fine line you have to walk because you have to do something but you aren't president."
Tuesday, October 21, 2008
Stocks hit by recession fears
Stocks slumped Tuesday as mixed corporate earnings reports gave investors a reason to retreat after the previous session's big rally.
The Dow Jones industrial average (INDU) lost 231 points or 2.5%. The Standard & Poor's 500 (SPX) index lost 3.1% and the Nasdaq composite (COMP) lost 4.1%.
Lending rates continued to improve, helping to reassure investors that the efforts of world governments to try and stabilize financial markets are starting to work. But relief about the credit markets was countered by broader fears about a recession and the health of American corporations.
"The credit market is improving, which is good, but the problem is that everyone is focused right now on earnings as a representation of the economy," said Greg Church, founder and president of Church Capital. "And while there will be exceptions, the overwhelming number of earnings reports won't be positive."
With 21% of S&P 500 companies already having reported results, third-quarter profits are currently on track to have fallen almost 10% from a year ago, according to the latest estimates from Thomson Reuters.
After the close, Yahoo (YHOO, Fortune 500) reported earnings of four cents a share, versus 11 cents a year ago and short of analysts' forecasts for a profit of 9 cents per share. The company also said it will cut at least 10% of its workforce, or around 1,500 people, through the end of the year as a result of the weak economy.
Looking forward, Yahoo warned that 2008 revenue won't meet its earlier forecasts. However, shares gained 7% in extended-hours trading.
Also after the close, Apple (AAPL, Fortune 500) reported fourth-quarter sales and earnings that jumped from a year ago due to strong sales of its new iPhone. Earnings topped forecasts, while sales missed expectations.
Looking forward, Apple forecast fiscal first-quarter sales and earnings that are short of analysts' projections. The company said forecasting the December quarter was a challenge because of the weak economy. Shares gained 4% in extended-hours trading.
The Dow gained 413 points Monday on improved lending rates and comments from Federal Reserve Chairman Ben Bernanke that supported a second fiscal stimulus package. It was the Dow's eighth-biggest one-day point advance ever, but did not spark a follow-up rally Tuesday.
"I think the tone in the stock market has been a little better recently with the credit spreads coming down," said Robert Loest, portfolio manager at Integrity Funds. "But I'm reluctant to get too optimistic because the economy is going to continue to deteriorate both in the U.S. and abroad."
Earnings: Dow component American Express (AXP, Fortune 500) reported weaker quarterly profit after the close of trade Monday. However, the results were better than expected and shares gained 8.4% Tuesday. (Full story)
Four other Dow components reported results Tuesday morning, including 3M (MMM, Fortune 500), which reported higher quarterly sales and earnings that topped estimates. Shares gained 4.8%.
DuPont (DD, Fortune 500) reported a big drop in earnings due to manufacturing disruptions in the wake of Hurricane Ike. The chemical giant also warned that full-year results won't meet forecasts. Shares fell 8%.
Caterpillar (CAT, Fortune 500) reported lower earnings and higher revenue versus a year ago, and shares fell 5%. Pfizer (PFE, Fortune 500) reported higher quarterly earnings that topped estimates. Shares were little changed.
Texas Instruments (TXN, Fortune 500) reported reduced third-quarter profit after the close Monday and forecast fourth-quarter revenue would fall sharply, missing estimates. The chipmaker also said it is looking to sell part of its wireless operations. Shares fell 6.3% Tuesday.
Among other companies releasing results, troubled bank National City (NCC, Fortune 500) reported a bigger-than-expected loss Tuesday and said it was cutting 4,000 jobs. However, investors lifted the shares, which have been battered soundly over the last few months on fears about the firm's solvency. The stock added 3%.
Citigroup (C, Fortune 500) slumped 6% in tune with the broader selloff and also in response to Goldman Sachs' reinstatement of its sell rating on the company.
In other company news, Kirk Kerkorian's Tracinda is dumping 7.3 million shares of Ford Motor (F, Fortune 500) and could end up selling the rest of his 6% stake in the automaker. Ford shares lost 6.9%.
A number of stocks that had led the advance Monday retreated Tuesday, including oil services firms Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500), ConocoPhilips (COP, Fortune 500) and BP (BP).
Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by over two to one on volume of 1.16 billion shares. On the Nasdaq, losers beat winners by five to two on volume of 2.17 billion shares.
Credit market: Lending rates continued to improve Tuesday, extending the weeklong recovery.
Libor, the overnight bank-to-bank lending rate, fell to 1.28% from 1.51% Monday, according to Bloomberg.com. That set the rate below the Fed's benchmark lending rate of 1.5%, a good sign for the credit market. Libor hit a record 6.88% earlier this month at the height of the market panic.
The 3-month Libor rate, which banks charge each other to borrow for three months, fell to 3.83% from 4.06% late Monday.
The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.63% from 2.97% late Monday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.
The improvement in bank lending over the last week is critical and analysts say it must continue to improve in the months ahead. Credit froze up in the wake of the housing market collapse, the subprime lending fallout and contraction in the bank sector.
The lack of available credit has punished the already weak economy, making it hard for businesses to function on a daily basis and for consumers to get loans.
The Federal Reserve and banks around the world have made potentially trillions of dollars available to lending institutions. On Tuesday, the Fed said it will start buying commercial paper from money market mutual funds. Commercial paper is a short-term funding source that companies need for daily operations.
