Why is Wall Street ignoring Detroit?
Investors aren't sweating the possibility of a GM or Chrysler bankruptcy. But they shouldn't dismiss the impact more auto woes may have on the economy.
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| Unemployment is on the rise as companies cut more and more jobs. A bankruptcy at GM and/or Chrysler could add to the ranks ot the jobless. |
NEW YORK (CNNMoney.com) -- Detroit's Big Three could soon become the Big Two or even the Big One.
The futures of Chrysler LLC and General Motors (GM, Fortune 500) are highly uncertain as deadlines near for them to either restructure or file for bankruptcy.
And the Motown automaker in the "best" shape isn't exactly healthy either. Ford Motor (F, Fortune 500) reported a quarterly loss of $1.4 billion in the first quarter and burned through $3.7 billion in cash.
So why is Wall Street relatively sanguine about the possibility of even more upheaval in what's a fairly important sector of the U.S. economy?
Part of this is because the auto sector's problems are taking a back seat (pardon the pun) to the state of the nation's banks and insurance companies. And, for now at least, investors are feeling a little better about the financial sector.
There is also a sense that an automaker bankruptcy may already be priced into the market.
After all, executives from GM, Chrysler and Ford painted a bleak short-term picture when they asked Congress for aid last fall.
"This is old news. The idea of a GM bankruptcy or Chrysler bankruptcy has no shock value to the market anymore," said Hank Smith, chief investment officer with Haverford Investments, a Radnor, Pa.-based money manger with $5 billion in assets. "Investors don't think there will be a big ripple effect from a bankruptcy of one or even two automakers."
One market strategist even went as far to suggest that a bankruptcy, particularly for GM, could be a good thing since it could be the first step toward actually getting the companies back on solid financial footing.
And that would be in stark contrast to how the bailout of banks have been viewed by investors -- as a money pit with no end in sight.
"With all this outrage over government aid for banks, people are questioning the success of interventions,'" said Nick Kalivas, vice president of financial research with MF Global, a futures and options brokerage in Chicago. "But a smart Chapter 11 restructuring may be viewed as healthy for the auto industry and economy and less of a burden on taxpayers."
Still, investors should ignore the crisis in the auto industry at their own peril. It's clearly an issue that affects more than just Detroit, the state of Michigan and the Midwest.
According to the Labor Department's employment figures for April, about 3.5 million people in the United States have a job directly tied to the auto sector (i.e. manufacturing of vehicles and parts, auto dealers and parts retailers.)
To be sure, many of these jobs should still be secure regardless of what happens to GM and Chrysler. Ford CEO Alan Mulally reiterated Friday that his company won't need a federal bailout unless the economy gets significantly worse. And the government has a program in place to help out suppliers that GM and Chrysler deem as "critical vendors."
But the industry has been rapidly hemorrhaging jobs. A year ago, there were more than 4 million workers in the vehicle manufacturing, dealers and auto retailing industries.
What's more, according to the Labor Department's mass layoff report for March, two of the 10 industries with the largest number of mass layoffs were tied to the auto sector -- motor vehicle power train components manufacturing and light truck and utility vehicle manufacturing.
It's difficult to imagine a scenario where auto companies are going to be working at full capacity and adding workers anytime soon.
GM announced earlier this week it was cutting 1,600 jobs as part of a previously disclosed plan. On Thursday, the automaker said it was shutting down 13 of 20 North American plants for much longer than usual this summer.
"The turmoil in Detroit can worsen the job market," said Lawrence Creatura, a portfolio manager with Federated Investors, a mutual fund firm based in Pittsburgh. "More declines in employment at the auto markers and the food chain that supplies the automakers are likely to occur."
And considering that rising unemployment nationwide is a big problem for banks, which across the board reported weakening credit quality in the first quarter, it doesn't seem wise to gloss over the potential impact that more job losses in the auto industry could have on lenders.
Yes, the stock market and broader economy recovered more quickly than the job market coming out of the last recession in 2001.
But that was a much different recession. The job losses during that recession were not as broad as this downturn. As a result, the unemployment rate peaked at 6.3% in 2003. The unemployment rate is already 8.5% and many economists think it could head higher than 10% before the worst is over. A bankruptcy at GM or Chrysler could quickly move the jobless rate in that direction.
"Auto bankruptcies may be priced in but investors still have to worry about them because of unemployment," said Rob Stein, managing partner with Astor Asset Management, an investment firm based in Chicago.
"There is a magnitude of job losses after a certain point that could be devastating to the economy. That's where we're at right now. Until the job losses stop, the economy will remain challenged," Stein added.
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