GM's June sales will prove costly

By Charley Blaine and Elizabeth Strott

Don't let the stock market fool you. The June sales reports by automakers showed what damage high gasoline prices are doing to the auto business.

Only one of six big automakers -- Honda Motor (HMC, news, msgs) -- could say it sold more vehicles than a year ago. The situation is so dire that investors rejoiced when General Motors (GM, news, msgs) said it sold 8% fewer cars than a year ago -- better than the 15.9% decline analysts had expected.

GM's sales of 265,937 vehicles ensured that it will remain the top automaker in the United States at least for another month. Toyota's (TM, news, msgs) sales fell 11.5% to 193,234 units.

But, as investors dug into the numbers, the stark reality was this: GM's big incentive promotion of a week ago helped enormously but the bill will have to be paid. That's why GM shares, which had been up as much as 15%, ended the day up 2.2% to $11.75.

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GM's was the third-best performance among the 30 stocks in the Dow Jones Industrial Average, which closed up 32 points to 11,382 -- after falling as many as 166 points earlier in the session. The Standard & Poor's 500 Index was up 5 points to 1,285, and the Nasdaq Composite Index was up 12 points to 2,305.

It wasn't clear if the rebound can be sustained. For one thing, crude oil moved higher, closing at $140.97 a barrel, up 97 cents from Monday.

The whole auto industry is now reeling. Autodata, which tracks motor vehicle sales, says June sales ran at annualized rate of 13.6 million units, down 13.4% from a year ago. Ford (F, news, msgs) and Chrysler Group weren't so lucky. Ford sales fell 19%. Sales of its F- series pickups -- the company's biggest money maker for years -- fell 40%.

Chrysler's sales fell 28%, a day after the company said it was mothballing a minivan assembly plant in St. Louis trimming pickup production at another plant. Chrysler is now the fifth-largest automaker, based on sales, behind GM, Toyota, Ford and Honda.

• Read more: The death of the minivan (and Chrysler?)

But even Toyota's results were surprisingly weak, with trucks the biggest problem. Car sales, however, were flat, and its Lexus sales were down 21%.

The challenge for automakers now is to find ways to produce more high-mileage vehicles. Dealers can't get enough of them, and buyers, apparently, want little else.

Sales of GM's widely praised Chevrolet Malibu were up 95%; its Silverado sales fell 14.2%. Getting those sales cost the company $3,454 in incentives, according to Reuters, up 19% from a year ago.

Honda's car sales, adjusted for 3 fewer selling days than in 2007, were up 34% from a year ago; its truck sales were off 24%. Sales of Civics jumped 23%, sales of the small Fit were up 100.5%. The Odyssey minivan sales were off 8.6%, and the Pilot pickup was down 21%.

Honda's incentives were $1,367, down from $1,412 a year ago.

That's why GM's huge stock rebound faded at the end of the day and why Honda finished basically even at $34.02. Ford fell 2.1% to $4.71; it had been down as much as 8.3% until GM's news came out. Toyota was off slightly at $93.66, and Nissan, whose sales fell 7.5%, was off 1% in New York to $16.29.

Jim Farley, Ford's group vice president of marketing and communications, said the rapid rise in gasoline prices and the shift to fuel-efficient vehicles were the biggest reasons for the dramatic sales slump.

A gallon of gas now costs $4.09 on average nationwide, up from $4.08 Monday, according to AAA. The Fuel Gauge Index showed that 33 states now have gas prices over $4 per gallon.

On an adjusted basis, Edmunds.com was expecting a 16.7% sales decline for all automakers from a year ago.

How the biggest automakers fared

	June 2008	June 2008	Adjusted change
Chrysler	117,457	183,347	-35.9%
Ford	167,090	232,457	-28.1%
General Motors	265,937	326,300	-18.5%
Honda	142,539	140,935	1.1%
Nissan	75,847	92,213	-17.7%
Toyota	193,234	245,739	-21.4%

June 2008 had 24 selling days; June 2007 had 27 selling days.

Starbucks accelerates closures

Shares of Starbucks (SBUX, news, msgs) jumped 4.6% to $15.62 in after-hours trading after the coffee company said it would close 600 underperforming stores in the U.S.