Treasury prices rallied, lowering the yield on the 10-year note to 3.70% from 3.84% late Monday. Treasury prices and yields move in opposite directions.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 1.19% from 1.05% late Monday as investors began to pull money out of the safer investment and put it back in stocks.
Last week, the 3-month fell to below 0.2%. Last month, it reached a 68-year low around 0% as investor panic hit its peak.
Other markets: In global trade, Asian markets ended higher and European markets ended lower.
U.S. light crude oil for November delivery fell $3.36 to settle at $70.89 a barrel on the New York Mercantile Exchange after hitting a 13-month low last week.
Oil prices have been slowing since crude peaked at an all-time high of $147.27 a barrel on July 11. But the decline has been a mix of speculators leaving the market and investors betting that a slowing global economy means weaker oil demand. As a result, the falling oil prices haven't helped stock investor sentiment much.
Gasoline prices fell another 3.4 cents overnight, to a national average of $2.889 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 34th consecutive day that prices have decreased - in the past month alone, they're down more than 93 cents a gallon.
COMEX gold for December delivery fell $22 to $768 an ounce.
In currency trading, the dollar rose against the euro and yen.
The Dow Jones industrial average (INDU) lost 231 points or 2.5%. The Standard & Poor's 500 (SPX) index lost 3.1% and the Nasdaq composite (COMP) lost 4.1%.
Lending rates continued to improve, helping to reassure investors that the efforts of world governments to try and stabilize financial markets are starting to work. But relief about the credit markets was countered by broader fears about a recession and the health of American corporations.
"The credit market is improving, which is good, but the problem is that everyone is focused right now on earnings as a representation of the economy," said Greg Church, founder and president of Church Capital. "And while there will be exceptions, the overwhelming number of earnings reports won't be positive."
With 21% of S&P 500 companies already having reported results, third-quarter profits are currently on track to have fallen almost 10% from a year ago, according to the latest estimates from Thomson Reuters.
After the close, Yahoo (YHOO, Fortune 500) reported earnings of four cents a share, versus 11 cents a year ago and short of analysts' forecasts for a profit of 9 cents per share. The company also said it will cut at least 10% of its workforce, or around 1,500 people, through the end of the year as a result of the weak economy.
Looking forward, Yahoo warned that 2008 revenue won't meet its earlier forecasts. However, shares gained 7% in extended-hours trading.
Also after the close, Apple (AAPL, Fortune 500) reported fourth-quarter sales and earnings that jumped from a year ago due to strong sales of its new iPhone. Earnings topped forecasts, while sales missed expectations.
Looking forward, Apple forecast fiscal first-quarter sales and earnings that are short of analysts' projections. The company said forecasting the December quarter was a challenge because of the weak economy. Shares gained 4% in extended-hours trading.
The Dow gained 413 points Monday on improved lending rates and comments from Federal Reserve Chairman Ben Bernanke that supported a second fiscal stimulus package. It was the Dow's eighth-biggest one-day point advance ever, but did not spark a follow-up rally Tuesday.
"I think the tone in the stock market has been a little better recently with the credit spreads coming down," said Robert Loest, portfolio manager at Integrity Funds. "But I'm reluctant to get too optimistic because the economy is going to continue to deteriorate both in the U.S. and abroad."
Earnings: Dow component American Express (AXP, Fortune 500) reported weaker quarterly profit after the close of trade Monday. However, the results were better than expected and shares gained 8.4% Tuesday. (Full story)
Four other Dow components reported results Tuesday morning, including 3M (MMM, Fortune 500), which reported higher quarterly sales and earnings that topped estimates. Shares gained 4.8%.
DuPont (DD, Fortune 500) reported a big drop in earnings due to manufacturing disruptions in the wake of Hurricane Ike. The chemical giant also warned that full-year results won't meet forecasts. Shares fell 8%.
Caterpillar (CAT, Fortune 500) reported lower earnings and higher revenue versus a year ago, and shares fell 5%. Pfizer (PFE, Fortune 500) reported higher quarterly earnings that topped estimates. Shares were little changed.
Texas Instruments (TXN, Fortune 500) reported reduced third-quarter profit after the close Monday and forecast fourth-quarter revenue would fall sharply, missing estimates. The chipmaker also said it is looking to sell part of its wireless operations. Shares fell 6.3% Tuesday.
Among other companies releasing results, troubled bank National City (NCC, Fortune 500) reported a bigger-than-expected loss Tuesday and said it was cutting 4,000 jobs. However, investors lifted the shares, which have been battered soundly over the last few months on fears about the firm's solvency. The stock added 3%.
Citigroup (C, Fortune 500) slumped 6% in tune with the broader selloff and also in response to Goldman Sachs' reinstatement of its sell rating on the company.
In other company news, Kirk Kerkorian's Tracinda is dumping 7.3 million shares of Ford Motor (F, Fortune 500) and could end up selling the rest of his 6% stake in the automaker. Ford shares lost 6.9%.
A number of stocks that had led the advance Monday retreated Tuesday, including oil services firms Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500), ConocoPhilips (COP, Fortune 500) and BP (BP).
Market breadth was negative. On the New York Stock Exchange, decliners topped advancers by over two to one on volume of 1.16 billion shares. On the Nasdaq, losers beat winners by five to two on volume of 2.17 billion shares.
