General Motors said Wednesday that it has fallen far short of the bondholder support it needed for its proposed debt-for-stock offer, virtually guaranteeing that the nation's largest automaker will be forced to file for bankruptcy court protection within the next five days.
The bondholders were not satisfied with the prospect of owning only 10% of the company when the U.S. government would own nearly 70% and a union-controlled trust fund up to 20%.
The bondholders own $27 billion in corporate notes. GM (GM, Fortune 500) needed owners of 90% of those bonds to accept stock in return for the debt in order to reduce its interest expenses to a more manageable level.
But GM's announcement said that bondholders who took the company's offer were "substantially less than the amount required."
The company owes the bondholders $1 billion in interest payments on June 1 - money it says it does not have.
The company also faces a June 1 deadline to win concessions from its union, creditors and other parties or be forced into bankruptcy by the U.S. Treasury Department, which is funding GM's operations through direct federal help.
"The GM board of directors will be meeting to discuss GM's next steps in light of the expiration of the exchange offers," said the company's statement.
In another sign that a bankruptcy filing could come as soon as Friday, GM moved up the pay date for its U.S. employees this week.
Hourly employees represented by the United Auto Workers union were paid Wednesday, and salaried employees will be paid Thursday, said GM spokesman Chris Lee. Both normally would have been paid Friday.
"Obviously there's a lot of anxiety as we approach the June 1 deadline," said Lee. "We just moved the payroll up as a way to reassure our employees that payroll will continue regardless of what takes place next week."
GM had previously announced that it would make about $2 billion in payments due to suppliers on Thursday, rather than waiting for the normally scheduled payment on June 2. If the company files for bankruptcy, it would need court approval to make payments to employees and suppliers.
Lee said the early payroll payments should not be taken as an indication that the filing would come on Friday.
What next for bondholders?
The ad hoc committee of major bondholders had no immediate comment on the vote. The group, which includes major pension funds and mutual funds that own large blocks of the bonds, had proposed the bondholders as a group receive 58% of the stock in GM, rather than the 10% being offered.
The major bondholders have also said they want to continue negotiating with Treasury's auto industry task force overseeing the federal bailout of GM and Chrysler LLC.
A source with knowledge of GM's restructuring discussions said Treasury is willing to hold negotiations up until June 1.
"We've said consistently that we were happy to talk to any stakeholder any time about anything," the source said. "Recently there have been far more constructive and orderly conversations."
0:00 /02:53Remove GM from the Dow
But the source added that Treasury believed the offer made to GM creditors, which would give them 225 shares of GM stock for every $1,000 they are owed, is fair and equitable, and that it is not likely to be substantially increased. The 225 shares would be worth $324 based on Tuesday's closing price, although the value of these shares could be significantly less after a reorganization.
However, if GM does go into bankruptcy, the source said that Treasury believes the bondholders would likely get even less than what was offered.
"In any kind of liquidation scenario, they would get nothing or something unbelievably small," said the source.
It is estimated that about 20% of the $27 billion in debt, between $5 billion and $6 billion, is held by individual investors who bought the bonds for the steady revenue stream they provided. Most of the bonds pay better than 7% interest, and those that were purchased at a discount since GM debt was downgraded to junk bond status in 2005 pay an even better return.
GM stock does not pay any dividend and will not do so for the foreseeable future. Stock is also a riskier investment than bonds because stockholders are certain to be wiped out if there is a bankruptcy filing, while bondholders can hope that they will recover some of their investment in court.
But rating agency Standard & Poor's estimates that the bondholders, whose debt is not secured by specific company assets, will get between 0% and 10% of their investment back in bankruptcy court.
The stock being offered bondholders would be equal to only about 10% of the company. GM's stated plan is for the government and a union-controlled trust fund to own 89% of the company between them.
The UAW disclosed to its local presidents Tuesday that it has agreed to accept 17.5% of GM's common stock to cover future retiree health care costs, as well as warrants for an additional 2.5% that give the trust fund the right to buy shares at a very low price.
Previously, many had expected the union to control nearly 40% of GM shares, rather than 20%. But the source familiar with the restructuring discussions said the lower stake for the UAW does not open the way for bondholders to get a larger stake in GM.
The source said the Canadian government will own a small percentage of GM, as it does of Chrysler. The source added that a Treasury stake well above 50% is fair given that the government has provided GM with $19.4 billion in help so far and will likely give the company tens of billions of dollars more to fund its operations during bankruptcy.
General Motors' U.S. operations are not the only ones experiencing trouble. The company is looking to sell a majority stake in its money-losing European business, which operates under the Opel and Vauxhall brands.
On Wednesday, GM spun off those brands - including plants, sales organizations and patents - into a new company. GM said the move will allow the German government to place those assets into a trusteeship and provide its own bailout to continue operations until a sale can be finalized.
Wednesday, May 27, 2009
Thursday, May 21, 2009
Economy to resume growth this year
The economy will start growing in the second half of 2009, but it will be several years before the positive effects of a turnaround will be felt, the Congressional Budget Office said Thursday.
"Even if the economy returns to positive growth this year, the loss in output, income and employment during the recession and the next few years will be huge," said Douglas Elmendorf, director of the CBO, in testimony before the House Budget Committee.
The CBO is updating its economic forecasts and will release new estimates in August. Elmendorf expects the new numbers will be less optimistic than the estimates the agency released in March.
"CBO's forecast in August is likely to show even larger shortfalls in output over the next few years," he said.
The agency is expecting that the unemployment rate will continue to rise into the second half of next year and will peak at 10.5%. In March, CBO forecast unemployment would peak in the first half of next year at 9.5%.
