Market Talk

We've got just the thing for over-indebted consumers: new cars.

The more I read about GM’s $3.5B acquisition of auto finance company AmeriCredit (ACF), the more confused I get.

The government-controlled GM is getting back in the subprime lending business only a few years after arguably the worst credit crisis since the Great Depression. Yet memory appears to be short-lived, at least for GM. From WSJ’s Sharon Terlop:

The deal gives GM an in-house auto lender for the first time since it sold control of its GMAC finance arm in 2006, leaving it the only major car maker without a so-called captive finance arm.

GM sees the acquisition as a way to drive up sales, which is critical as the company plans a return to the public stock markets as soon as this fall.

“Dealers and customers have said not having in-house finance arm hurts our ability to offer loans and leases,” GM Chief Executive Edward E. Whitacre Jr. said in a conference call with analysts and media. “We were not as competitive as we could be.”

Evidently, GM is convinced that heading down this road will make itself a more well-rounded company and one that should become more popular by the time it’s ready to go public again.

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We said almost four months ago that this “unintended acceleration” issue with Toyota automobiles didn’t smell right, and our suspicions about who was to blame (Toyota cars, or the US driver) appear to be validated now.

From WSJ:

The U.S. Department of Transportation has analyzed dozens of data recorders from Toyota Motor Corp. vehicles involved in accidents blamed on sudden acceleration and found that at the time of the crashes, throttles were wide open and the brakes were not engaged, people familiar with the findings said.

The results suggest that some drivers who said their Toyota and Lexus vehicles surged out of control were mistakenly flooring the accelerator when they intended to jam on the brakes.

And recently, Daniel Smith, the National Highway Transportation Safety Administration’s associate administrator for enforcement said the following to a panel of the National Academy of Sciences (also from WSJ):

“In spite of our investigations, we have not actually been able yet to find a defect” in electronic throttle-control systems.

“We’re bound and determined that if it exists we’re going to find it,” he added. “But as yet, we haven’t found it.”

As for the investigation (which amazingly still includes the resources of NASA), it continues and we’ll surely be treated some time down the road to a lengthy report, paid for by wasted tax dollars to reach a conclusion that was always obvious.

And Toyota, they’re taking the high road, with president Akio Toyoda saying the company won’t fault customers for its problems, as part of its PR response.

Admirable of them, since the terms “witch hunt” and “railroaded” come to mind. Wouldn’t blame Toyota for taking a cue from former labor secretary Ray Donovan, and asking Transportation’s Ray LaHood, “Which office do we go to to get our reputation back?”

Excuse me sir, can I interest you in a brand new Cadillac?

With all we’ve been through, have we learned nothing, GM?

After the financial and economic disaster experienced in the past few years, mainly at the hands of shoddy lending practices, GM apparently is hot to drive back down that road once again.

WSJ’s Sharon Terlep reports GM is negotiating with “financial institutions” in a bid to gain wider access to auto loans for its customers, “particularly those with weaker credit.” Weaker credit. Uh-oh. Why, GM? Why? 

Terlep tells us:

GM wants to boost sales “at a time when the company is looking to become more attractive on Wall Street ahead of an initial public stock offering.”

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I'm sure I'll have no problem moving this sucker now.

Now we’ll get to the Journal story I wanted to point out to you. We made the point this week that what you are starting to see in the economy, in the stock market, is the fading of government and central bank stimulus. I do believe that’s at least partially responsible for the stock selloff.

More concretely, you’re starting to see it in the housing market, where the sugar-high from the home-buyer tax credit is wearing off. It may leave, to mix metaphors, a nasty hangover. From the Journal’s James Hagerty and Nick Timiraos:

The withdrawal of federal tax credits for home buyers led to a steeper-than-expected plunge in May home sales in much of the U.S., as the housing market struggles to wean itself from government support.

Economists and real estate analysts expected home sales to slow after the tax credit, of as much as $8,000, expired at the end of April. But early data from real estate brokers indicate that the sales decline has been far more substantial than expected, with some markets showing declines of 25% to 30%.

Now, really, ask yourself, why should anybody be surprised by this? Since the tax credit was first hatched, roughly half the home sales have been by first-time buyers (the credit originally was offered to only first-timers, the extension also extended it to other buyers.) Consequently, all the action in the market was for homes priced under $500,000, the ones first-timers could afford (I have that anecdotally from talking to real estate agents, but I believe I could find figures to back it up.)

So is a 25-30% slide in sales post-credit really a surprise? It shouldn’t be. So many buyers were “pulled forward,” as they say, that a big drop-off should be expected right about now. If the NAR didn’t expect a pullback at least this big, they’re just fools.