Credit market: Lending rates continued to improve Tuesday, extending the weeklong recovery.
Libor, the overnight bank-to-bank lending rate, fell to 1.28% from 1.51% Monday, according to Bloomberg.com. That set the rate below the Fed's benchmark lending rate of 1.5%, a good sign for the credit market. Libor hit a record 6.88% earlier this month at the height of the market panic.
The 3-month Libor rate, which banks charge each other to borrow for three months, fell to 3.83% from 4.06% late Monday.
The TED spread, which is the difference between what banks pay to borrow from each other for three months and what the Treasury pays, narrowed to 2.63% from 2.97% late Monday. The spread hit a record 4.65% earlier this month. The narrower the spread, the more willing banks are to lend to each other.
The improvement in bank lending over the last week is critical and analysts say it must continue to improve in the months ahead. Credit froze up in the wake of the housing market collapse, the subprime lending fallout and contraction in the bank sector.
The lack of available credit has punished the already weak economy, making it hard for businesses to function on a daily basis and for consumers to get loans.
The Federal Reserve and banks around the world have made potentially trillions of dollars available to lending institutions. On Tuesday, the Fed said it will start buying commercial paper from money market mutual funds. Commercial paper is a short-term funding source that companies need for daily operations.
Treasury prices rallied, lowering the yield on the 10-year note to 3.70% from 3.84% late Monday. Treasury prices and yields move in opposite directions.
The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 1.19% from 1.05% late Monday as investors began to pull money out of the safer investment and put it back in stocks.
Last week, the 3-month fell to below 0.2%. Last month, it reached a 68-year low around 0% as investor panic hit its peak.
Other markets: In global trade, Asian markets ended higher and European markets ended lower.
U.S. light crude oil for November delivery fell $3.36 to settle at $70.89 a barrel on the New York Mercantile Exchange after hitting a 13-month low last week.
Oil prices have been slowing since crude peaked at an all-time high of $147.27 a barrel on July 11. But the decline has been a mix of speculators leaving the market and investors betting that a slowing global economy means weaker oil demand. As a result, the falling oil prices haven't helped stock investor sentiment much.
Gasoline prices fell another 3.4 cents overnight, to a national average of $2.889 a gallon, according to a survey of credit-card activity by motorist group AAA. It was the 34th consecutive day that prices have decreased - in the past month alone, they're down more than 93 cents a gallon.
COMEX gold for December delivery fell $22 to $768 an ounce.
In currency trading, the dollar rose against the euro and yen.
Monday, October 20, 2008
The bright spot in a dark economy
The economic storm pelting the U.S. economy is going to do plenty more damage to already flattened job and housing markets.
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
But as dark as the next three or four quarters could be, the U.S. economy appears to be undergoing a more lasting, and ultimately uplifting, shift.
Americans who for decades have spent an increasing share of their incomes and taken on more and more debt are now, for the first time in years, saving instead.
The personal savings rate, which measures the amount of disposable personal income that isn't spent, ticked up to almost 3% in the second quarter of 2008, after almost four years below 1%.
While Americans still aren't going to win any awards for thrift - consumers save more than 10% of their paychecks in creditor nations such as Germany and Japan, for instance - the return to saving carries big implications for U.S. economic health.
More saving is good over the long haul, because domestic savings create a pool of money from which companies can borrow to invest in new plants and equipment, creating the jobs that push living standards higher over time.
A growing domestic savings pool could also reduce America's need to borrow money overseas - which would make the U.S. less beholden to foreign creditors who now supply us with hundreds of billions of dollars in financing every year.
The trouble with virtue
Unfortunately, thrift will cost in the short run. Saving more means spending less - which translates into more hard times in retail and other consumer-driven businesses like the auto industry. The latest evidence of the shift came in Wednesday's steeper-than-expected pullback in retail sales. They dropped 1.2% in September, in their first year-on-year decline in six years and only their third drop in the past 16 years. Economists had been looking for a 0.7% drop.
Given that two-thirds of economic activity is consumer spending, today's thrift will exacerbate a general downturn and will weaken the impact of the massive interventions the government has made in the financial markets.
"The breadth of the decline shows a broad-based pullback in consumer spending that will not quickly turn around," writes PNC economist Stuart Hoffman, "even with the arsenal of federal firepower now aimed at the Great Financial Crisis of 2008."
Federal actions such as a $250 billion plan to buy preferred shares in banks, along with a public guarantee of bank deposits and bank debt, are aimed at unlocking credit markets and boosting economic activity. Policymakers have promised to get banks lending again, to restore economic growth that has clearly been ebbing even as government data chalked up modest gains in gross domestic product for the first half of the year.
"This plan is a means to an end," Hoffman says of the Treasury's agreement to make capital injections in banks such as Citi (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). "The key concept is that reasonably prudent lending should be supported."
But as the economy shows further signs of deceleration - factory production and industrial capacity utilization fell sharply in September, the Federal Reserve said Thursday - the question is who the banks will be lending to. Indeed, merely plying the banks with capital isn't certain to get them lending in a world in which businesses and consumers are trying to reduce their leverage after a long run of credit expansion.
William Cline, a senior fellow at the Peterson Institute for International Economics, notes that the decline of saving in the United States over the past two decades was accompanied by a sharp increase in the rate of bank lending, as consumers cashed in on the appreciating value of their houses.