The company also said it would open fewer than 200 new company-operated stores in the U.S. in fiscal 2009, which starts Oct. 1.

The moves will affect 12,000 employees; the company hopes to absorb some of those employees at other stores.

Starbucks has been trying to cope with slowing growth in domestic business and rising costs. It had earlier said it expected to close around 100 stores.

About 75% of the stores affected were opened since 2005, The Seattle Times said. That suggests the company made poor real estate decisions and didn't realize how difficult the economy would be, Morningstar analyst John Owens told the newspaper.

The store closures will generate pre-tax charges to earnings of $328 million to $348 million.

Starbucks had closed down 0.8% to $15.62 in regular Nasdaq trading.

A real rally or just short-covering?

Sorry, bulls, but it looks the rally was a bounce off a grossly oversold condition.

The Standard & Poor's Oscillator, which traders watch closely, measured -9.4 at the end of Monday's trading; a reading of -4 suggests a market that's oversold and ready to bounce. It was the 22nd lowest reading for the oscillator since 1997, according to S&P technical analyst Howard Silverblatt. The oscillator is based on changes in highs and lows for stocks and moving averages.

At their lows of the day, the Dow and Nasdaq were each more than 20% off their October highs, the popular definition of a bear market. It was the third time in three sessions that the Dow's loss had exceeded 20%, even briefly.

With the late-day rebound, however, the Dow's loss was trimmed to 19.6% off its October high; the Nasdaq is 19.4% under its October high.

Plus, the problems that have bedeviled the markets all year -- lower dollar, high oil prices, desperately weak financial stocks -- really haven't gone away. -- even if financials rallied.

Transportation stocks, especially airlines, were slammed as fuel costs continued to rise. The Dow Jones Transportation Average ($DJT) was off 86 points to 4,862, with American Airlines parent AMR (AMR, news, msgs) the laggard, down 5.3% to $4.85. The shares, which fell 43% in the second quarter, are down 65% on the year.

While gains for tech stalwarts Apple (AAPL, news, msgs), Research In Motion (RIMM, news, msgs) and Google (GOOG, news, msgs) contributed 13 points to a 16-point gain for Nasdaq-100 Index ($NDX.X), chip stocks were mostly lower. The Nasdaq-100 was up 1.4% to 1863. The Philadelphia Semiconductor Index ($SOX.X) was off slightly to 366.

Yahoo (YHOO, news, msgs), meanwhile, fell under $20 during the day for the first time since Microsoft (MSFT, news, msgs) launched its unsuccessful bid for the company at the end of January. However, the Internet company closed at $20.20, down 2.2%. The stock is down 33.7% from an intraday high of $30.25 on Feb. 14.

Microsoft, the publisher of MSN Money, was down 2.3% to $26.87, its lowest close since March 2007.

In addition, this is a short trading week. The market will be closed Friday for July Fourth. But Thursday will be an eventful day. The European Central Bank may raise interest rates, which would put more pressure on the dollar. The bank's decision will be followed by the Labor Department's monthly unemployment and payroll employment report.

The market opened lower because of the dollar, oil and worries that Israel might attack Iran and vastly expand war in the Middle East. After hitting $143.33 overnight, crude oil fell back before ending at $140.97. Tensions over Iran's nuclear program have been building for weeks.

But the market turned on the GM news.

Sixteen of the 30 Dow stocks finished higher, along with 268 S&P 500 stocks.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$140.97	$140.00	$0.97	0.69%	46.87%
Heating oil (per gallon)	$3.9435	$3.9100	$0.0335	1.04%	48.85%
Natural gas (per million BTU)	$13.5050	$13.3530	$0.1520	1.14%	80.48%
Unleaded gasoline (per gallon)	$3.5134	$3.4991	$0.0143	0.34%	41.06%

Manufacturing shows surprise expansion

After an ugly first half, there was some better-than-expected data on the manufacturing sector this morning.

The Institute of Supply Management's factory index rose unexpectedly in June to a reading of 50.2, up from a reading of 49.6 in May. Economists had expected a decline to a reading of 48.5. June was the first month to show growth since January.

Readings below 50 indicate contraction in the sector, while readings above 50 indicate expansion.