The trick will be to see how sales shape up after that initial drop-off. If memory serves, the cash-for-clunkers program took auto sales from somewhere under the 10M-range — the seasonally adjusted annual rate (SAAR) — to something like 14M, only to see a drop after the program ended, and ground out currently at about 11.4M.

That is a slight enough gain that you could argue it is probably the level sales would have come up to from the 2009 lows with or without the clunkers deal. It also is a level that puts auto sales back where they were in 1983, despite a significant population growth.

Like John wrote yesterday, all of these little stimulus gimmicks are band-aids. Uncle George, and then Uncle Barry, thought they could throw money at the problem and it would go away. But it’s not that simple. It’s not nearly that simple.

Doesn't look like much of a "V"

Just reading the headlines could leave one thinking the US auto industry is booming and roaring its way on the recovery path. Check out these auto sales data from last month, courtesy of WSJ:

GM reported a 17% year-over-year rise in monthly sales, which included a 32% surge for the company’s four remaining brands: Chevrolet, Buick, GMC, Cadillac. The car maker held on to its market share despite shedding four of its eight brands last year.

Meantime, Ford Motor Co. posted a 22% increase in May U.S. light-vehicle sales as it benefited from high demand for its crossovers and trucks, as well as strong sales to fleets such as rental companies…

Toyota Motor Corp., which has been contending with fallout from safety recalls, posted a 6.7% rise for May, selling 162,813 cars and trucks, though sales for Toyota-brand passenger cars fell 1.9%.

Chrysler Group LLC, meanwhile, reported its May sales jumped 33% to 104,819 vehicles, surpassing the 100,000 mark for the first time in 14 months. Results were boosted by the Jeep Wrangler, it said. It was the car maker’s second consecutive year-over-year increase in monthly sales.

Korea’s Hyundai Motor Co. continued its strong showing in the U.S., as its May sales rose 33% to 49,045.

At Nissan Motor Corp., U.S. sales rose 24% to 83,764 as consumers snapped up the Japanese company’s Versa compact and Armada full-sized sport-utility vehicle, said Al Castignetti, vice president of sales for North America.

But enthusiasm needs to be muted a bit, cautions Michael Shedlock, an investment adviser for SitkaPacific Capital. “Before everyone brings out the high-fives celebrating a miraculous recovery, let’s put this rebound in perspective,” he says on his blog.

GM estimates total US sales reached 11.4 million in May on an annualized basis, up from 11.2 million in the previous month. But Shedlock publishes a chart of light vehicle auto and truck sales dating back to 1975, which shows how diminished the estimated 11.4M annualized sales rate truly is. Sales spiked last year during the cash-for-clunkers craze, but have since come way off those levels after the program ran out.

“The industry had impressive gains percentage-wise, but sales are at early 1980′s levels,” he says. “This is hardly a V-Shaped recovery.”

(Chart courtesy of Michael Shedlock)

- The surging US dollar is “eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy,” the Pragmatic Capitalist says. “As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.”

- University of Oregon economics professor Mark Thoma isn’t on board with Yale professor Robert Shiller’s argument in a NYT op-ed that fears of double-dip recession could become a self-fulfilling prophecy. Bigger economic shocks would seem “the more likely trigger” of double-dip, Thoma says. “Even more likely is an outbreak of extreme hawkishness causing us to pull back too fast on fiscal stimulus, and to raise interest rates too fast.”

- Turns out Palm’s sale to Hewlett-Packard (HPQ) last month wasn’t exactly a last-minute deal. Digital Daily blogger John Paczkowski points to a PALM SEC filing, which reveals the buyout process began in February and the company was in contact with 16 potential acquirers.

- HAMP April data shows program slowing down.

- The “shock and awe” effects of Europe’s big bailout package are already starting to fade, and the concern is that long-term viability is being sacrificed for short-term gains, Pimco CEO Mohamed El-Erian writes at FT’s Alphaville blog. So far, the package is just giving investors an escape hatch, without addressing the real issue: solvency.

- GM isn’t putting on the hard sell for an IPO.

- Reuters blogger Felix Salmon looks at how government bailouts affect moral hazard and the role they play in market volatility. “A lot of investors have made a lot of money from the moral-hazard trade over the past 15 years or so. When that trade comes to an end, expect the losses to be just as big, if not bigger.”

- Ryan Avent shows how the role the declining euro plays in the global economy.

- Though it’s still early for conclusive evidence, it appears Apple’s (AAPL) Mac sales haven’t been cannibalized by the iPad, Digital Daily blogger John Paczkowski says, citing research from Piper Jaffray.

- Jason Zweig looks at the debate over holding brokers to a higher standard.

Things are hopping...now.

Enjoy the economic growth we’re seeing now, because the second half of 2010 may not be so kind.