The $787 billion economic stimulus package enacted in February is helping to boost GDP this year and, to a lesser extent, will do so in 2010 as well. Thereafter, economic growth will be hindered if private demand does not pick up, he told lawmakers.
And even if private demand picks up, "it still takes a long time to catch up with the weak growth last year and this year," Elmendorf said.
Elmendorf was asked to lay out what he saw as potential risks going forward. "The number of sandpits we see ahead would scare a good golfer," he said.
Among them is the exposure of small- and medium-sized banks to the fortunes of commercial real estate.
"The fundamentals in the market are very weak," Elmendorf said. He said current price declines of between 35% and 45% exceed those of the early 1990s, when commercial property collapsed. Meanwhile, delinquency rates are up.
With estimates of commercial real estate losses totaling more than $200 billion, that could exceed the revenue small and mid-size banks take in, thereby reducing their capital.
As goes Britain?
This week, Standard & Poor's lowered its ratings outlook to negative for the United Kingdom, in great part due to its growing debt levels.
House Budget Committee Ranking Member Paul Ryan, R-Wisc., asked Elmendorf to assess whether the United States is likely to suffer the same fate.
The U.S. government and others around the world flood the debt markets with government issues. That, in turn, can cause interest rates to rise as investors start to demand greater reward for the risk they're taking.
"Certainly in the next several years, there's likely to be significant upward pressure on interest rates," Elmendorf said. But any increase "is likely to be delayed until the economy comes out of its [downturn]."
CBO projects that, under the current congressional budget resolution for fiscal year 2010, the debt held by the public could rise to more than 60% of GDP over the next 5 years. Under the president's budget proposals, it could rise more than 80% over the next 10 years.
"This is a grim outlook for the federal budget," Elmendorf said. "At some point investors may decide the United States is not the safest haven. [But there's great] uncertainty when sentiment will turn." If it does, it could turn more quickly than expected, he noted.
"Even if the economy returns to positive growth this year, the loss in output, income and employment during the recession and the next few years will be huge," said Douglas Elmendorf, director of the CBO, in testimony before the House Budget Committee.
The CBO is updating its economic forecasts and will release new estimates in August. Elmendorf expects the new numbers will be less optimistic than the estimates the agency released in March.
"CBO's forecast in August is likely to show even larger shortfalls in output over the next few years," he said.
The agency is expecting that the unemployment rate will continue to rise into the second half of next year and will peak at 10.5%. In March, CBO forecast unemployment would peak in the first half of next year at 9.5%.
The $787 billion economic stimulus package enacted in February is helping to boost GDP this year and, to a lesser extent, will do so in 2010 as well. Thereafter, economic growth will be hindered if private demand does not pick up, he told lawmakers.
And even if private demand picks up, "it still takes a long time to catch up with the weak growth last year and this year," Elmendorf said.
Elmendorf was asked to lay out what he saw as potential risks going forward. "The number of sandpits we see ahead would scare a good golfer," he said.
Among them is the exposure of small- and medium-sized banks to the fortunes of commercial real estate.
"The fundamentals in the market are very weak," Elmendorf said. He said current price declines of between 35% and 45% exceed those of the early 1990s, when commercial property collapsed. Meanwhile, delinquency rates are up.
With estimates of commercial real estate losses totaling more than $200 billion, that could exceed the revenue small and mid-size banks take in, thereby reducing their capital.
As goes Britain?
This week, Standard & Poor's lowered its ratings outlook to negative for the United Kingdom, in great part due to its growing debt levels.
House Budget Committee Ranking Member Paul Ryan, R-Wisc., asked Elmendorf to assess whether the United States is likely to suffer the same fate.
The U.S. government and others around the world flood the debt markets with government issues. That, in turn, can cause interest rates to rise as investors start to demand greater reward for the risk they're taking.
"Certainly in the next several years, there's likely to be significant upward pressure on interest rates," Elmendorf said. But any increase "is likely to be delayed until the economy comes out of its [downturn]."
CBO projects that, under the current congressional budget resolution for fiscal year 2010, the debt held by the public could rise to more than 60% of GDP over the next 5 years. Under the president's budget proposals, it could rise more than 80% over the next 10 years.
"This is a grim outlook for the federal budget," Elmendorf said. "At some point investors may decide the United States is not the safest haven. [But there's great] uncertainty when sentiment will turn." If it does, it could turn more quickly than expected, he noted.
Tuesday, May 12, 2009
GM falls to 76-year low as execs sell stock
General Motors Corp. stock plunged more than 22% to a 76-year low Tuesday, a day after a group of GM executives disclosed they had sold shares in the struggling automaker.
Six GM executives, led by former GM Vice Chairman and product chief Bob Lutz, disclosed Monday that they sold almost $315,000 in stock and liquidated their remaining direct holdings in the automaker.
The stock sale underscores the extreme pressure on GM with less than three weeks remaining for the embattled automaker to win deals to slash debt and operating costs with its major union and bondholders to avoid bankruptcy.
GM (GM, Fortune 500) is headed for either a bankruptcy filing or an out-of-court restructuring that would wipe out current stockholders by flooding the market with new shares to pay off creditors.
0:00 /00:49GM CEO: Bankruptcy is an option
The automaker's stock could be worthless in a bankruptcy or worth less than 2 cents apiece if it proceeds with plans to issue shares to creditors led by the U.S. Treasury Department, the company has said.
"It's a lose-lose situation as far as we see it, and the shares kind of seem to have been doing a levitating magic trick and just staying up there in the $1.50 to $2.00 range," Standard & Poor's equity analyst Efraim Levy said.
0:00 /2:09GM brands, jobs junkyard-bound
"Given that there is a two-week deadline coming there should be additional downside pressure," Levy said.
