MarketView for December 2

Summary 

The volatility that has been an ongoing characteristic of the equity markets ever since the meltdown of the securities based on subprime mortgages was very much in evidence on Tuesday. Stocks pared gains and the Dow Jones industrial average briefly turned negative after General Motors reported U.S. vehicle sales declined by 41 percent in November. The good news is that by the closing bell, the markets had recovered from a nasty downturn and turned in a welcome gain.

Much of the late gain was due to the momentum generated by General Electric when it pledged to leave its dividend intact. The end result was that financial stocks recovered a sizable chunk of Monday's record loss after the Federal Reserve extended several emergency measures integral to stabilizing banks during the credit crisis. The S&P financial index rose nearly 8 percent, as Citigroup and Bank of America both closed up nearly 12 percent.

But the spotlight was on conglomerate GE, whose shares surged 13.6 percent to $17.61 after the maker of goods from jet engines to light bulbs stated that it plans to scale back its sizable finance arm and cut jobs as the recession digs deeper, while maintaining its dividend.

Energy stocks, currently the cheapest S&P sector in relation to earnings, also drove the Dow higher on Monday. Chevron gained almost 5 percent to $75.54, while Exxon Mobil climbed over 4 percent to $77.61. General Motors recovered from Monday’s retreat to end up almost 6 percent at $4.85, while Ford closed up 6 percent at $2.70.

Executives of the big three are due to present Washington with their plans to justify a $25 billion bailout as worries about possible bankruptcy persist. As part of its plan, Ford said it expected its overall and North American automotive business to break even or be profitable in 2011 and did not anticipate a liquidity crisis, barring a bankruptcy of one of its domestic rivals.

Even with the broad gains, worries about the deepening economic slump caused some caution, as 3M fell over 2.4 percent to $60.86 after a brokerage downgrade.

GE To Scale Back

General Electric reported on Tuesday that it plans to scale back its finance arm and repeated that it will pay its regular dividend next year, sending shares up 13.6 percent, their biggest one-day percentage gain in more than a quarter century. GE expects fourth-quarter earnings to be at the low end of its prior forecast and said it aims to pull back from riskier finance businesses, such as consumer mortgages and some equipment finance, and reduce its reliance on the troubled commercial-paper market.

Investors welcomed the idea of restructuring GE Capital, even as GE officials warned they do not expect that business to return to growth until 2010. The finance arm, with businesses ranging from investing in real estate to commercial lending, was largely responsible for GE's 12 percent profit drop so far this year.

"Obviously the macro environment remains very challenging," said Keith Sherin, GE's chief financial officer, in a briefing with investors on Tuesday. "We know that we have to reduce our cost structure in this environment."

GE reiterated its intention to pay a $1.24 per share annual dividend next year and maintain its triple-A credit rating. Moody's Investors Service affirmed its top rating on GE and GE Capital with a stable outlook, meaning that a rating change is not likely over the next 12 to 18 months.

GE, which has seen its shares beaten down about 52 percent so far this year amid concerns about its financial arm, had most recently pledged to keep its 2009 dividend last month. The 13.6 percent gain in GE’s Share price for the day was the largest in percentage terms since 1981.

The company expects to take $1 billion to $1.4 billion in fourth-quarter after-tax charges related to restructuring. It is considering unspecified job cuts at both GE Capital and across its industrial units, which make products ranging from jet engines to refrigerators.

GE currently expects quarterly earnings of 50 to 52 cents per share, compared with its prior guidance of 50 to 65 cents per share. Company officials said they are planning for unemployment to reach 8.5 percent by the end of 2009, up from 6.5 percent in October, and expect at least one U.S. airline to liquidate next year. GE Capital expects to earn about $5 billion next year, down from a targeted $8 billion this year. It expects the finance business to return to double-digit earnings growth in 2010.

GE aims to lower the leverage ratio of its GE finance unit to six-to-one next year, from a seven-to-one target this year. To do that it is considering moving about $5 billion in capital into that business, with the funding coming from the $15 billion the company raised earlier this year in a stock offering. GE also plans to reduce its outstanding commercial paper to $50 billion next year. That would be down from $88 billion at the end of the third quarter.

Auto Sales Collapse

The auto industry was hammered again on Tuesday down nearly 37 percent as sales fell for the 13th consecutive month in November, led by a 47 percent sales drop at Chrysler and a 41 percent decline at General Motors with the slump rapidly spreading to Europe and Asia, forcing automakers to slash production. According to the statements from the three companies, there was no sign that demand would rebound in the next six months in the world's largest vehicle market.

Industry wide, auto sales in November were around 10.2 million units annually, the lowest in 26 years, according to preliminary results released Tuesday. Industry-wide sales of cars and light trucks dropped to 746,789 in November after falling below the 1 million threshold in September for the first time in 15 years. It marked the thirteenth consecutive monthly sales decline.

New car registrations in Germany, Europe's largest car market, dropped 17.6 percent in November from a year ago, the VDIK association of foreign carmakers said on Tuesday, adding to a string of similar news across the continent on Monday.

As the global financial crisis makes consumers increasingly reluctant to part with cash and lenders unwilling to offer credit, carmakers across the world have struggled to find buyers to keep their production lines running.

U.S. sales for Toyota Motor fell 34 percent, Honda fell 32 percent, Ford was off 31 percent, Nissan down 42.2 percent and Chrysler down 47 percent.

GM and Ford set first-quarter North American production targets lower by 32 percent and 38 percent, respectively.

Toyota is halting production at assembly lines in two factories in Japan for two days later this month, cutting production primarily of its premium Lexus brand, which has seen a 24 percent drop in sales so far this year in Japan and sharp falls in the U.S., its main market.

Sweden's Volvo, the world's second largest truck manufacturer, said its order intake had dropped substantially in several markets, and it would make cuts in production mostly in December to adapt to the fall.

Ford, considered to be in the strongest financial position of the three Detroit automakers, submitted a restructuring plan to Congress in support of its application for a government credit line of up to $9 billion.

GM requested $18 billion in loans and credit line from the U.S. government to save it from failure, and laid out a restructuring plan that includes consideration of dropping or selling off the Pontiac, Saab and Saturn brands. The company also plans to reopen talks with the United Auto Workers union.

Chrysler is requesting a $7 billion bridge loan by the end of 2008 and said a prepackaged bankruptcy would not be plausible for the automaker.