Bank credit growth, after averaging around 6.5% in the 1990s, spiked to 12% in the four years ended in 2007, Cline says. Meanwhile the U.S. personal saving rate turned negative at the height of the housing bubble in 2005, down from around 7% in the early 1990s.
"We were already on course to have some return to saving," says Cline, who is the author of the 2005 book, "The United States as a Debtor Nation." With the credit crunch making consumer credit scarcer, he adds, and reduced house prices making Americans feel poorer, "We're going to see some more pressure on household spending."
For now, that will mean more pressure on companies that sell their goods to consumers. GM (GM, Fortune 500) and Ford (F, Fortune 500) have traded at multi-decade lows this month as U.S. auto sales slowed to a pace last seen in the early 1990s. Macy's (M, Fortune 500) dropped 12% Wednesday after the department store chain cut its profit forecast, prompting ratings agency Moody's to warn that further problems could prompt a costly credit downgrade.
The government interventions mean deleveraging can continue without the risk of an economic collapse, which is obviously "extremely positive" in the long run, says Ken Kamen, a financial adviser who is president of Mercadien Asset Management in Trenton, N.J. But that doesn't mean the short run is going to be particularly enjoyable, as Wednesday's 9% stock market decline suggests.
Kamen warns his clients that before they make any hasty decisions, they should decide how much stress they can tolerate in their portfolios.
"You don't want to be resetting your financial future while the compass needle is spinning," he says. "You may need to sell assets - but only to the point where you can sleep at night."
Friday, October 17, 2008
Tense times in Hollywood's dream factory
Even in the land of make-believe, where the meltdown on Wall Street feels a million miles away, these are tense days. While no one can say for sure how the financial crisis will affect Hollywood, a prevailing view is that the film business is relatively protected for at least a year or two, but that the TV industry which was already impacted by last winter's writers' strike could be in for a rocky ride.
Surreal at the best of times - ok, all the time - sunny Tinseltown has avoided the sense of catastrophe that has enshrouded Wall Street and spooked Silicon Valley. But now its biggest players are trying to come to grips with exactly what the financial and economic meltdown is going to mean for them. One big-deal agent told me the other day that only projects involving major stars and producers are going forward right now. "Everybody's putting their tail between their legs," the agent said. "It's hard to get deals done." More worryingly, one senior TV executive posited to me: "I can almost guarantee that you're going to see major cuts across our businesses."
Well-timed funding boom
Broadly, there are in fact two early takes on how tough times are going to affect the entertainment industry. The first take is that the movie industry in particular is going to be just fine for the next couple of years. This is more by happenstance then design, although there is evidence that entertainment products are less impacted by economic downturns than other sources of consumer spending. (The conventional thinking that the box office actually goes up because people are taking fewer vacations and or holding off on big-ticket items).
Additionally, this time Hollywood has timing on its side. For one thing, Tinseltown has just gone through a boom in new outside sources of funding led by hedge funds and Wall Street sources. By the estimate of one finance executive who worked on several of these financings, between $10 and $15 billion was raised over the past few years to fund slates of studio films, as well as television projects.
What this means is that whatever films are already in the works don't have to worry about how they are going to be financed, and relatively few big Hollywood players are going to have an imminent need for cash. The only deal that has been held up by the crisis is the $700-million debt financing for the Dreamworks (DWA) studio's new venture with India's Reliance group, but no one has expressed fears that the financing is in doubt. (There are of course question marks on the horizon, such as $3.7 billion of MGM's debt coming due in 2012, and relentless chatter about the capital needs of smaller shops like the Weinstein Company.)
"Hollywood is pretty well financed in terms of enough money being there right now," says a finance chief at one of the studios. "What it looks like two years from now, I don't know."
Hollywood under pressure
Meanwhile, the impact of last winter's writer's strike - as well as uncertainty over whether there might yet be a strike from the Screen Actors Guild - led to a slowdown in the production of new films and TV shows that some have called a "de facto strike." But according to a recent report in Variety, after a period of being put on hold some 40 or more films are going to go into production between spring and summer of next year.
Layer on top of this the fact that many of the Hollywood majors, including Warner Bros. (owned by Fortune parent Time Warner), Fox and the Disney (DIS, Fortune 500) studio, have reduced the number of films they are releasing, while smaller studio divisions like Warner Independent, New Line and Paramount Vantage have been restructured or shuttered. In the first announcement of cost-cutting that was directly linked to the financial crisis, Paramount announced that it is slimming its release slate by 20% to 20 films a year to hit financial targets set by its parent, Viacom (VIA).
Which brings us to the second take, that the downturn is still going to hurt everyone, and more fallout in LaLa Land is inevitable. Television costs will be under immense pressure as advertising continues to weaken, and, if the fall TV season so far is any indication, viewers are not stampeding to watch all the new shows. (To be fair, part of this is still hangover from the strike plus the fact that the election and meltdown have been competing rather well for audiences' attentions.)
Also worrying: To the extent that Hollywood's growth is driven by the adoption of new technologies - a lot - a bleak outlook for selling new gizmos this holiday season could lead to further sluggishness in home video and ancillary revenues, a big cash engine for the studios from both film and TV.