The automaker has historically been one of the powerhouses in the best-known measurement of U.S. stocks, the Dow Jones Industrial Average. It has been on the index for 83 consecutive years and despite the dramatic fall in the price of its shares, Dow has still kept the stock as part of the index.
GM's market capitalization as of Tuesday was about $690 million, making it one of the smaller Dow members.
The company has lost $88 billion since its turnaround efforts began in 2005 under former Chief Executive Rick Wagoner.
The automaker's shares were down 21% or 30 cents, at $1.14 on the New York Stock Exchange. The stock had fallen to as low as $1.09 earlier in the day, the lowest since 1933.
GM was first listed on the Dow in 1915. Journal editors removed it - as they did more frequently back then - adding it again in 1925, and it has remained ever since. Only General Electric Co. (GE, Fortune 500), which joined in 1907, has been there longer.
Six GM executives, led by former GM Vice Chairman and product chief Bob Lutz, disclosed Monday that they sold almost $315,000 in stock and liquidated their remaining direct holdings in the automaker.
The stock sale underscores the extreme pressure on GM with less than three weeks remaining for the embattled automaker to win deals to slash debt and operating costs with its major union and bondholders to avoid bankruptcy.
GM (GM, Fortune 500) is headed for either a bankruptcy filing or an out-of-court restructuring that would wipe out current stockholders by flooding the market with new shares to pay off creditors.
0:00 /00:49GM CEO: Bankruptcy is an option
The automaker's stock could be worthless in a bankruptcy or worth less than 2 cents apiece if it proceeds with plans to issue shares to creditors led by the U.S. Treasury Department, the company has said.
"It's a lose-lose situation as far as we see it, and the shares kind of seem to have been doing a levitating magic trick and just staying up there in the $1.50 to $2.00 range," Standard & Poor's equity analyst Efraim Levy said.
0:00 /2:09GM brands, jobs junkyard-bound
"Given that there is a two-week deadline coming there should be additional downside pressure," Levy said.
The automaker has historically been one of the powerhouses in the best-known measurement of U.S. stocks, the Dow Jones Industrial Average. It has been on the index for 83 consecutive years and despite the dramatic fall in the price of its shares, Dow has still kept the stock as part of the index.
GM's market capitalization as of Tuesday was about $690 million, making it one of the smaller Dow members.
The company has lost $88 billion since its turnaround efforts began in 2005 under former Chief Executive Rick Wagoner.
The automaker's shares were down 21% or 30 cents, at $1.14 on the New York Stock Exchange. The stock had fallen to as low as $1.09 earlier in the day, the lowest since 1933.
GM was first listed on the Dow in 1915. Journal editors removed it - as they did more frequently back then - adding it again in 1925, and it has remained ever since. Only General Electric Co. (GE, Fortune 500), which joined in 1907, has been there longer.
Tuesday, May 5, 2009
Stocks flip-flop in early trade
Stocks were mixed Tuesday as investors were cautious after the previous session's big run and ahead of comments from Federal Reserve Chairman Ben Bernanke.
The Dow Jones industrial average (INDU) added a few points in the early going. The S&P 500 (SPX) index was barely changed. The Nasdaq composite (COMP) fell 6 points, or 0.4%.
U.S. stocks climbed Monday, buoyed by optimism about the economic recovery. The Nasdaq rose to a six-month peak while the Dow and S&P 500 reached their highest levels in almost four months.
"It's going to take a powerful catalyst to [continue to] move us forward," said Art Hogan, chief market strategist at Jefferies & Co.
Economy: Federal Reserve Chairman Ben Bernanke is due to give his outlook on the economy to the Joint Economic Committee.
A reading on the services sector of the economy from the Institute for Supply Management, a purchasing managers' group, is also due out.
Banks: The financial sector will remain in focus as investors await the release of the results of the U.S. government's stress tests on banks, which are due out Thursday.
At least 10 of the 19 big banks under review -- including Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) -- may need to boost their capital, according to a report in The Wall Street Journal. The number of reported banks that may need to boost their capital requirements has been fluctuating in the runup to the release of the results.
Companies: Swiss bank UBS (UBS) reported a $1.76 billion quarterly loss and said it remains cautious about the outlook because the global economy has continued to worsen.
Dow component Kraft Foods (KFT, Fortune 500) reported higher quarterly earnings that topped estimates. But revenue fell as the stronger U.S. dollar hurt sales overseas. Kraft shares rallied 6% Tuesday morning.
Fellow Dow component Walt Disney (DIS, Fortune 500) was expected to release results after the closing bell.
The Dow Jones industrial average (INDU) added a few points in the early going. The S&P 500 (SPX) index was barely changed. The Nasdaq composite (COMP) fell 6 points, or 0.4%.
U.S. stocks climbed Monday, buoyed by optimism about the economic recovery. The Nasdaq rose to a six-month peak while the Dow and S&P 500 reached their highest levels in almost four months.
"It's going to take a powerful catalyst to [continue to] move us forward," said Art Hogan, chief market strategist at Jefferies & Co.
Economy: Federal Reserve Chairman Ben Bernanke is due to give his outlook on the economy to the Joint Economic Committee.
A reading on the services sector of the economy from the Institute for Supply Management, a purchasing managers' group, is also due out.
Banks: The financial sector will remain in focus as investors await the release of the results of the U.S. government's stress tests on banks, which are due out Thursday.
At least 10 of the 19 big banks under review -- including Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) -- may need to boost their capital, according to a report in The Wall Street Journal. The number of reported banks that may need to boost their capital requirements has been fluctuating in the runup to the release of the results.
Companies: Swiss bank UBS (UBS) reported a $1.76 billion quarterly loss and said it remains cautious about the outlook because the global economy has continued to worsen.
