Pescod says...

Where's the bull?:Contemplating oil which dropped today...$4-billion in aid for Canadian car makers

Where's the bull?

RTGAM



Any confidence that had come creeping back into the stock market over the past few weeks was shredded on Monday, after renewed concerns about the financial sector and the rising possibility of bankruptcy in the auto sector sent investors scrambling for cover.


The Dow Jones industrial average closed at 7522.02, down 254.16 points, or 3.3 per cent. The broader S&P 500 closed at 787.53, down 28.41 points or 3.5 per cent. Both declines were the biggest one-day setbacks for the indexes since they began a three-week rebound that sent the S&P 500 up as much as 24.7 per cent from its intraday low - the steepest rise since the 1930s.


General Motors Corp. fell 25.4 per cent after the Obama administration rejected the auto maker's plan to stay viable, sacked its chief executive over the weekend and then floated the idea that it prefers a bankruptcy filing to reorganize the ailing company.


Although GM has withered to a relatively minor part of the stock market, given that it trades at just $2.70 (U.S.) a share, investors are clearly concerned about widespread layoffs, not to mention the impact on parts suppliers. Still, despite the threat of bankruptcy hanging over the stock, it is still trading more than 110 per cent above its low point in early March.


Financials were also weak on Monday, after the U.S. Treasury Secretary said in a weekend interview that, despite some optimism in the sector, some banks are going to need considerable government assistance. At the same time, a draft communique from the G20 dashed hopes for a recovery in the second half of this year, instead suggesting that the global economic slowdown could persist until the end of 2010.


Citigroup Inc. fell 11.8 per cent and Bank of America Corp. fell 17.9 per cent. General Electric Co., which has a large and struggling financial arm, fell 7.9 per cent - taking the stock back below $10, to $9.93.


In Canada, the S&P/TSX composite index closed at 8596.22, down 224.84 points, or 2.6 per cent. The index, which had poked into positive territory last week for the year to date, has now fallen 4.4 per cent in 2009.


Among financials, Manulife Financial Corp. fell 8.5 per cent, Royal Bank of Canada fell 3.2 per cent and Toronto-Dominion Bank fell 4.2 per cent.


Energy stocks were down after the price of crude oil fell below the threshold of $50 a barrel again, to $48.41, down $3.97. Suncor Energy Inc. fell 3.8 per cent, Talisman Energy Inc. fell 1.5 per cent and Canadian Natural Resources Ltd. fell 5.3 per cent.


Gold producers were among the few winners, even though the price of gold fell to about $915 an ounce, down nearly $8. Barrick Gold Corp. rose 3 per cent and Goldcorp Inc. rose 2 per cent.

Copyright 2001 The Globe and Mail

Contemplating oil

Monday, March 30, 2009

The price of crude oil is well off its lows of $32.40 (U.S.) a barrel in mid-December, which has investors wondering whether there's more room to run.

Dina Cover of TD Securities noted that the rally in the price of crude oil to a high of $54 a barrel last week was based on increased optimism of a global economic recovery and data suggesting that fuel consumption rose during the previous week.

“However, crude oil fundamentals do not support a price in the mid-$50s, and this morning, prices have fallen back below $51 per barrel as renewed economic concerns filtered into the market,” she said in a note.

Patricia Mohr, an economist at Bank of Nova Scotia, remains more upbeat. She[amp]nbsp;argued that recent production cuts implemented by the Organization of Petroleum Exporting Countries have taken out 3.3 million barrels a day – and additional pledges for production cuts could bring that total to 4.2 million barrels a day. That is far greater than the 2.4 million barrels a day decline in year-over-year oil consumption in 2009, suggesting that supply is not out of whack with demand.

“While oil demand could retreat further in the second quarter of 2009, OPEC's cuts will go a long way towards rebalancing world markets, particularly if world demand levels out in the second half of 2009,” she said in a note, adding that non-OPEC supplies are declining. She believes that oil prices will rally to $65 a barrel in 2010 and over $75 in the medium term.[amp]nbsp;

$4-billion in aid for Canadian car makers

Shawn McCarthy and Greg Keenan

Monday, March 30, 2009

Ottawa, Toronto — The federal and Ontario governments have committed to provide $4-billion in short-term loans to General Motors of Canada Ltd. and Chrysler LLC, but the two companies must negotiate deeper savings from their workers and suppliers before the governments agree to a long-term restructuring plan.

