June 1, 2009

Economic Outlook: What next?

Monday offered a snapshot of shifting financial power as General Motors Corp. was filing for bankruptcy and China's manufacturing sector was making gains.

Once an icon of industrial might, commanding 50 percent of the U.S. auto market, GM was scheduled to file for protection in New York in a process that will greatly reduce its infrastructure and its image.

With its current U.S. market share down to 20 percent and sales plummeting in a recession, GM is nothing short of insolvent, a government official told The New York Times.

Share values dropped to 75 cents a share Friday and the company, the leading automaker in the world for 50 years, will likely be removed from the New York Stock Exchange by the end of the day, as the bankruptcy filing will render the shares worthless.

The current restructuring plan calls for 12 to 20 factories to close, at least 21,000 union workers to lose their jobs and creditors, owed $27 billion, to accept 10 cents on the dollar for unsecured debt. In the end, the government will name a board director and own 60 percent of GM. Canada will own 12 percent and name another board member. The union will own 17.5 percent of the company, while creditors will be granted 10 percent with the option to buy an additional 15 percent at a later date.

If that wasn't ignoble enough, GM is also negotiating its way out of most of its European operations, with a group led by Canadian parts supplier Magna International Inc. on track to buy Opel, which is sold in Britain as Vauxhall.

With headlines half the size, news that China's manufacturing index stayed positive for the third consecutive month helped lift stocks in Asia and Europe, The Financial Times reported.

Mining companies and steel producers were reaping rewards in Europe, while a federal judge in New York gave the green light for Chrysler LLC to sell most of its assets to a group led by Fiat of Italy. Risk appetite within European equities is back with a vengeance, equity strategies Alberto Yacoub at ING told the Times.

Markets displayed the shift Monday with the Nikkei average in Japan up 1.63 percent, the Hang Seng index in Hong Kong rising 3.95 percent and the Singapore Straits Times up 2.19 percent. The S&P/ASX rose 2 percent.

Stocks in Europe also made gains. The FTSE 100 in London rose 1.3 percent, while the DAX 40 in Frankfurt rose 2.92 percent in midday trading. The CAC 40 in Paris rose 1.98 percent, while the broader DJStoxx 600 rose 1.92 percent.

From a U.S. perspective, GM's demise was an unwinding of value, but also of glory and sentiment. But from a market perspective, it was simply a question of what next?