Dow component Kraft Foods (KFT, Fortune 500) reported higher quarterly earnings that topped estimates. But revenue fell as the stronger U.S. dollar hurt sales overseas. Kraft shares rallied 6% Tuesday morning.
Fellow Dow component Walt Disney (DIS, Fortune 500) was expected to release results after the closing bell.
New Chrysler auto incentives coming
With bankruptcy threatening to further weigh down the carmaker's sales, Chrysler is expected to announce a new incentive program Tuesday.
Chrysler's "Employee Pricing Plus Plus," program ended just days after the carmaker declared Chapter 11 bankruptcy. That program combined cash rebates with price reductions and cut-rate financing for qualified customers.
The new sales program is expected to rely heavily on giving dealers cash incentives, which means that customers will see big price reductions at the dealership, said Jessica Caldwell, an industry analyst with the automotive Website Edmunds.com.
Dealer incentives give auto dealers extra cash that can, in turn, be used to offset price reductions negotiated with customers. Dealer cash incentives are more subtle than straight cash rebates, so they aren't as damaging to a car brand's image and they don't reduce resale value of cars the way more straightforward customer rebates do.
But incentive money for dealers will likely be paired with limited customer rebates as well, Caldwell said. The carmaker announced in a conference call on Friday that the incentive plan would include some "loyalty" incentives for returning Chrysler, Dodge and Jeep buyers.
Chrysler has been the biggest spender among all auto manufacturers on incentives in the U.S. market. Last month, Chrysler spent $4,288 per vehicle on incentives.
0:00 /2:06Chrysler then and now
The next highest spender was General Motors, which is also undergoing a government-driven restructuring and may declare bankruptcy later this month. GM spent $4,063 per sale.
Despite the incentive spending, Chrysler sales were down 48% last month compared to April, 2008. Reduced fleet sales were a big part of the drop, the carmaker said.
Chrysler will probably not follow the lead of GM (GM, Fortune 500) and Ford (F, Fortune 500) by offering payment protection to buyers who might lose their jobs, Chrysler vice president of sales Steve Landry said in the Friday call. Those sorts of incentives didn't seem to be working well for other automakers, he said.
Media reports have drawn conflicting pictures of the bankruptcy announcement's impact on sales with some dealers reporting empty showrooms over the weekend and others higher-than-normal customer traffic.
12 cars that made Chrysler
Not everyone sees bankruptcy as a disaster for Chrysler sales. Some customers are optimistic, focusing more on the possibility of a Fiat deal and on the fact that Chrysler isn't going out of business, said Scott Painter, chief executive of Zag.com, an automotive buying service provider, and Truecar.com, an auto pricing Website.
Interest in Chrysler, Dodge and Jeep products has actually gone up, he said.
Chrysler rolled out a new print advertising campaign over the weekend aimed at reassuring customers that the carmaker will not be going away anytime soon.
Over the tagline "Come see what we're building for you," the ad describes Chrysler's planned relationship with Fiat and points out that the carmaker's warranties are now backed by the federal government.
Chrysler's "Employee Pricing Plus Plus," program ended just days after the carmaker declared Chapter 11 bankruptcy. That program combined cash rebates with price reductions and cut-rate financing for qualified customers.
The new sales program is expected to rely heavily on giving dealers cash incentives, which means that customers will see big price reductions at the dealership, said Jessica Caldwell, an industry analyst with the automotive Website Edmunds.com.
Dealer incentives give auto dealers extra cash that can, in turn, be used to offset price reductions negotiated with customers. Dealer cash incentives are more subtle than straight cash rebates, so they aren't as damaging to a car brand's image and they don't reduce resale value of cars the way more straightforward customer rebates do.
But incentive money for dealers will likely be paired with limited customer rebates as well, Caldwell said. The carmaker announced in a conference call on Friday that the incentive plan would include some "loyalty" incentives for returning Chrysler, Dodge and Jeep buyers.
Chrysler has been the biggest spender among all auto manufacturers on incentives in the U.S. market. Last month, Chrysler spent $4,288 per vehicle on incentives.
0:00 /2:06Chrysler then and now
The next highest spender was General Motors, which is also undergoing a government-driven restructuring and may declare bankruptcy later this month. GM spent $4,063 per sale.
Despite the incentive spending, Chrysler sales were down 48% last month compared to April, 2008. Reduced fleet sales were a big part of the drop, the carmaker said.
Chrysler will probably not follow the lead of GM (GM, Fortune 500) and Ford (F, Fortune 500) by offering payment protection to buyers who might lose their jobs, Chrysler vice president of sales Steve Landry said in the Friday call. Those sorts of incentives didn't seem to be working well for other automakers, he said.
Media reports have drawn conflicting pictures of the bankruptcy announcement's impact on sales with some dealers reporting empty showrooms over the weekend and others higher-than-normal customer traffic.
12 cars that made Chrysler
Not everyone sees bankruptcy as a disaster for Chrysler sales. Some customers are optimistic, focusing more on the possibility of a Fiat deal and on the fact that Chrysler isn't going out of business, said Scott Painter, chief executive of Zag.com, an automotive buying service provider, and Truecar.com, an auto pricing Website.
Interest in Chrysler, Dodge and Jeep products has actually gone up, he said.
Chrysler rolled out a new print advertising campaign over the weekend aimed at reassuring customers that the carmaker will not be going away anytime soon.
Over the tagline "Come see what we're building for you," the ad describes Chrysler's planned relationship with Fiat and points out that the carmaker's warranties are now backed by the federal government.
Monday, May 4, 2009
Are consumers back from the dead?
This Thursday is D-Day for the nation's biggest banks. That's when regulators will release the eagerly awaited results of the stress tests conducted on the 19 largest financial institutions.