The governments are forcing General Motors to negotiate further reductions in retiree pension and benefit costs with its Canadian Auto Workers union, just weeks after the company and union agreed to a deal that GM said would make it competitive with foreign-owned car makers in North America.

On Monday afternoon, CAW chief Ken Lewenza said the union will not reopen talks with GM Canada.

“We have determined that further fundamental changes for both companies are needed,” Federal Industry Minister Tony Clement said in Ottawa on Monday.

Chrysler must achieve deep cost reductions in its now-stalled negotiations with the CAW and also conclude a strategic alliance with Italian auto maker Fiat SpA.

Following the lead of the U.S. administration, Ottawa has given General Motors two months to conclude its viability plan, and will lend it $3-billion until then.

Chrysler has one month to conclude its work, and can borrow $1-billion; the company was expected to draw down $250-million of that amount Monday.

The companies eventually hope to borrow $11.5-billion from the Canadian governments to finance their long-term restructuring plans.

Ottawa is also demanding that the companies restrict the compensation of their top Canadian executives, including no performance bonuses for 2008, no raises in 2009 and no “golden parachutes” for executives who leave the firms.

Mr. Clement and Finance Minister Jim Flaherty, along with Ontario Economic Development Minister Michael Bryant, announced the decision at a news conference in Ottawa Monday.

In a television interview Sunday, Prime Minister Stephen Harper said his government had “no choice” but to provide some assistance to see whether it could rescue the struggling car companies.

“If we're going to put taxpayer money in this, we have to make sure it works,” Mr. Harper told Fox News. “And I think, given the scope and the size of this industry, we have no choice.”

General Motors – which employs 15,000 people in Canada – has asked the federal and Ontario government to provide up to $7.5-billion in long-term funding to maintain its 20-per-cent share of North American production in Canada.

Chrysler – with 9,400 workers in Canada – has asked for $4-billion to maintain a 25-per-cent share of production here.

Mr. Clement has stressed the aid would not only save direct production jobs but protect the vast web of domestic suppliers that feed the Canadian plants.

The two Detroit companies reached this point because of “a failure of leadership from Washington to Detroit,” President Barack Obama said Monday in outlining the U.S. government's response.

“These companies and this industry must ultimately stand on their own and not as wards of the state,” Mr. Obama said.

The President raised the possibility that one or both Chrysler and GM may have to go into bankruptcy protection to win the concessions needed from stakeholders.

In fact, “given the magnitude of the concessions needed, the most effective way for Chrysler to emerge from this restructuring with a fresh start may be by using an expedited bankruptcy process as a tool to extinguish liabilities,” the U.S. government said in a document outlining ways that the two companies might repair themselves.

After consultations with U.S. officials, the Canadian governments determined GM was not viable under the restructuring plan it submitted in February, and needed to make a more realistic assessment of future car sales and its share of the market, and find deeper cost savings from workers, management, dealers and suppliers.

Chrysler is seen as not viable as a stand-alone company and needs to conclude a strategic alliance with Fiat to qualify for further taxpayer assistance.

Ottawa insists that, while the short-term loans are not “risk-free,” they are well secured by the Canadian assets of both companies. As well, the Canadian governments will receive warrants that can be converted to GM shares, and additional guarantees from Detroit-based, privately owned Chrysler.

Chrysler, which is battling the Canada Revenue Agency over $1-billion in back taxes, cannot use the loan proceeds to pay back taxes.

Chrysler president Tom LaSorda told a parliamentary committee that, in order to close its alliance with Fiat, the company needs a letter from Canada Revenue that the government will not seek more security on the tax liability. Government officials won't say whether Canada Revenue has agreed to provide that letter.

The U.S. government wants Chrysler to wring more concessions out of the United Auto Workers at its U.S. operations, a demand that is likely to further complicate the stalled talks between the auto maker and its Canadian workers.

