Legion of Angels News Archive

NEW YORK (CNNMoney.com) – General Motors and Chrysler both find themselves in too much trouble not to look at a deal. But those same troubles could make a combination too difficult to pull off.

The two battered automakers are reported to be in talks about joining operations in order to cut billions in overlapping expenses.

Experts say both companies need to consider such a radical move as a way to stop the bleeding. GM (GM, Fortune 500) has only about $21 billion in cash and Chrysler has $11 billion, although most of that was borrowed.

This may sound like a lot of cash but given declining auto sales and rising losses, both companies could run into cash shortages as soon as next year, according to credit rating agency Standard & Poor’s.

“They are looking at some can-we-live-until-tomorrow questions,” said David Cole, chairman of the Center for Automotive Research.

Officials with the two companies wouldn’t publicly comment on the widespread merger reports. But sources with knowledge of the situation confirm such discussions are taking place.

“We talk to people all the time. In times like this, when markets get the way they are, there are opportunities out there,” said an executive with one of the firms.

Death of some well-known brands

So what might happen if GM and Chrysler were to turn Detroit’s Big Three (Ford Motor (F, Fortune 500) is the other) into the Big Two?

Analysts say a deal could lead to the end of some of the most storied automotive brands in the world.

Of the three brands that make up Chrysler LLC — Chrysler, Dodge and Jeep, only the Jeep brand is considered a strong one. GM’s Buick, Pontiac and MC brands are also considered troubled.

So which brands are kept, which ones go away are part of a merger will be one of the difficult questions to work out.

But that’s only one of the tough tasks that executives of a combined GM and Chrysler would face. Even if an agreement on a deal can be reached, most experts caution that ringing the necessary savings will prove difficult if not ultimately impossible.

“It’s easy to calculate the cost reductions on paper. It pencils outs very well. But it’s immensely challenging to execute,” said auto industry consultant John Casesa of Casesa Strategic Advisors.

Unions likely to oppose a merger

The combination could also face strong opposition from two powerful constituencies - the United Auto Workers union and the companies’ dealers.

UAW President Ron Gettelfinger, who just last year negotiated cost-saving labor agreements with both companies as well as Ford, told reporters in Michigan on Friday that he knows the companies have been holding discussions for a long time and that the union is very concerned such a move would result in another round of deep job cuts.

Casesa said the only way the deal makes sense is if GM takes the $11 billion in cash that Chrysler has on hand and uses it to close most of the additional capacity and dealerships it acquires as part of the deal, shut plants, buy out hourly workers and pay severance to nonunion staff. Staff cuts at the combined companies could approach the 66,000 now on Chrysler’s payroll, he said.

“You eliminate some capacity in the market and a competitor. That I think is the appeal,” he said. But he said the steps needed to close factories and dealerships would eat up most of Chrysler’s cash. So there is limited advantage to GM taking all these difficult steps.

“GM is already on a path today to be much more competitive. What it lacks is the capital to give it staying power to complete the plan,” said Casesa.

Bob Shulz, S&P’s senior automotive credit analyst, also questions whether the deal would significantly help the cash outlook of the combined company.

“We’re skeptical about how it helps them in the short run, given the state of the capital market,” said Shulz. “A deal probably requires them to spend more cash in the short-term.”

Financing also an issue

Raising the money needed to do a deal in these locked-up credit markets would probably be close to impossible, according to one strategist.

“It’s difficult enough getting money for good deals that show immediate earnings growth. To get the funding to do a deal in auto industry takes an enormous leap of faith,” said Art Hogan, chief market analyst at Jefferies & Co.

But because of this need for upfront cash, some are predicting the two automakers will make an appeal for merger-related funding directly to the federal government.

That would be in addition to the $25 billion in loans that Congress approved in this year’s energy bill to help GM, Chrysler and other automakers shift to making more fuel efficient cars.

