General Motors Corp. reported a $3.25 billion (U.S.) loss April 30 – and its stock soared 9.4 per cent in response. That’s because after one-time losses, including lingering ties to auto-parts maker Delphi, GM managed to beat Street estimates. The world’s biggest troubled auto maker, which is sitting on $24 billion in cash reserves, booked an impressive $1 billion in profits overseas, including $200 million in its long-ailing European operations. The impact of workforce reductions – 35,000 buyouts over the past two years, and the recent layoff of about 3,500 employees at four North American plants, including 970 workers in Oshawa – yielded some $400 million in savings.
While GM is hardly out of the woods – its all-important U.S. market share slipped to 22.1 per cent in the first quarter, from 22.8 per cent – the company is arguably more focused than in decades on what it must do to achieve sustainable profits. Which is to build more small cars with showroom appeal.
On that front, GM has met with some early success from new Saturn, Buick and Cadillac models, but it still looks to slow-selling trucks and SUVs for 40 per cent of revenues. That suggests considerable upside potential for the long-time Detroit laggard, if it gives its style mavens full rein to experiment with daring small-car designs that exploit the staid look that still characterizes many Asian models.
What inflation scare?
Inflation bulls have plenty to feed on: soaring prices for energy and food, and the potential inflationary impact of the billions of dollars that central banks have injected into the global financial system to contain the credit crisis. Yet "core inflation," which excludes food and energy, is actually down in Canada, the U.S., Britain, Germany and other nations.
While certain commodities have skyrocketed over the past year (crude oil up almost 90 per cent, wheat up almost 50 per cent, eggs up 30 per cent), other commodities have slumped, including nickel (down almost 50 per cent), lean hogs (down 35 per cent) and live cattle (down 12 per cent). And U.S. inflation in non-energy services such as education, health care and housing has slipped to 3.3 per cent from last year’s 3.6 per cent.
Bottom line: Easy-money advocates will argue that central bankers have room to cut key lending rates still further without risking an inflationary spiral.
The gas-tax pander
U.S. presidential candidates John McCain and Hillary Clinton have proposed a summer "holiday" from the 18.4-cent federal excise tax on a gallon of gasoline. A consensus of economists has quickly emerged to argue that retailers might reap a windfall by raising prices to capture the difference; that the average U.S. motorist would save the equivalent of half a gallon of gas over the summer; and that the federal highway maintenance fund, financed by the tax, would suffer a $9 billion hit.
Rival candidate Barack Obama, a former Illinois state senator, rues a state gas-tax holiday for which he voted that backfired for those reasons. And it’s state gas-tax levies that take the bigger bite, running as high as 45.5 cents per gallon, accounting for wide price disparities between states. Economists know that the gimmick – which resurfaces every time gas prices spike – tends to push up demand and prices, and is a backward step in the goal of energy self-sufficiency. Worse, it removes a disincentive to drive at a time of mounting concern about global warming.
But legislators in Florida, Texas, New York, Missouri and other states who are now flirting with their own proposed gas-tax holidays know the potent populist appeal of the gesture. "It clearly evokes a visceral response because we’re the only industry that has our prices in two-foot-high letters on the street corner," John Felmy, chief economist at the American Petroleum Institute, told The New York Times last week bad credit payday loan payday loans in one hour. "We’ve seen other things go up in price, like milk, but if you ask 10 people on the street what’s the price of milk they may not know. All of them will know the price of gas."
Candy consolidators
The disappearance of century-old Wm. Wrigley Jr. Co. in a $23 billion acquisition by Mars Inc., maker of M&M’s and Snickers, doesn’t portend well for another independent U.S. holdout, Hershey Co. The Mars-Wrigley combo will control 14.5 per cent of the global confectionery market, with distribution in 180 countries. Hershey, the No. 4 player worldwide, trailing Mars-Wrigley, Cadbury Schweppes PLC and Nestl? SA, has less than 6 per cent of the market, a weak overseas presence, and has been losing market share to Mars for the past two years.
The Hershey orphans’ trust set up by founder Milton Hershey controls the firm, but would have sold the company to Wrigley in 2002 but for a groundswell of local opposition.
Six years later, with Hershey at an even greater disadvantage to its global rivals in distribution and economies of scale, the firm is takeover bait again – except this time to a foreign buyer, since a distracted Mars is unlikely to take on another acquisition. A combination with Cadbury, in particular, would be a good geographic fit. And after selling off its U.S. soft-drink business, Cadbury could easily finance an $11 billion Hershey bid.
Signs of the times
Alberta often has been faulted for under-investing in its sovereign wealth fund; the province’s Heritage Fund has assets of just $16.6 billion (Canadian). But Saudi Arabia’s new sovereign wealth fund debuts this month with assets of only $5.3 billion (U.S.).
Towering over both funds are those of Abu Dhabi (about $875 billion), Norway ($380 billion) and Singapore ($330 billion) … Not bad for a guy who paid off his student loans just two years ago: Barack Obama’s hyper-aggressive online recruiting drive for donors and volunteers has so far yielded 800,000 profiles, a data mine worth as much as $200 million, a Republican campaign expert tells Bloomberg News …
Worth repeating
"We’re here to be part of a strong federation, and we’re here to help our weaker sisters in their time of need."
–Danny Williams, premier of Newfoundland and Labrador, gloating over a Toronto Dominion Bank study last week forecasting that Ontario might become a "have-not" province within two years.
Quotable tycoon
"[Americans] had run up consumer credit card debt, they’d run up the house, car loans and then they would refinance the house. So the house became a kind of ATM with a bedroom attached. And now that game is over with … What’s happening is we’re out of the fantasy world, more into a real world, both for the consumer and for the financial markets. It was Looney Tunes what was going on before."
–U.S. financier Wilbur Ross, long-time specialist in buying distressed assets, interviewed by the U.K. Financial Times, May 2. Ross expects the collapse in the U.S. housing market to be followed by a wave of bankruptcies among corporations that were extended easy credit during the boom years 2005-07.
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