Friday, December 12, 2008

Senate Sends Detroit Pink Slips

It has been amazing to watch the unwinding of the economy the past few months, but some of the most riveting action occurred this week on Capitol Hill, where congress debated a bailout plan for Detroit's Big 3 automakers: Ford, Chrysler and General Motors.

Forget the fact that there are at least 15 other automobile manufacturers that are producing vehicles in the US, the executives of these oh-so-American icons of the well-traveled road have been bending the collective ears of congress for the better part of a month now, having argued against the "catastrophic" consequences of their imminent failure by seeking first, a bailout, second, a bridge loan, and finally, "anything" for two of the three (Chrysler and GM), ad Ford fessed up to being in better shape than they had previously let on.

At the end of Thursday night, they still had nothing to show for their weeks of jaw-boning. Senate Republicans (God bless each and every one of their conservative hearts) balked at the idea that the UAW unions would not accept wage concessions to seal a deal, though behind the scenes, it was suggested that the senators wanted the removal of key management figures - especially GM's Rick Waggoner - before signing off on any deal, and that was not part of the package.

In any case, the Senate vote was so far short of a majority last night that the deal fell apart. Now the Bush White House is pondering helping the automakers out on their own, using $15 billion from the TARP plan, originally designed to help ailing banks, but recently having empowered Treasury Secretary to spend the money as he sees fit. Oddly enough, there is just $15 billion left in the first $250 billion tranche approved by congress, exactly the amount GM and Chrysler need.

If the money is made available to Chrysler, it will be a first, in that Chrysler was purchased wholly by Cerberus Equity Partners, a private firm, a few years ago. If the government gets into the business of bailing out privately-held firms, then the doors to hell have been flung wide open. Every small business in need of a lift should head to the Capitol to get his or her share of the booty.

It's a fascinating chapter in the nation's financial history, albeit a very weird one and one which could lead to unforeseen, unintended consequences down the road.

In response, global markets tanked on word that congress was not going to help the automakers, and Wall Street began the morning with a steep loss, until rumor of the administration acting without congressional approval or action began to percolate through the brokerages. stocks gathered momentum throughout the day, with all indices ending with marginal gains.

Dow 8,629.68, +64.59 (0.75%)
NASDAQ 1,540.72, +32.84 (2.18%)
S&P 500 879.73, +6.14 (0.70%)
NYSE Composite 5,543.96, +39.23 (0.71%)

The indicators inside the broader market were mixed. While advancing issues defeated decliners for the day, 4219-2420, However, the steep morning sell-off produced a discouraging result as new lows expanded to 267, while only 11 issues registered new highs. This is indeed a departure from the trend, signaling further losses ahead. Volume was the lightest of the week.

NYSE Volume 5,981,236,500
NASDAQ Volume 1,866,510,500

Adding to the morning's scare was the PPI release for November, which showed the producer price index falling by 2.2% on the heels of October's 2.8% drop. It was just more news the markets didn't need, further proof that the economy remains in a recession/deflation downward spiral.

This piece of video also caught my attention. If you think the worst is behind us, wait until February when malls will turn into ghost towns. It's not getting any better. In fact, economic conditions are almost certain to worsen over the next few months.

Commodities reversed course from the previous few sessions. Oil lost $1.70, to $46.28. Gold dipped $6.10, to $820.50, and silver fell 20 cents to $10.23. Food and fuel prices continue to decline in both wholesale and retail markets. Good for consumers, but not so bright for producers and farmers.

We continue to seek a bottom but don't see one any time soon. Have a nice weekend.

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