“I believe the federal government has already decided they can not have a failure of significance in this business,” said Cole. He said that a failure at a major automaker would have a huge impact on the broader economy, with 10 more jobs being lost in related industries for every job lost on an auto assembly line.

“The cost of cleaning up a collapse of an automaker is a lot greater than preventing it from occurring,” he said.

But it’s questionable that the government would approve financing for a deal that could eliminate additional jobs in the short-run at a time of rising unemployment.

And the state of the Detroit automakers is so precarious there are many who wonder whether Washington can afford to take a risk and pump money into the firms, especially since the government is also spending hundreds of billions to bail out the banking sector.

“This is not Lee Iacocca’s Chrysler,” said University of Maryland Professor Peter Morici, referring to the former Chrysler boss, who won federal loan guarantees to save the company in the 1970s. “That company was savable. These are not. They’re not going to get fixed by just giving them money. And pretty soon we’re going to run out of money to give out.”

Merger has merits but doubts remain

Cole argues that the reduction in capacity that would take place in a deal, coupled with savings from lower research and development costs, could help a combined GM-Chrysler return to profitability.

He added that even the UAW won’t block a move to close plants and buyout more workers if it’s what is needed to ward off bankruptcy.

“What labor has to have more than anything else is a competitive profitable company over the longer term,” Cole said. “They’ll not stand in the way if this really helps out.”

But others doubt that even a leaner combined GM-Chrysler will be well positioned for a market for autos that could stay soft into 2010.

“The fact that it’s gotten this far makes me think it might actually happen. But there are so many issues to deal with, it’ll be tough to sell to the boards, the unions, the dealers. It’ll be a tough merger to pull off,” said Bob Schnorbus, chief economist with J.D. Power & Associates.

Source — CNN

NEW YORK (CNNMoney.com) – 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.

Source — CNN

NEW YORK (CNNMoney.com) – Gasoline prices extended a month-long decline but drivers are not being easily lured back to the road, despite an uptick in demand.

The national average price of a gallon of gas dropped 3.4 cents to $2.889, according to a survey of credit card swipes at gasoline stations by motorist group AAA.

The national average is now about 30% below the record-high price of $4.114 on July 17, but 15 states are still selling gas at $3 a gallon or more. The highest prices are in Alaska ($3.84) and Hawaii ($3.79) and the lowest are in Oklahoma ($2.46) and Kansas ($2.52).

In the past month alone, prices are down an average of 25% and are just 7 cents shy of year-earlier levels.

While demand is edging higher, there still appear to be fewer consumers on the road when compared with this time last year.

U.S. gasoline demand rose 2.6% during the week ended Oct. 17, according to the MasterCard Spending Pulse report, which tracks national retail sales.

However, demand levels are down 6.4% from a year ago and are also lower than during the summer months. Last week, 62.9 million barrels were sold at retail locations, compared to 66.9 million barrels that were sold during the same week in July when gasoline prices surged to a record high. One barrel is equivalent to 42 U.S. gallons.

“Statistically, the sharp drop in prices has not resulted in demand recovery, as it has been offset by shrinking home values, 401(k)s and cash in pockets,” said Ben Brockwell, director of Data, Pricing & Information Services at Oil Price Information Service in Wall, N.J. “Additionally, the change has happened so quickly that consumers are wondering if it’s real. They’re not going to touch the stove if it’s not cooled off.”

According to Brockwell, gas demand during the work week has stayed relatively steady, up only 0.5% to 1% since prices started to drop more than a month ago. But weekend driving has shown a dramatic decrease, with demand falling 7% to 10% from a year ago.

James Fisher, a professor at St. Louis University and an expert on consumer behavior, agrees that the gloomy economic environment, coupled with unpredictable oil prices, has left consumers wary. “People are skittish about the future of energy prices and they lack confidence in the future of their economic situation, which translates to disciplined spending,” he said. “Though they may be pleased to see the price per barrel plunge, they’re going to think twice before taking that road trip or using the car get doesn’t get good mileage.”