But that's not the only important news that will be out that day. It's also when most top retailers will be releasing sales figures for April.
Investors should pay close attention because it will be the first real glimpse into whether consumers really are feeling more confident about the economy.
Even though the stock market has rallied sharply in the past two months on hopes that the recession may soon be over, it's still unclear whether the economy can quickly bounce back or if the road to recovery will be a slow, tough slog.
One thing is certain, though. For the economy to rebound, consumers are going to have to lead the way. Consumer spending makes up about two-thirds of the nation's overall economy.
Talkback: Are you feeling more confident about the economy?
There are some tentative signs that consumers are no longer paralyzed by fear as they were after the collapse of Lehman Brothers in September.
Although the government reported last week that the economy dipped at an annualized pace of 6.1% in the first quarter, personal consumption expenditures rose 2.2%. That's encouraging since it comes on the heels of consumer spending declines of about 4% in both the third and fourth quarters of last year.
"Barring some nasty surprise, the negative adjustment in consumer spending is largely over. The big declines are behind us," said Chris Probyn, chief economist with State Street Global Advisors in Boston.
Investors are definitely betting that the consumer is back. The S&P Retail Index is up nearly 45% since the market's low point in early March, outperforming the broader S&P 500's gain of about 30%. Shares of some prominent retailers, including Macy's (M, Fortune 500) and J.C. Penney (JCP, Fortune 500), have doubled.
Still, some fear that investors may be getting ahead of themselves. Are consumers, which have begun to save more in the wake of last fall's credit crisis, really going to return to their spendthrift ways? Is there really that much pent-up demand for goods?
0:00 /02:49Commercial real estate trouble
There is a good chance that consumers really have learned their lesson and that people will stop relying so much on debt.
For example, Paul Nolte, director of investments for Hinsdale Associates, a money-management firm based in Hinsdale, Ill., said that when he asks a lot of clients what they would do if someone gave them an extra $5,000, most indicated they would pay down debt and put money into savings.
"There is a shift in mentality. Consumers will spend when they have to. But you won't see that level of debt-driven spending like you did in the past," said Nolte.
And if people are more cautious with their money, that's likely to mean that the economy will take longer to start growing again than the market now seems to think.
"People are looking for the light at the end of the tunnel, but investors are kidding themselves if they think this will be a normal quick V-shaped recovery," said Stephanie Giroux, chief investment strategist with TD Ameritrade. "There are excesses that built up over 20 to 30 years. That's not going to unwind in a one to two year period."
Retailers likely endured another tough month in April. According to estimates from Thomson Reuters, same-store sales are expected to be flat. And if you exclude the expected 3% increase from Wal-Mart (WMT, Fortune 500), which has a big impact on the overall results, sales are forecast to be down 3%.
Department store chains Kohl's is expected to post 7% declines in sales at stores open at least a year, while analysts are projecting a 9% drop for JW Nordstrom (JWN, Fortune 500).
It also goes without saying that consumer spending patterns are tied closely to the health of the job market. And there are no signs that companies are going to hire en masse anytime soon.
The government will release employment figures for April on Friday. Economists are forecasting a loss of 620,000 jobs and an increase in the unemployment rate to 8.9% from 8.5% in March.
And with many banks still reluctant to lend, it may be tough for consumers to spend more -- even if they wanted to. That means that any boost to spending is likely to be more modest.
"Will consumers be able to increase spending 3% to 4% like they were heading into this recession? No," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm. "Increases are likely to be in the 1% to 2% range. You may get temporary pops but that is not going to be sustained given limited access to credit."
Now don't get me wrong. If consumers moderately increase their spending, that's great news for the economy in the long-term. That's because it will lessen the chances of another credit bubble-induced recession as ugly as this one taking place anytime soon.
But the market's big bounce does not seem to be predicated on hopes of economic stabilization over the long haul, but a rapid rebound by the end of the summer.
That's why the April retail sales numbers are so crucial. We already know that spending was up in the first quarter. Has it carried over into the second quarter? If a couple of big name retailers report better-than-expected sales for April on Thursday, then that could be a sign that this market rally is for real.
If not, hopes of an imminent recovery could fade. Nolte worries that earnings estimates for many companies may be too high because of unreasonable hopes about how much people will really spend.
"Historically, you should never bet against the consumer. But this time might finally be the time," Nolte said.
But that's not the only important news that will be out that day. It's also when most top retailers will be releasing sales figures for April.
Investors should pay close attention because it will be the first real glimpse into whether consumers really are feeling more confident about the economy.
Even though the stock market has rallied sharply in the past two months on hopes that the recession may soon be over, it's still unclear whether the economy can quickly bounce back or if the road to recovery will be a slow, tough slog.
One thing is certain, though. For the economy to rebound, consumers are going to have to lead the way. Consumer spending makes up about two-thirds of the nation's overall economy.
Talkback: Are you feeling more confident about the economy?
There are some tentative signs that consumers are no longer paralyzed by fear as they were after the collapse of Lehman Brothers in September.
Although the government reported last week that the economy dipped at an annualized pace of 6.1% in the first quarter, personal consumption expenditures rose 2.2%. That's encouraging since it comes on the heels of consumer spending declines of about 4% in both the third and fourth quarters of last year.
"Barring some nasty surprise, the negative adjustment in consumer spending is largely over. The big declines are behind us," said Chris Probyn, chief economist with State Street Global Advisors in Boston.
Investors are definitely betting that the consumer is back. The S&P Retail Index is up nearly 45% since the market's low point in early March, outperforming the broader S&P 500's gain of about 30%. Shares of some prominent retailers, including Macy's (M, Fortune 500) and J.C. Penney (JCP, Fortune 500), have doubled.