Meanwhile, for all the Hollywood executives who are sadly watching their shareholdings in their media conglomerate parent companies diminish, we can only offer by way of a suggestion a recent statement made by the studios' trade association in the context of preventing another strike: "If ever there was a time when Americans wanted the diversions of movies and television, it is now."
Surreal at the best of times - ok, all the time - sunny Tinseltown has avoided the sense of catastrophe that has enshrouded Wall Street and spooked Silicon Valley. But now its biggest players are trying to come to grips with exactly what the financial and economic meltdown is going to mean for them. One big-deal agent told me the other day that only projects involving major stars and producers are going forward right now. "Everybody's putting their tail between their legs," the agent said. "It's hard to get deals done." More worryingly, one senior TV executive posited to me: "I can almost guarantee that you're going to see major cuts across our businesses."
Well-timed funding boom
Broadly, there are in fact two early takes on how tough times are going to affect the entertainment industry. The first take is that the movie industry in particular is going to be just fine for the next couple of years. This is more by happenstance then design, although there is evidence that entertainment products are less impacted by economic downturns than other sources of consumer spending. (The conventional thinking that the box office actually goes up because people are taking fewer vacations and or holding off on big-ticket items).
Additionally, this time Hollywood has timing on its side. For one thing, Tinseltown has just gone through a boom in new outside sources of funding led by hedge funds and Wall Street sources. By the estimate of one finance executive who worked on several of these financings, between $10 and $15 billion was raised over the past few years to fund slates of studio films, as well as television projects.
What this means is that whatever films are already in the works don't have to worry about how they are going to be financed, and relatively few big Hollywood players are going to have an imminent need for cash. The only deal that has been held up by the crisis is the $700-million debt financing for the Dreamworks (DWA) studio's new venture with India's Reliance group, but no one has expressed fears that the financing is in doubt. (There are of course question marks on the horizon, such as $3.7 billion of MGM's debt coming due in 2012, and relentless chatter about the capital needs of smaller shops like the Weinstein Company.)
"Hollywood is pretty well financed in terms of enough money being there right now," says a finance chief at one of the studios. "What it looks like two years from now, I don't know."
Hollywood under pressure
Meanwhile, the impact of last winter's writer's strike - as well as uncertainty over whether there might yet be a strike from the Screen Actors Guild - led to a slowdown in the production of new films and TV shows that some have called a "de facto strike." But according to a recent report in Variety, after a period of being put on hold some 40 or more films are going to go into production between spring and summer of next year.
Layer on top of this the fact that many of the Hollywood majors, including Warner Bros. (owned by Fortune parent Time Warner), Fox and the Disney (DIS, Fortune 500) studio, have reduced the number of films they are releasing, while smaller studio divisions like Warner Independent, New Line and Paramount Vantage have been restructured or shuttered. In the first announcement of cost-cutting that was directly linked to the financial crisis, Paramount announced that it is slimming its release slate by 20% to 20 films a year to hit financial targets set by its parent, Viacom (VIA).
Which brings us to the second take, that the downturn is still going to hurt everyone, and more fallout in LaLa Land is inevitable. Television costs will be under immense pressure as advertising continues to weaken, and, if the fall TV season so far is any indication, viewers are not stampeding to watch all the new shows. (To be fair, part of this is still hangover from the strike plus the fact that the election and meltdown have been competing rather well for audiences' attentions.)
Also worrying: To the extent that Hollywood's growth is driven by the adoption of new technologies - a lot - a bleak outlook for selling new gizmos this holiday season could lead to further sluggishness in home video and ancillary revenues, a big cash engine for the studios from both film and TV.
Meanwhile, for all the Hollywood executives who are sadly watching their shareholdings in their media conglomerate parent companies diminish, we can only offer by way of a suggestion a recent statement made by the studios' trade association in the context of preventing another strike: "If ever there was a time when Americans wanted the diversions of movies and television, it is now."
Monday, October 13, 2008
Europe to U.S.: You messed up the rescue, too
First you mess up the world's financial system. Then you blow the rescue of it. Now let's show you how to do it properly.
That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there's a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world's financial system.
In particular, they now think - and are openly saying - that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That's at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too).
Much of the griping has been taking place anonymously, so as not to cause political ructions. But France's Finance Minister Christine Lagarde cast aside diplomatic niceties on the eve of last weekend's G-7 meetings in the U.S. when she told French radio: "as soon as you let one domino fall, the rest risk crashing down."
While not defending Lehman - "there were certainly bad decisions taken by that bank, bad management," she said, Lagarde nonetheless argued that allowing the investment bank to fail merely heightened anxiety in international banking and led to the seizing up of interbank lending. It's an argument that has now become conventional wisdom in Europe, where the mantra for this week's rescues is: Relax, no bank will be allowed to fail.
Too complex, too opaque
The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden's banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that "prompt and transparent handling" of the problems were a key to the success.
By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent. "It looks as complex as the credit derivatives that caused the problem in the first place," one top European finance official told me, on condition I didn't quote him by name.
Of course, this is not exactly a time to crow, and there are some big unanswered questions about the European solution, too. One is just how tough governments will be in imposing their conditions on national banks, including forcing mergers of stronger and weaker ones. That's particularly a concern for Germany, which has the most fragmented banking sector of any of the big European nations and has the biggest potential for discovering nasty surprises. Germany's problem is that any banking consolidation is likely to run into opposition from regional authorities, who have a say in the running of savings banks networks. And with national elections scheduled for next year, the fragile coalition government under Chancellor Angela Merkel doesn't have a very strong hand to play.