Also, habits are hard to break, and now that Americans are in the mindset of consuming less, they’re not going to go back to their old ways tout de suite, according to Kit Yarrow, Department Chair of Psychology at Golden Gate University.

In addition to financial woes, Brockwell believes a surge in the demand for fuel-efficient cars due to recent record-breaking gas prices and a heightened eco-consciousness may also be contributing to fewer sales at gas stations. While actual sales of hybrids have decreased, along with sales across the rest of the auto industry, JD Power and Associates confirms that the sales share of hybrids has risen within the light vehicle category.

“People became mindful of their consumption, but they realized the ramifications of driving more were both financial and ecological,” added Yarrow. “Now they’ve developed this consciousness, they can’t just suddenly stop thinking about it.”

But gas station owners don’t think heightened environmental awareness is the reason for the consumer’s reticence at the pump.

“I’ve seen hybrids, but the conversations with my customers have been more about 401(k)s,” said David Johnson, of Sunset Service Station in South Weymouth, Mass. “One of my customers this morning was talking about having to buy canned tomatoes - it’s really the general economic conditions that have people cutting back.”

Though he is able to buy and sell gasoline at cheaper prices because his station isn’t branded, his customers are still pulling the reins when it comes to filling up.

Source — CNN

WASHINGTON (AP) – Treasury Secretary Henry Paulson said Tuesday the current financial challenges facing the country will persist for a number of months, but he said the economy will rebound.

Paulson, speaking to an audience in New York, said that the recovery will occur because the administration, working with the Federal Reserve, is committed to taking the necessary steps to strength the financial system.

He said that close cooperation with other countries is critical and cautioned that it is important for all nations to be careful to make sure that the actions they are taking to deal with the crisis do not come at the expense of other nations.

“Our government will do what is necessary to significantly strengthen our banks and financial institutions, enabling them to increase financing for the consumption and business investments that drive U.S. economic growth,” Paulson said in remarks to the National Committee on U.S.-China Relations.

Copies of his remarks were released in Washington.

“Through a multitude of powerful actions we have and will demonstrate our commitment to unlocking our credit markets and minimizing the impact of the current instability on the rest of the U.S. economy,” Paulson said. “Although we expect current challenges to continue for a number of months, we will overcome them as we have overcome every challenge our nation has ever faced.”

He said that dealing with the financial crisis required “dramatic teps” in the United States and close coordination with other nations. He specifically mentioned talks he has had with Chinese leaders including Vice Premier Wang Qishan, who was recently appointed to lead a newly created financial crisis committee in China.

“It is clear that China accepts its responsibility as a major world economy that will work with the United States and other partners to ensure global economic stability,” Paulson said.

The Treasury Secretary also said he was looking forward to the next round of high-level talks with China, which will take place in Beijing in December.

Paulson began the discussions, known as the Strategic Economic Dialogue, in 2006 as a way to deal with a number of trade tensions between the two nations that reflected America’s soaring trade gap with China.

Paulson has expressed the hope that the next administration will continue these talks but he said Tuesday night that for this to occur, the talks must produce concrete results.

In a separate appearance Tuesday, Paulson said in an interview on the “Charlie Rose Show” that the government’s efforts to deal with the credit crisis were working but he cautioned that the disruptions to the economy would continue to be felt for some time.

“We’ve got some challenging months ahead in terms of the impact of the credit crunch on the economy,” he said.

Source — CNN

(CNNMoney.com) – In speech after speech, presidential candidate John McCain hammers on the claim that his rival Barack Obama will raise taxes on many small businesses.

At the debate on Wednesday night, McCain said, “The small businesses that we’re talking about would receive an increase in their taxes right now.”

More typically he has said: “What [Obama] hasn’t told you is that he would tax half of the income of small businesses in America,” a line used in La Crosse, Wisc., last week.

Should small business owners fear for their wallets if Obama is elected? Not the vast majority, business and tax experts say.