Still, some fear that investors may be getting ahead of themselves. Are consumers, which have begun to save more in the wake of last fall's credit crisis, really going to return to their spendthrift ways? Is there really that much pent-up demand for goods?
0:00 /02:49Commercial real estate trouble
There is a good chance that consumers really have learned their lesson and that people will stop relying so much on debt.
For example, Paul Nolte, director of investments for Hinsdale Associates, a money-management firm based in Hinsdale, Ill., said that when he asks a lot of clients what they would do if someone gave them an extra $5,000, most indicated they would pay down debt and put money into savings.
"There is a shift in mentality. Consumers will spend when they have to. But you won't see that level of debt-driven spending like you did in the past," said Nolte.
And if people are more cautious with their money, that's likely to mean that the economy will take longer to start growing again than the market now seems to think.
"People are looking for the light at the end of the tunnel, but investors are kidding themselves if they think this will be a normal quick V-shaped recovery," said Stephanie Giroux, chief investment strategist with TD Ameritrade. "There are excesses that built up over 20 to 30 years. That's not going to unwind in a one to two year period."
Retailers likely endured another tough month in April. According to estimates from Thomson Reuters, same-store sales are expected to be flat. And if you exclude the expected 3% increase from Wal-Mart (WMT, Fortune 500), which has a big impact on the overall results, sales are forecast to be down 3%.
Department store chains Kohl's is expected to post 7% declines in sales at stores open at least a year, while analysts are projecting a 9% drop for JW Nordstrom (JWN, Fortune 500).
It also goes without saying that consumer spending patterns are tied closely to the health of the job market. And there are no signs that companies are going to hire en masse anytime soon.
The government will release employment figures for April on Friday. Economists are forecasting a loss of 620,000 jobs and an increase in the unemployment rate to 8.9% from 8.5% in March.
And with many banks still reluctant to lend, it may be tough for consumers to spend more -- even if they wanted to. That means that any boost to spending is likely to be more modest.
"Will consumers be able to increase spending 3% to 4% like they were heading into this recession? No," said Tom Higgins, chief economist with Payden & Rygel, a Los Angeles-based money management firm. "Increases are likely to be in the 1% to 2% range. You may get temporary pops but that is not going to be sustained given limited access to credit."
Now don't get me wrong. If consumers moderately increase their spending, that's great news for the economy in the long-term. That's because it will lessen the chances of another credit bubble-induced recession as ugly as this one taking place anytime soon.
But the market's big bounce does not seem to be predicated on hopes of economic stabilization over the long haul, but a rapid rebound by the end of the summer.
That's why the April retail sales numbers are so crucial. We already know that spending was up in the first quarter. Has it carried over into the second quarter? If a couple of big name retailers report better-than-expected sales for April on Thursday, then that could be a sign that this market rally is for real.
If not, hopes of an imminent recovery could fade. Nolte worries that earnings estimates for many companies may be too high because of unreasonable hopes about how much people will really spend.
"Historically, you should never bet against the consumer. But this time might finally be the time," Nolte said.
Friday, May 1, 2009
Buffett fans set for 'capitalist Woodstock'
Warren Buffett's Berkshire Hathaway had its worst year ever in 2008. But for the throng gathering in Omaha for Saturday's annual shareholder meeting, that's ancient history.
Berkshire fans are far more interested in learning how Buffett sizes up the investing opportunities arising out of the global economic slowdown, and how the downgrade earlier this month of Berkshire's credit rating might affect the firm.
Mostly, they expect to hear how Berkshire (BRKA, Fortune 500) will get back on track following a year in which its net worth dropped by $11.5 billion and its shares gave back five years of gains.
"There are lots of opportunities out there right now," said Mohnish Pabrai, the managing partner at Berkshire shareholder Pabrai Investment funds in Irvine, Calif. "I'd love to see Warren give us some color on things like where they have been active in the debt markets."
There should be ample time for color this year, even with attendance at the meeting expected to reach a record 35,000. One key is a shift in the format for the question-and-answer session with Buffett and Berkshire Vice Chairman Charlie Munger.
0:00 /4:58Buffett's annus horribilis
The Berkshire meeting has long been a bit of a free-for-all, with Buffett and Munger fielding questions from anyone who took the microphones on the floor. In 1997, a year in which annual meeting attendance was estimated at 7,000, he dubbed the event "our capitalist's version of Woodstock" -- a label that has stuck.
But this year's event should be a bit more orderly. The early morning rush to line up at the microphones has been replaced by a lottery, and Buffett and Munger will answer some questions that were submitted online and filtered by three journalists - including Carol Loomis of Fortune.
The idea, Buffett has said, is to cut down on the non-Berkshire-related questions that had grown more prevalent as Buffett's profile rose.
Last year he fielded one question on whether he believes in Christ ("I am agnostic") and three on environmental issues tied to the dams that Berkshire's Pacificorp unit operates on the Klamath River in Oregon. Buffett said regulators would have the final say there.
"In recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last year there were practically none," Buffett said in the guide to this year's annual meeting. "So we need to steer the discussion back to Berkshire's businesses."
'Tailwinds' in insurance
The story there, Berkshire shareholders say, is largely upbeat, despite the downgrades earlier this month that stripped Berkshire of its triple-A credit rating. One of the downgrades came from Moody's (MCO) - the New York-based bond rater of which Berkshire owns 20%.
Many investors brushed off the downgrades, coming as they did from ratings agencies that failed to warn investors of the credit meltdown. Still, some will be paying attention to any comments Buffett might make on the subject.
"I'd be interested to hear how the ratings actions could affect the business," said Glenn Tongue, managing partner at Berkshire shareholder T2 Partners.
