Economic & Market Update: November 17, 2008
“US Car Corp in the Works”
Chip Norton, Managing Director of Fixed Income & Economic Analysis
Last Week:
Retail Sales: Weaker than expected – Down 2.8%
Dow: 8497 – Traders take it south
S&P 500: 873 – Econ woes abound
VIX: 66 – Volatility up 10 points
10-Yr Bond: 3.75% – Long bond stable
3-mo TBill: 0.15% – Yield cut in half for the week
AAA 10-yr Municipal: 4.32% – Retail bid strong
Dollar/Euro: $1.26 – Slight strength in the greenback
Dollar/Yen: 96.50 – Yen has small bounce
Oil: $55.65 – Crude dives $10 for the week, gas follows
Economics This Week:
Date Item Est. Comment
11/18 PPI -1.8%/0.1% Declines due to energy and econ slowdown
11/19 CPI -0.8%/0.1% Same story as PPI
11/19 Housing Starts 780k Look for weakness again
Retail Sales Disappoint
Last week’s retail sales data were even weaker than expected with a 2.8% decline for the month and a soft sales report in nearly every sector. At the same time, the announcements of BestBuy and Circuit City being in major trouble as we head into the holiday season does not bode well for November sales. On the other side, however, were decent results from Wal-Mart. Clearly, shoppers are being selective and finding value wherever they can. My “drive by” mall observation is that every store is pulling out the stops on early season deals and significant discounts. They are no doubt all in survival mode. The good news is that shoppers have probably the best pricing deals in many, many years. The question will be if the “hunker down” mentality is in full force or not. At least it’s costing a lot less to drive to the mall. With gas now below $2 per gallon for “regular” gas in many states, the good old days of relatively cheap fuel have returned. Too bad nobody has interest in buying a big honking SUV – at least not an American-made one.
Straight Car Talk
We all knew this day would come for the big three – either fly or die. It’s not like the problems in the US auto industry just appeared from nowhere. GM, Chrysler, and Ford have been struggling for many years. The legacy of high healthcare and union costs means cars come off the production line at a loss before they even hit the dealer showrooms. So now we taxpayers are faced with the question of providing a bailout. This, of course, isn’t the first time a big bailout program has been developed. It was a mere 30 years ago that Lee Iacocca pulled Chrysler from the ashes with a $1.5 bill loan guarantee from Uncle Sam. In December 1979, Congress passed the "Chrysler Corporation Loan Guarantee Act of 1979." It was lobbied for by auto workers and dealers in every congressional district who feared the loss of their livelihoods – sound familiar? Back then, as part of the bailout, the military and the US government bought thousands of cars for government use. Today, the big three are looking for a number north of $55 billion to keep them afloat. Do you find it kind of funny (funny interesting, not funny “ha-ha”) that rather than encourage Americans to buy cars from the big three, our government finds it an easier job to just give them money – hmmmm.
It’s a huge ticket to keep three companies that have lost their competitive edge from downsizing and retooling on their own. Have you noticed that Toyota, Honda, Volkswagen, and Mercedes don’t seem to be having the same problems? We all know the implications of lost jobs in Michigan and elsewhere, but isn’t this simply reinforcing negative behavior? And more importantly, do you really think this will solve their issues and costs such as healthcare and union deals? To this observer, it’s just a band-aid that will require surgery again before the ultimate demise of the patient. I guess I’d feel a lot better if there were a Lee Iacocca leading the charge forward to a better reinvented car industry. There just isn’t – all I see are handouts to survive. I say amputate the limbs now to live to fight another day as a stronger, leaner, more innovative industry. Ooops, that’s not so popular to say, is it?
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