To make its claim, according to a McCain spokesman, the campaign counts as a small-business owner any taxpayer who files a Schedule C, E or F - the forms used to report gains and losses from business ventures and farms.

Using that definition and citing IRS data, the campaign notes that “56.8% of total small business income is earned by businesses in the top two rates, which Barack Obama has pledged to raise.”

It’s true that Obama has proposed raising taxes on the top two income rates.

But there are three main problems with McCain’s charge.

What is a small business?

First, it relies on a broad definition of what counts as a small business, including everyone who files a Schedule C, E and F.

But most people who file those forms don’t run a business for a living: Those forms are also used to report income from freelance and consulting work, real-estate rentals, and most other non-salary sources.

For example, McCain and Obama both file Schedule C returns, thanks to their book royalties - but they hardly should be considered small business owners.

In 2005, there were 21.5 million Schedule C returns filed, according to the IRS.

A more realistic definition of small businesses turns up far fewer firms. The Small Business Administration estimates that there were 6 million small businesses in 2005, as measured by those with fewer than 500 employees and with staff on the payroll other than the owner.

Who pays?

Second, even using the broad definition of small business that McCain likes, very few owners would see their own taxes rise.

That’s because the lion’s share of taxable income comes from a small number of wealthy businesses. Out of 34.7 million filers with business income on Schedules C, E or F, 479,000 filers fall into the top two brackets, according to an analysis of projected 2009 filings by the nonpartisan Tax Policy Center.

The other 34.3 million - or 98.6% - would be unaffected by Obama’s proposed rate hike.

That includes Joe “The Plumber” Wurzelbacher, whom McCain invoked nearly two dozen times at the debate Wednesday night to illustrate the plight of the average worker and small business owner.

“Joe wants to buy the business that he has been in for all of these years … he wanted to buy the business but he looked at your tax plan and he saw that he was going to pay much higher taxes,” McCain said.

In an interview afterward with WTOL, Wurzelbacher acknowledged that he’d still like to eventually buy the plumbing company he works for but that he wouldn’t yet be hit by higher taxes.

“I want to set the record straight: Currently I would not fall into Barack Obama’s $250,000-plus,” he said. “But if I’m lucky in business and taxes don’t go up then maybe I can grow the business and be in that tax bracket - well, let me rephrase it. Hopefully, that tax won’t be there.”

Few owners are that lucky in business. In a member survey conducted late last year, the National Federation of Independent Business (NFIB) found that only 14% of respondents said they had $200,000 or more in annual income.

As Tax Policy Center fellow Len Berman recently told Fortune Small Business: “Most owners of small businesses have small incomes.”

What gets taxed?

Third, even if you’re one of the rare business owners making enough money to be affected by Obama’s proposed tax increases, you still won’t see a big hike in your tax bill.

McCain’s claim that Obama “will increase taxes on 50% of small business revenue” - the line he used in the second presidential debate - is incorrect because of how income is taxed.

If a business owner falls into the top bracket, that doesn’t mean that all of his or her income is taxed at the highest level.

For example: If a small-business owner makes $210,000 in taxable income, he edges into the 33% bracket, one of the two top tax rates that Obama would like to raise.

But he would pay the higher tax only on the amount that exceeds the cutoff - in 2007, the two top tax rates applied to single filers with income of $160,850 or more and joint filers with income of at least $195,850. As a single filer, this business owner would see his federal taxes increase $1,475 under Obama’s plan, which calls for raising the 33% tax rate to 36%.

“While Obama does favor raising the top two rates, the quote is not true because not all the small business income of those in the top two rates is taxed at the 33% and 35% rates,” said Gerald Prante, a senior economist at the nonpartisan Tax Foundation.

The bottom line: McCain’s claim only works by using an overly broad definition of what counts as a “small business” - and even with that definition, fewer than 2% of business owners would be hit by Obama’s proposed rate increase. For those who are affected, the increase would be levied only on a part of their earnings, not all of them.

Source — CNN