Meanwhile, there's little doubt that the third of Berkshire's industrial portfolio that focuses on economically sensitive businesses like retail and homebuilding will be hit hard by the recession.
But as Buffett pointed out in February's release of his 2008 letter to shareholders, two-thirds of the company's businesses are in utilities and insurance -- which are less apt to suffer in an economic downturn.
Berkshire holders such as Pabrai say the insurance business, which has been strong in recent years, could be in for even bigger gains as capital-impaired rivals raise prices to restore their financial health.
"There could be some real tailwinds in some of the insurance lines," said Pabrai.
Others note the regular income Berkshire shareholders stand to reap from the flurry of investments Buffett has made in blue-chip companies such as Goldman Sachs (GS, Fortune 500), General Electric (GE, Fortune 500) and Tiffany (TIF).
They also see room for a substantial rise in Berkshire shares. At a recent $94,000 each, the class A shares have jumped more than 30% since the financial sector hit a recent low in early March -- but remain 38% below their all-time high from December 2007.
The company's less-expensive Class B shares, which have far fewer voting rights, have also bounced back lately. But at about $3,100 a share, they are also well below their peak from December 2007.
At last month's low, Tongue says investors in the A shares were essentially paying for the value of Berkshire's investment portfolio and getting the company's operating businesses -- such as insurer Geico and ice cream chain Dairy Queen -- for free.
"Would you pay $70,000 for an envelope that contained $70,000 in cash and $50,000 worth of businesses?" he asked. "I think you would."
This weekend in Omaha, it may be difficult to find anyone who wouldn't
Berkshire fans are far more interested in learning how Buffett sizes up the investing opportunities arising out of the global economic slowdown, and how the downgrade earlier this month of Berkshire's credit rating might affect the firm.
Mostly, they expect to hear how Berkshire (BRKA, Fortune 500) will get back on track following a year in which its net worth dropped by $11.5 billion and its shares gave back five years of gains.
"There are lots of opportunities out there right now," said Mohnish Pabrai, the managing partner at Berkshire shareholder Pabrai Investment funds in Irvine, Calif. "I'd love to see Warren give us some color on things like where they have been active in the debt markets."
There should be ample time for color this year, even with attendance at the meeting expected to reach a record 35,000. One key is a shift in the format for the question-and-answer session with Buffett and Berkshire Vice Chairman Charlie Munger.
0:00 /4:58Buffett's annus horribilis
The Berkshire meeting has long been a bit of a free-for-all, with Buffett and Munger fielding questions from anyone who took the microphones on the floor. In 1997, a year in which annual meeting attendance was estimated at 7,000, he dubbed the event "our capitalist's version of Woodstock" -- a label that has stuck.
But this year's event should be a bit more orderly. The early morning rush to line up at the microphones has been replaced by a lottery, and Buffett and Munger will answer some questions that were submitted online and filtered by three journalists - including Carol Loomis of Fortune.
The idea, Buffett has said, is to cut down on the non-Berkshire-related questions that had grown more prevalent as Buffett's profile rose.
Last year he fielded one question on whether he believes in Christ ("I am agnostic") and three on environmental issues tied to the dams that Berkshire's Pacificorp unit operates on the Klamath River in Oregon. Buffett said regulators would have the final say there.
"In recent years, we have received only a handful of questions directly related to Berkshire and its operations. Last year there were practically none," Buffett said in the guide to this year's annual meeting. "So we need to steer the discussion back to Berkshire's businesses."
'Tailwinds' in insurance
The story there, Berkshire shareholders say, is largely upbeat, despite the downgrades earlier this month that stripped Berkshire of its triple-A credit rating. One of the downgrades came from Moody's (MCO) - the New York-based bond rater of which Berkshire owns 20%.
Many investors brushed off the downgrades, coming as they did from ratings agencies that failed to warn investors of the credit meltdown. Still, some will be paying attention to any comments Buffett might make on the subject.
"I'd be interested to hear how the ratings actions could affect the business," said Glenn Tongue, managing partner at Berkshire shareholder T2 Partners.
Meanwhile, there's little doubt that the third of Berkshire's industrial portfolio that focuses on economically sensitive businesses like retail and homebuilding will be hit hard by the recession.
But as Buffett pointed out in February's release of his 2008 letter to shareholders, two-thirds of the company's businesses are in utilities and insurance -- which are less apt to suffer in an economic downturn.
Berkshire holders such as Pabrai say the insurance business, which has been strong in recent years, could be in for even bigger gains as capital-impaired rivals raise prices to restore their financial health.
"There could be some real tailwinds in some of the insurance lines," said Pabrai.
Others note the regular income Berkshire shareholders stand to reap from the flurry of investments Buffett has made in blue-chip companies such as Goldman Sachs (GS, Fortune 500), General Electric (GE, Fortune 500) and Tiffany (TIF).
They also see room for a substantial rise in Berkshire shares. At a recent $94,000 each, the class A shares have jumped more than 30% since the financial sector hit a recent low in early March -- but remain 38% below their all-time high from December 2007.
The company's less-expensive Class B shares, which have far fewer voting rights, have also bounced back lately. But at about $3,100 a share, they are also well below their peak from December 2007.
At last month's low, Tongue says investors in the A shares were essentially paying for the value of Berkshire's investment portfolio and getting the company's operating businesses -- such as insurer Geico and ice cream chain Dairy Queen -- for free.
"Would you pay $70,000 for an envelope that contained $70,000 in cash and $50,000 worth of businesses?" he asked. "I think you would."
This weekend in Omaha, it may be difficult to find anyone who wouldn't
Stocks choppy after strong month
Stocks seesawed Friday morning, despite a few better-than-expected economic reports, as investors took a breather after a strong month on Wall Street.