At least that’s what Calculated Risk blogger Bill McBride predicts, offering four reasons for his thinking: declining stimulus spending, inventory correction running its course, lack of income growth and troubles in China and Europe.

“Maybe some commodities like oil will be cheaper and give a boost to the US economy…maybe the saving rate will fall further and consumption will continue to grow faster than income…maybe residential investment will pick up sooner than I expect…maybe,” McBride says. “But this suggests a second half slowdown to me.”

UC San Diego economics professor James Hamilton hits on a similar theme in a blog post today, saying there’s a prevailing theme in much of the recent economic data. “The US economy has returned to positive, but still disappointing, growth,” he writes.

Auto sales have “bounced off the bottom but are still less than halfway back up to where we were,” he says, and Chicago Fed’s national activity index edged up in March but can’t break into positive territory. “All of which confirms the impression from earlier data — US growth has resumed, but we still have a long way to go,” Hamilton says.

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Auto-part suppliers (except for the one that made all those defective pedals, of course) had a good first quarter, and most are at least moderately optimistic that the rebound for the auto industry will stick. Still, if we’re talking about

From The Upshot:

There’s a lot of confidence, and in some cases even a little swagger, coming from U.S. suppliers to global auto makers these days.

After two very lean years that saw sales plunge and bankruptcies sweep the industry, rejuvenated sales and production rates—U.S. auto sales were up 20% in April—are forging higher profits for auto-parts suppliers.

Compared to record-low production levels in early 2009, this year’s first quarter was “a blowout,” BorgWarner Inc. finance chief Robin Adams crowed last week. “You know, if there was a slaughter rule in the auto industry for year-over-year production performance, it would have been invoked in the first quarter,” Mr. Adams said, referring to the gains.

- Greece’s historic bailout proves what many have believed for some time: Greece’s problems quickly turned into a “death spiral,” Paul Krugman says. “The EU has now, in effect, given up on trying to restore market confidence; instead, it’s going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding.”

- The Greek bailout isn’t a bond cure-all as some investors expect government bond yields to keep increasing for many debt-laden countries, WSJ reports.

- Most asset classes saw minimal gains in April. But REITs were the lone exception, posting a 7.1% monthly return and have now gained 18% in 2010. At The Capital Spectator, James Picerno discusses whether they are they ripe for some profit-taking.

- Both consumption and spending rose in March, but spending growth outpaced income growth, forcing the savings rate down again to its lowest level in a year and a half. But “this isn’t the worst thing in the world,” Ryan Avent writes at The Economist’s Free Exchange blog. Not at least in the short-term.

- Newspaper ad sales are still falling, but the declines have significantly abated throughout first three months of 2010, Newsosaur blogger Alan Mutter reports.

- As the tiff between Apple (AAPL) and Adobe (ADBE) heats up, Microsoft (MSFT) weighs in, detailing its side of the debate.

- IPad 3G’s launch weekend was a success, though not as successful as original Wi-Fi-only release last month. Overall, Apple says iPad sales have already topped 1 million.

- US auto sales increased 20% in April compared to depressed levels a year ago as Chrysler, Ford and Toyota all reported sales up at least 25%.

- MarketWatch’s Mark Hulbert offers advice on how to gain exposure to financials without betting on Goldman Sachs (GS).

-Details of the Times Square bomb plot continue to unfold.

Bulls kick off the week flexing their muscles.

US stocks wipe away much of Friday’s losses as everything seems to fall the bulls’ way.

Rising consumer spending and increasing auto sales as well as manufacturing activity hitting its highest level since July 2004 boosts sentiment. The market, which loves M&A, got a big, headline making deal with United and Continental. And what finally seems like a resolution to Greece’s debt woes contributed to the run-up.

Consumer discretionaries among the market’s biggest gainers as the consumer is slowly returning to pre-recession habits. Consumers increased their spending and cut their savings in March, not a good sign for the long-term economy but a positive development for these stocks in the short-term.

DJIA closes up 143, or 1.3%, to 11152, marking its biggest gain since Feb. 16 and fourth largest gain of the year. The index recaptured roughly 90% of Friday’s 159-point drop. Still, this marked the fourth triple-digit move out of the last six sessions, and that kind of volatility doesn’t exactly speak to overriding confidence.

Dow components Caterpillar and Boeing each rise 2.7% and contribute to about 20% of the index’s overall gain. The floats of those two stocks are among the smallest of the 30 in the average, so when the momentum gets cooking, as it did today, it’s easier to see a more pronounced increase (or decrease) in the dollar-value change in those stock prices.

S&P rises 16 to 1202, crossing back above the key 1200 level. Nasdaq Comp jumps 38 to 2499.

(John Shipman and Paul Vigna contributed to this post.)