Investors unsure on $17.4b auto deal
NEW YORK (AP) - Stock prices pared earlier gains to end a choppy day relatively flat yesterday, as Wall Street remained uncertain that a $17.4 billion lifeline for US automakers will make a lasting difference for the beleaguered industry.
In the early going, investors cheered the government's pledge to provide General Motors Corp. (GM) and Chrysler LLC with short-term financing and sent the Dow Jones industrial average up as much as 182 points. But stocks turned lower at mid-day, recovered in the afternoon, and then lost ground again in the last hour of trading as initial enthusiasm over the bailout waned.
The decision to provide emergency help to carry the struggling industry into the new year comes after a $14 billion bailout for the automakers failed to make it out of the Senate last week.
The companies' cash flows have been dwindling to a slow trickle due to the weak economy, slumping sales and the credit crunch.
The White House said it will let GM and Chrysler draw $13.4 billion in short-term financing, and another $4 billion will be added later. But it attached conditions that must be quickly met - GM and Chrysler must prove viability, defined as positive cash flow and the ability to pay back government loans, by March 31. Ford Motor Co., meanwhile, is not asking for short-term assistance, but its CEO predicted the aid will stabilise the broader industry.
GM CEO Rick Wagoner said the company had much work ahead, but he was confident it could reinvent itself with the government help.
Some analysts expressed doubts.
"I think that there's a lot of skepticism about how much real reform we're likely to see, particularly at GM, given the parameters under which the loans have been made," said Alan Gayle, senior investment strategist at RidgeWorth Investments. "There is a lot of skepticism about whether GM is prepared to do what needs to be done."
Still, the government's move staved off, for the time being, a major bankruptcy that could have sent a debilitating blow to the economy and the labour market.
Investors have been concerned about the job market ramifications of a possible bankruptcy filing by an automaker like GM or Chrysler LLC, which some analysts said could result in up to three million US job losses. The government lost more than half a million jobs in November, and the Labour Department said on Thursday that new claims for unemployment remained well above 500,000 last week. When unemployment rises, spending declines and credit deteriorates.
The White House's action yesterday "prevents the collapse of a very high profile industry less than a week before Christmas," said Phil Orlando, chief equity market strategist at Federated Investors. "That's not to say that these guys won't collapse next March, but it takes it out of the headlines now, and takes the threat of an auto industry default off the table until next spring."
GM shares jumped 83 cents, or 22.7 percent, to $4.49, while Ford shares added 11 cents or 3.9 percent to $2.95. Chrysler is not publicly traded.
According to preliminary calculations, the Dow Jones industrial average fell 25.88, or 0.3 percent, to 8,579.11. The Standard & Poor's 500 index rose 2.6, or 0.29 percent, to 887.88, while the Nasdaq composite index rose 11.95, or 0.77 percent, to 1,564.32.
For the week, the Dow ended down 0.59 percent, while the S&P 500 finished up 0.93 percent and the Nasdaq up 1.53 percent. All of the indexes are still down more than 35 percent for the year.
The technology-heavy Nasdaq was lifted by big gains from Oracle Corp. and Research In Motion Ltd., both of which released earnings reports after the bell on Thursday. Oracle's profit weakened for the first time in years, but its shares rose 7 percent as investors bet that the company will fare better than others as the economy struggles. BlackBerry-maker Research In Motion rallied $4.39, or 11 percent, to $42.83, after reporting better-than-expected revenue guidance for the fourth quarter and strong holiday sales of its new smart phones.
The Russell 2000 index of smaller companies rose 7.09, or 1.48 percent, to 486.26.
Advancing issues outnumbered decliners by about two-to-one on the New York Stock Exchange, where volume came to 2.14 billion shares.
Some analysts attributed much of the market's choppiness yesterday to the expiration of options contracts, as well as the routine rebalancing of stock indexes.
Earlier yesterday, Treasury Secretary Henry Paulson said that Congress should release the second $350 billion from the rescue fund that it approved in October to bail out financial institutions.