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.