“Chrysler, Fiat and the UAW need to reach an agreement that entails greater concessions than those outlined in the existing loan agreements,” the U.S. government's task force on the auto industry said in its analysis of the Chrysler viability plan released early Monday.

Chrysler and the CAW are at loggerheads over a cut of $19 in the auto maker's $76 hourly labour costs in Canada. The company insists it needs concessions that will generate a savings of that amount, while the CAW has countered that it will not provide more concessions to Chrysler than it gave to GM Canada in an earlier agreement.

Talks between the union and Chrysler were put on hold over the weekend while the two sides awaited the U.S. administration's verdict on whether Chrysler is viable.

© Copyright The Globe and Mail

Last chance for GM, Chrysler?

John Crawley, Helen Massy-Beresford
Reuters

Mar 30, 2009

WASHINGTON/PARIS – The Obama administration seized the wheel of the failing U.S. auto industry on Monday, forcing out General Motors Corp's CEO, pushing Chrysler LLC toward a merger and threatening bankruptcy for both.

GM shares plunged around 20 per cent in Frankfurt after steps outlined by the White House autos panel marked a stunning reversal for management at both GM and private equity-owned Chrysler.

The moves came after Europe's second-biggest carmaker by sales – PSA Peugeot Citroen – ousted CEO Christian Streiff, replacing him with former Corus head Philippe Varin from June 1.

The Obama administration pledged only to fund GM's operations for the next 60 days while it develops a sweeping restructuring plan, instead of granting GM's request for up to a further $16 billion (dollar figures U.S.) in loans.

GM CEO Rick Wagoner, who had presided over the company's rapid decline in the past five years and had run the automaker since 2000, was forced out at the request of the autos panel headed by former investment banker Steve Rattner. A majority of GM's board will also be replaced.

"We are left to look back and say that Wagoner's appointment as both chairman and CEO in 2003 was little more than an act to ensure the dynasty of GM boardroom arrogance and failure continued," said Howard Wheeldon, senior strategist at brokerage BGC Partners.

Wheeldon said Wagoner's departure had been all but inevitable since the automaker sought government funds and said he was disappointed the authorities had not insisted on an external replacement.

UNDER FIRE

Wagoner protégé and GM President and Chief Operating Officer Fritz Henderson was named as new CEO. Wagoner's departure came as the Obama administration came under fire for not blocking bonuses to executives at American International Group Inc.

The senior labour leader of GM's German brand Opel, being spun off with the UK's Vauxhall and seeking investors and government support, said the move was overdue.

In Europe, auto stocks fell on concerns about the broader industry impact of the failure of a major U.S. producer. The DJ Stoxx European autos index fell 6.4 per cent by mid morning, while PSA Peugeot Citroen fell 7.7 per cent.

In France PSA Chairman Thierry Peugeot said in a statement the exceptional difficulties faced by the industry warranted a change in management, but Streiff defended himself saying his policies had equipped the group to weather the storm.

Some analysts viewed the appointment of Philippe Varin as positive.

"It brings somebody in that can look at the problem with fresh eyes. The hope will be that he will have a similar impact here to the impact (Sergio) Marchionne had at Fiat, and indeed Varin had at Corus," said Credit Suisse analyst Stuart Pearson.

Elsewhere, Russia's Avtovaz bucked the trend, its shares surging after Prime Minister Vladimir Putin pledged 20 billion roubles in aid, while Spain's plan to grant subsidies for green cars won approval from the European Commission.

Chrysler, controlled by Cerberus Capital Management, was given 30 days to complete an alliance with Italy's Fiat or face a cut-off of its government funding that could force its liquidation.

Fiat was not immediately available for comment.

The autos panel rejected a claim by Cerberus that Chrysler could be viable on its own, citing its relatively small size, weak product line-up and declining U.S. market share.

AGGRESSIVE RESTRUCTURING

If Chrysler can complete a tie-up with Fiat and cost-saving deals with creditors and its major union, the Treasury would consider investing up to another $6 billion, officials said.