Her finance minister Peer Steinbrück, who could end up as her challenger in the election, has been among the most vocal European government official complaining about how the problems started in the U.S. sub-prime market - and how they will result in the erosion of American influence. "The U.S. will lose its superpower status in the world financial system," he has said, predicting that the dollar will also lose ground to the euro and the Japanese yen.
Stock markets for the moment are applauding the concerted European response. Only time will tell whether they're getting it right. It puts a huge onus on governments to fix the system, and the track record there is mixed. France nationalized its banks in the 1980s under President Francois Mitterrand for ideological reasons, but made such a mess of the job that it privatized them again. Still, after two weeks of conflicting and contradictory moves and statements in Europe, a bit of coordination certainly feels good - and if it looks like it stands a good chance of working, all the better.
That, in a nutshell, is the less-than-flattering message European governments are sending to the U.S. as they mount their own gigantic bank bailout. The plans, announced Monday after two weeks of dithering, involve Britain, Germany, France and some others recapitalizing national banks that require help, and providing state guarantees and other measures to kick-start the stalled credit market. The details are strikingly different from the U.S. approach adopted by U.S. Treasury Secretary Hank Paulson and the Federal Reserve Board. And there's a big reason for that: The Europeans think Paulson got it badly wrong, and have watched aghast as he failed to restore confidence in the world's financial system.
In particular, they now think - and are openly saying - that it was a huge mistake to allow Lehman Brothers to fail. But they also believe that the $700 billion bailout plan was badly misdirected. Rather than buying up toxic assets, as the Paulson plan initially intended, they believe the role of government intervention should be to recapitalize the banks directly in exchange for some control of operations. That's at the core of the European plans announced Monday (and apparently the direction Treasury is now heading, too).
Much of the griping has been taking place anonymously, so as not to cause political ructions. But France's Finance Minister Christine Lagarde cast aside diplomatic niceties on the eve of last weekend's G-7 meetings in the U.S. when she told French radio: "as soon as you let one domino fall, the rest risk crashing down."
While not defending Lehman - "there were certainly bad decisions taken by that bank, bad management," she said, Lagarde nonetheless argued that allowing the investment bank to fail merely heightened anxiety in international banking and led to the seizing up of interbank lending. It's an argument that has now become conventional wisdom in Europe, where the mantra for this week's rescues is: Relax, no bank will be allowed to fail.
Too complex, too opaque
The second lesson from the U.S. handling of the crisis concerns the way government money is best used. Here the Europeans have a valuable precedent: Sweden's banking crisis in the early 1990s, which was resolved by the state forcing a consolidation and clean-up of the system even as it kept the banks afloat. Starting in Sept. 1992, the government in Stockholm announced a general guarantee for the whole of the banking system, encouraged the central bank to organize massive injections of liquidity, and created a state agency that essentially forced banks to give up any remnants of make-belief accounting and quickly write down the value of their assets to much more realistic levels. The strategy worked, and Urban Bäckström, the former Swedish central bank president who played a central role in the rescue, has said that "prompt and transparent handling" of the problems were a key to the success.
By contrast, the initial Paulson plan involved the U.S. government buying up the problem securities of banks in a procedure that risked being anything other than prompt and transparent. "It looks as complex as the credit derivatives that caused the problem in the first place," one top European finance official told me, on condition I didn't quote him by name.
Of course, this is not exactly a time to crow, and there are some big unanswered questions about the European solution, too. One is just how tough governments will be in imposing their conditions on national banks, including forcing mergers of stronger and weaker ones. That's particularly a concern for Germany, which has the most fragmented banking sector of any of the big European nations and has the biggest potential for discovering nasty surprises. Germany's problem is that any banking consolidation is likely to run into opposition from regional authorities, who have a say in the running of savings banks networks. And with national elections scheduled for next year, the fragile coalition government under Chancellor Angela Merkel doesn't have a very strong hand to play.
Her finance minister Peer Steinbrück, who could end up as her challenger in the election, has been among the most vocal European government official complaining about how the problems started in the U.S. sub-prime market - and how they will result in the erosion of American influence. "The U.S. will lose its superpower status in the world financial system," he has said, predicting that the dollar will also lose ground to the euro and the Japanese yen.
Stock markets for the moment are applauding the concerted European response. Only time will tell whether they're getting it right. It puts a huge onus on governments to fix the system, and the track record there is mixed. France nationalized its banks in the 1980s under President Francois Mitterrand for ideological reasons, but made such a mess of the job that it privatized them again. Still, after two weeks of conflicting and contradictory moves and statements in Europe, a bit of coordination certainly feels good - and if it looks like it stands a good chance of working, all the better.
Sunday, October 12, 2008
GM needs cash before Chrysler
For General Motors Corp. to acquire Chrysler LLC and all of its warts, GM would have to get desperately needed cash. Lots of it, according to industry analysts.
With both automakers struggling to survive amid slumping sales, a slowing global economy and an unprecedented credit crunch, it's unclear whether Chrysler's majority owner, Cerberus Capital Management LP, would be willing to pay up, or whether the federal government might even get involved to save one or both struggling automakers.