The Dow Jones industrial average (INDU) lost a few points around 90 minutes into the session. The S&P 500 (SPX) index was barely lower. The Nasdaq composite (COMP) fell 3 points, or 0.2%.
Declines had been bigger in the first 30 minutes of the session.
Stocks are coming off a strong April in which bets that the economy is close to stabilizing fueled a big run up. For the month, the Nasdaq gained 12.3%, the S&P 500 gained 9.4% and the Dow Jones gained 7.3%.
Economy: The Institute for Supply Management's manufacturing index rose to 40.1 in April from 36.3 in March versus forecasts for a rise to 38.4. Any reading under 50 indicates the sector is still contracting, but the report was consistent with other recent signs that the pace of the economic slowdown is easing.
Another report showed that consumer sentiment improved in April. The University of Michigan's consumer sentiment index was revised up to 65.1 from a previous reading of 61.9. Economists thought it would hold steady.
A third report showed March factory orders fell 0.9% after rising 0.7% in April. Economists thought orders would fall 0.6%, on average.
Corporate news: Dow component Chevron (CVX, Fortune 500) reported a big drop in first-quarter sales and earnings, that missed expectations, due to a steep drop in energy prices. Shares of the No. 2 oil services firm were little changed.
Fellow Dow component Exxon Mobil (XOM, Fortune 500) reported weaker sales and earnings Thursday.
MasterCard (MA, Fortune 500) reported weaker quarterly earnings that topped estimates on weaker revenue that missed expectations.
Citigroup (C, Fortune 500) is selling its Japanese retail brokerage business to Sumitomo Mitsui Financial Group in a deal worth $7.9 billion.
In other news, the release of the results of the "stress tests" of the nation's largest banks is expected late Thursday, a government source told Reuters. Results were initially expected to be released on Monday.
Autos: Chrysler filed for Chapter 11 bankruptcy protection Thursday after failing to reach a deal with some of its smaller lenders to cut debt. But a deal has been negotiated to combine the company with Italian automaker Fiat, allowing Chrysler to stay in business.
Chrysler is privately owned. Shares of rivals General Motors (GM, Fortune 500) and Ford Motor (F, Fortune 500) slipped Friday after rallying Thursday.
Automakers are due to report April sales figures later in the day.
Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.17% from 3.14% Thursday. Treasury prices and yields move in opposite directions.
Lending rates were mixed. The 3-month Libor rate fell to 1.01% from 1.02% Thursday, according to Bloomberg.com. The overnight Libor rate rose to 0.24% from 0.23%. Libor is a bank-to-bank lending rate.
0:00 /2:29Chrysler breakdown
Other markets: In global trading, Asian markets ended higher and European markets rallied in afternoon trading.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for June delivery rose $1.36 to $52.48 a barrel on the New York Mercantile Exchange.
COMEX gold for June delivery fell $6.70 to $884.50 an ounce.
The Dow Jones industrial average (INDU) lost a few points around 90 minutes into the session. The S&P 500 (SPX) index was barely lower. The Nasdaq composite (COMP) fell 3 points, or 0.2%.
Declines had been bigger in the first 30 minutes of the session.
Stocks are coming off a strong April in which bets that the economy is close to stabilizing fueled a big run up. For the month, the Nasdaq gained 12.3%, the S&P 500 gained 9.4% and the Dow Jones gained 7.3%.
Economy: The Institute for Supply Management's manufacturing index rose to 40.1 in April from 36.3 in March versus forecasts for a rise to 38.4. Any reading under 50 indicates the sector is still contracting, but the report was consistent with other recent signs that the pace of the economic slowdown is easing.
Another report showed that consumer sentiment improved in April. The University of Michigan's consumer sentiment index was revised up to 65.1 from a previous reading of 61.9. Economists thought it would hold steady.
A third report showed March factory orders fell 0.9% after rising 0.7% in April. Economists thought orders would fall 0.6%, on average.
Corporate news: Dow component Chevron (CVX, Fortune 500) reported a big drop in first-quarter sales and earnings, that missed expectations, due to a steep drop in energy prices. Shares of the No. 2 oil services firm were little changed.
Fellow Dow component Exxon Mobil (XOM, Fortune 500) reported weaker sales and earnings Thursday.
MasterCard (MA, Fortune 500) reported weaker quarterly earnings that topped estimates on weaker revenue that missed expectations.
Citigroup (C, Fortune 500) is selling its Japanese retail brokerage business to Sumitomo Mitsui Financial Group in a deal worth $7.9 billion.
In other news, the release of the results of the "stress tests" of the nation's largest banks is expected late Thursday, a government source told Reuters. Results were initially expected to be released on Monday.
Autos: Chrysler filed for Chapter 11 bankruptcy protection Thursday after failing to reach a deal with some of its smaller lenders to cut debt. But a deal has been negotiated to combine the company with Italian automaker Fiat, allowing Chrysler to stay in business.
Chrysler is privately owned. Shares of rivals General Motors (GM, Fortune 500) and Ford Motor (F, Fortune 500) slipped Friday after rallying Thursday.
Automakers are due to report April sales figures later in the day.
Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.17% from 3.14% Thursday. Treasury prices and yields move in opposite directions.
Lending rates were mixed. The 3-month Libor rate fell to 1.01% from 1.02% Thursday, according to Bloomberg.com. The overnight Libor rate rose to 0.24% from 0.23%. Libor is a bank-to-bank lending rate.
0:00 /2:29Chrysler breakdown
Other markets: In global trading, Asian markets ended higher and European markets rallied in afternoon trading.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for June delivery rose $1.36 to $52.48 a barrel on the New York Mercantile Exchange.
COMEX gold for June delivery fell $6.70 to $884.50 an ounce.
Subscribe to:
Posts (Atom)