U.S. officials said there had been progress in recent negotiations involving the task force. Fiat had agreed to take less than the 35 per cent stake in Chrysler the two companies had first negotiated, the senior official said.

Meanwhile, Henderson, a key architect of GM's now-rejected turnaround plan, was charged with working with U.S. officials and advisers to develop a more aggressive restructuring.

"We believe our approach to GM is starting with a clean sheet of paper," the senior official said.

GM bondholders, the official said, could have to take less than the 33-cent-on-the-dollar payout they have been offered and should abandon hope of a government guarantee.

The Obama administration had also not ruled out a quick bankruptcy process for either GM or Chrysler, he said.

Wagoner had been outspoken in his opposition to a Chapter 11 reorganization, saying it would drive away consumers and probably lead to GM's liquidation.

GM had asked for more than $16 billion in new government loans, while Chrysler wanted $5 billion to ride out the weakest market for new cars in almost 30 years.

GM has lost about $82 billion since 2005 when its problems began to mount in the U.S. market. GM stock has also lost about 95 per cent of its value since Wagoner took over as CEO. Although he inherited many of the company's deeper problems, his critics say he failed to act fast enough to resolve them.

Count me in on this golden stock buying opportunity

"There hasn't been a recession yet that hasn't ended."

Abby Joseph Cohen, a partner and chief U.S. investment strategist at Goldman, Sachs & Co. during the Squawk Financial Summit aired on CNBC March 24.

I was delighted to hear a practical observation from an economist because as a personal rule, I usually tune out the economists and their forecasts.

I find their little graphs displaying changes in retail sales, initial jobless claims, CPI, GDP, housing starts and so on to have no relevance to the stock market.

Cohen began her career as an economist in 1973 at the Federal Reserve Board in Washington, D.C., serving until 1977.

She worked as an economist and quantitative research director for T. Rowe Price Associates.

She crossed over to the money management side, obtaining her chartered financial analyst charterholder designation in 1980.

She joined Goldman Sachs Group Inc. in New York City as a vice-president and co-chair of the firm's investment policy committee in 1990 and was named a managing director in 1996.

Cohen developed a reputation as a so-called "perpetual bull" and was ridiculed for her bullish predictions.

Her reputation was further damaged when she failed to foresee the great crash of 2008.

Aside from the bad calls, Cohen's "visionary" style is admirable. When Cohen says there is $4 trillion (U.S.) in sideline cash and this is "the investment opportunity for a generation," I am all ears.

Now before I find myself being drawn into another compelling story spun by a very clever personality on business television I have to understand that my investments are my sole decision and responsibility.

The reality is that followers of any business media program must understand the host, the guest and the network do not guarantee any specific profit or loss outcome of any recommendation.

Viewers should be aware of the real risk of loss in following any advice you hear on any business media show.

Clearly, we must do our homework before acting because we need to know if the great bear of 2007-2008 has run its course. There are two basic tests to be satisfied in order to determine if the time is right to invest.

We know that bear markets are the result of falling stock prices. Falling stock prices are technically in a down trend as set out in a series of lower highs and lower lows. We also know that new bull markets need leadership from the important sectors such as financial, energy and technology

I have never seen a new bull market get underway without leadership from at least two of these important stock groups.

Let us assume the lows of October through November 2008 to be significant because every stock sector (including the gold index) posted new 52-week lows during that period.

Let us also assume lows of March to be significant because many stock sectors such as consumer staples, energy, materials and technology did not violate their October through November lows.

Our chart this week is that of the daily closes of the iShares CDN S&P/TSX Energy Index Fund (TSX-XEG) plotted above the SPDR Technology Select Sector Fund (NYSE-XLK).

Note both of these important leaders have so far not violated their important October—November lows. Both the U.S. and Canadian financial indices are trading above their respective October — November lows.

Most bear markets post a new low about every 12 to 16 weeks – and so far all of the important stock sectors and major indices are trading above their lows of 20-plus weeks ago.

This is clearly a base building process which satisfies the condition required to make a technical call for the end of the bear market in global equities.

Abby you got me, count me in on "the investment opportunity for a generation."

Bill Carrigan is an independent stock-market analyst.