"There's got to be more in it for GM than just Chrysler," said Erich Merkle, an auto industry analyst with Crowe Horwath LLP, an accounting and consulting firm. "If you put two auto companies together, both that are losing money, both that are losing market share, you've just got an auto company that's losing market share faster and losing more money."
GM and Cerberus, which owns 80.1% of Chrysler, have held preliminary talks about an acquisition or other combination of the two automakers, according to a person familiar with the discussions who did not want to be identified because the talks have not been made public.
A tie-up between the automotive giants would be historic for the industry and solidify GM's position as the global sales leader, which it has been in danger of losing to Toyota Motor Corp.
GM and Toyota finished 2007 essentially even in vehicles sold worldwide. GM and Chrysler already have a joint venture with BMW AG making a hybrid gas-electric powertrain.
While melding the companies could save money by combining management, engineering, manufacturing and administrative staffs, analysts say consolidation would bring more costs, and the rewards probably wouldn't come for several years.
That might be too late for both automakers. Auburn Hills-based Chrysler, a privately held company, doesn't have to open its books, but it lost at least $510 million in the first quarter and $1.6 billion last year. Its sales are down 25% so far this year, the worst drop of any major automaker.
Detroit-based GM is burning up more than $1 billion in cash per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year.
Sales are down 18%, and the company has lost $57.5 billion in the past 18 months, largely because of tax accounting changes.
Bad timing? All of this comes as U.S. sales have slowed to their lowest point in 15 years, making bankruptcy possible for all of the cash-strapped Detroit Three if things don't turn around soon enough.
Not exactly the prime scenario for a GM-Chrysler combination, said analyst Kevin Tynan of New York-based Argus Research Corp.
"Even though you're getting the rationalization of folding the two businesses together, it doesn't make sense at this time," he said. "There's got to be some sort of outside motivation for them to do that sort of deal, especially in this market."
That outside motive, analysts speculated, could be the federal government, which would inherit massive pension liabilities if either company went under.
In exchange for taking on Chrysler, analysts envisioned that GM could be given access to low-rate emergency borrowing from the Federal Reserve's discount window, used in normal times by banks.
GM, though, said it is not going to the Fed at present. "We're not actively pursuing anything at this time," said Greg Martin, GM's Washington spokesman.
What's in it for Cerberus? The Wall Street Journal reported late Friday that Cerberus might trade Chrysler for GM's 49% stake in GMAC Financial Services. Cerberus bought 51% of GM's former financial arm for $14 billion in 2006, but since then GMAC has suffered because of bad mortgage loans.
GMAC could look good to Cerberus now, Merkle said, because its insurance and auto businesses are profitable, and the federal government may take on its bad mortgages through the $700 billion financial bailout plan approved earlier this month.
If a merger were to go through, GM could move quickly to cut costs and save billions, said Van Conway, a mergers and acquisitions expert and partner with Birmingham, Mich.-based Conway & MacKenzie.
The company would have to calculate whether it has enough cash to stay alive and fund the deal, he said. If the numbers work, a lean, merged automaker would be in a strong position to make money once the U.S. market recovers and people start buying vehicles again, Conway said.
"You want to be the last man standing here because the car market is going to come back," he said.
Tynan estimated GM could save more than $5 billion a year by running the two companies as one, but said it could take years to realize the savings.
"Over the short term there's very little in the way of consolidation that could occur," said Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville, Mich.
Renault and Nissan are still completing their consolidation, even though the companies joined in 1999, he said.
A combined GM-Chrysler would have too much factory capacity, too many brands and too many dealers, the analysts said. "Adding three more brands (Chrysler, Dodge and Jeep) to their mix and another company that's very heavy in the area of truck production and sales, I don't know how that can be a good thing," Merkle said.
Neither GM nor Chrysler would confirm that they've talked, but each said discussions between automakers are routine.
There also were reports Saturday that Chrysler was in talks with Nissan-Renault, and The New York Times reported that GM had approached Ford Motor Co. about a merger earlier in the year, but Ford wanted to stay independent.
Merger talk among the Detroit Three is not new. GM talked with DaimlerChrysler AG in 2007 about acquiring Chrysler before Cerberus bought its stake in a $7.4 billion deal. The talks fell through when GM decided it should concentrate on cost savings and efficiencies by globalizing its own operations.
Cerberus and Daimler confirmed last month that they are in talks for the private equity firm to acquire Daimler's remaining 19.9% Chrysler stake.
The Journal said the talks between GM and Chrysler are on hold for now due to recent turmoil in the financial markets.
The auto industry has been hit hard in recent weeks by the effects of the credit crisis, prompting GM and Ford to issue statements Friday to dispel the notion that they might be headed for bankruptcy.
GM and Ford shares were battered with the rest of the stock market this week, falling to lows not seen in decades. GM (GM, Fortune 500) shares lost about half of their already-depressed value during the week, closing at $4.89 on Friday. Ford (F, Fortune 500) shares fell similarly, ending the week at $1.99.
GM said Friday, in response to the stock price, that it is nor considering a bankruptcy filing.
"Clearly we face unprecedented challenges related to uncertainties in the financial markets globally and weakening economic fundamentals in many key markets, but bankruptcy protection is not an option GM is considering," a company statement said.
With both automakers struggling to survive amid slumping sales, a slowing global economy and an unprecedented credit crunch, it's unclear whether Chrysler's majority owner, Cerberus Capital Management LP, would be willing to pay up, or whether the federal government might even get involved to save one or both struggling automakers.
"There's got to be more in it for GM than just Chrysler," said Erich Merkle, an auto industry analyst with Crowe Horwath LLP, an accounting and consulting firm. "If you put two auto companies together, both that are losing money, both that are losing market share, you've just got an auto company that's losing market share faster and losing more money."
GM and Cerberus, which owns 80.1% of Chrysler, have held preliminary talks about an acquisition or other combination of the two automakers, according to a person familiar with the discussions who did not want to be identified because the talks have not been made public.
A tie-up between the automotive giants would be historic for the industry and solidify GM's position as the global sales leader, which it has been in danger of losing to Toyota Motor Corp.
GM and Toyota finished 2007 essentially even in vehicles sold worldwide. GM and Chrysler already have a joint venture with BMW AG making a hybrid gas-electric powertrain.
While melding the companies could save money by combining management, engineering, manufacturing and administrative staffs, analysts say consolidation would bring more costs, and the rewards probably wouldn't come for several years.
That might be too late for both automakers. Auburn Hills-based Chrysler, a privately held company, doesn't have to open its books, but it lost at least $510 million in the first quarter and $1.6 billion last year. Its sales are down 25% so far this year, the worst drop of any major automaker.
Detroit-based GM is burning up more than $1 billion in cash per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year.
Sales are down 18%, and the company has lost $57.5 billion in the past 18 months, largely because of tax accounting changes.
Bad timing? All of this comes as U.S. sales have slowed to their lowest point in 15 years, making bankruptcy possible for all of the cash-strapped Detroit Three if things don't turn around soon enough.
Not exactly the prime scenario for a GM-Chrysler combination, said analyst Kevin Tynan of New York-based Argus Research Corp.
"Even though you're getting the rationalization of folding the two businesses together, it doesn't make sense at this time," he said. "There's got to be some sort of outside motivation for them to do that sort of deal, especially in this market."
That outside motive, analysts speculated, could be the federal government, which would inherit massive pension liabilities if either company went under.
In exchange for taking on Chrysler, analysts envisioned that GM could be given access to low-rate emergency borrowing from the Federal Reserve's discount window, used in normal times by banks.
GM, though, said it is not going to the Fed at present. "We're not actively pursuing anything at this time," said Greg Martin, GM's Washington spokesman.
What's in it for Cerberus? The Wall Street Journal reported late Friday that Cerberus might trade Chrysler for GM's 49% stake in GMAC Financial Services. Cerberus bought 51% of GM's former financial arm for $14 billion in 2006, but since then GMAC has suffered because of bad mortgage loans.
GMAC could look good to Cerberus now, Merkle said, because its insurance and auto businesses are profitable, and the federal government may take on its bad mortgages through the $700 billion financial bailout plan approved earlier this month.
If a merger were to go through, GM could move quickly to cut costs and save billions, said Van Conway, a mergers and acquisitions expert and partner with Birmingham, Mich.-based Conway & MacKenzie.
The company would have to calculate whether it has enough cash to stay alive and fund the deal, he said. If the numbers work, a lean, merged automaker would be in a strong position to make money once the U.S. market recovers and people start buying vehicles again, Conway said.
"You want to be the last man standing here because the car market is going to come back," he said.
Tynan estimated GM could save more than $5 billion a year by running the two companies as one, but said it could take years to realize the savings.
"Over the short term there's very little in the way of consolidation that could occur," said Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville, Mich.
Renault and Nissan are still completing their consolidation, even though the companies joined in 1999, he said.
A combined GM-Chrysler would have too much factory capacity, too many brands and too many dealers, the analysts said. "Adding three more brands (Chrysler, Dodge and Jeep) to their mix and another company that's very heavy in the area of truck production and sales, I don't know how that can be a good thing," Merkle said.
Neither GM nor Chrysler would confirm that they've talked, but each said discussions between automakers are routine.
There also were reports Saturday that Chrysler was in talks with Nissan-Renault, and The New York Times reported that GM had approached Ford Motor Co. about a merger earlier in the year, but Ford wanted to stay independent.
Merger talk among the Detroit Three is not new. GM talked with DaimlerChrysler AG in 2007 about acquiring Chrysler before Cerberus bought its stake in a $7.4 billion deal. The talks fell through when GM decided it should concentrate on cost savings and efficiencies by globalizing its own operations.
Cerberus and Daimler confirmed last month that they are in talks for the private equity firm to acquire Daimler's remaining 19.9% Chrysler stake.
The Journal said the talks between GM and Chrysler are on hold for now due to recent turmoil in the financial markets.
The auto industry has been hit hard in recent weeks by the effects of the credit crisis, prompting GM and Ford to issue statements Friday to dispel the notion that they might be headed for bankruptcy.
GM and Ford shares were battered with the rest of the stock market this week, falling to lows not seen in decades. GM (GM, Fortune 500) shares lost about half of their already-depressed value during the week, closing at $4.89 on Friday. Ford (F, Fortune 500) shares fell similarly, ending the week at $1.99.
GM said Friday, in response to the stock price, that it is nor considering a bankruptcy filing.
"Clearly we face unprecedented challenges related to uncertainties in the financial markets globally and weakening economic fundamentals in many key markets, but bankruptcy protection is not an option GM is considering," a company statement said.
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