Not everything in the manufacturing report was rosy: The ISM's index of prices paid rose to a reading of 91.5 in June, the highest since June 1979.

"When viewed from the manufacturer's perspective, they are experiencing higher prices for their inputs while demand for their products is slowing," Norbert Ore, chair of the ISM Manufacturing Business Survey Committee, said in a press release.

UBS under pressure

Swiss bank UBS (UBS, news, msgs) is still reeling from the effects of the mortgage-market mess.

The company said that it will hold an extraordinary shareholder meeting on Oct. 2 to replace four of its board members, after shareholder criticism that focused on the relationship between the board and company management.

Stephan Haeringer, Rolf Meyer, Peter Spuhler and Lawrence Weinbach will leave the board in October, the company said, adding that it is looking for replacements.

UBS has written down about $37 billion from bad bets related to the U.S. mortgage market. Shares fell 1.5% to $20.35.

The bank also faces a federal probe focused on tax evasion. The Department of Justice said it is seeking names and information about American clients who held accounts at UBS between 2003 and 2007.

The investigation revolves around a former UBS banker, Bradley Birkenfeld, who last month pleaded guilty to charges he had conspired to help U.S. clients avoid paying taxes.

"The bank is in a very difficult position," Jack Blum, a partner at Baker & Hostetler, told Bloomberg News. "If I were advising clients, I'd tell them to come clean; the people who come clean early will probably be allowed to get off with paying the tax, the interest and the penalties. Others could very easily face criminal prosecution."

UBS has been cooperating in the probe, said John DiCicco, Justice Department deputy assistant attorney general, in a statement. He added that the department is "prepared to seek enforcement if that process is not successful."

Lehman gets a break

Another troubled financial company, Lehman Bros. (LEH, news, msgs), saw shares rise 5.8% to $20.96 today after shedding 11% on Monday.

Lehman got a lift after Monday's close from Morgan Stanley, which initiated coverage of the company with an "overweight" rating on the stock.

"We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing," wrote Morgan Stanley analysts Patrick Pinschmidt and Avi Ghosh, in a note to clients. "The firm's ability to weather near-term market headwinds and return to respectable return on equity generation should help the shares trade closer to book value." Morgan Stanley initiated Lehman with a $31-per-share price target.

Short hits from the markets -- 4 p.m.

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.825%	1.705%	0.120	7.04%	-41.88%
5-year Treasury note yield	3.341%	3.341%	0.000	0.00%	-3.30%
10-year Treasury note yield	3.992%	3.979%	0.013	0.33%	-1.07%
30-year Treasury bond yield	4.544%	4.531%	0.013	0.29%	1.91%
Currencies
U.S. Dollar Index	72.670	72.800	-0.130	-0.18%	-5.25%
British pound in dollars	$1.9924	$1.9932	-0.0008	-0.04%	0.16%
Dollar in British pounds	£0.5019	£0.5017	0.0002	0.04%	-0.16%
Euro in dollars	$1.5758	$1.5763	-0.0005	0.05%	7.82%
Dollar in euros	€ 0.6346	€ 0.6344	0.0002	-0.05%	-7.25%
Dollar in yen	106.04	106.06	-0.02	-0.14%	-5.19%
Canadian dollar in U.S. dollars	$0.979	$0.980	-$0.0010	-0.07%	-1.38%
U.S. dollar in Canadian dollars	$1.021	$1.020	$0.0010	0.02%	1.33%
Commodities
Gold	$944.50	$928.30	$16.20	1.75%	12.71%
Copper	$3.9105	$3.8825	$0.03	0.72%	28.59%
Silver	$18.2900	$17.5100	$0.78	4.45%	22.59%
Corn	$7.1950	$7.2475	-$0.05	-0.72%	57.96%
Crude oil (NYMEX) (per barrel)	$140.97	$140.00	$0.97	0.69%	46.87%

Lehman slumped Monday after rumors circulated that the company may be sold.

"We're hearing that there may be a possibility of Lehman being taken over," Michael Nasto, senior trader at U.S. Global Investors, told Bloomberg. "There hasn't been any positive news on this firm for the last couple weeks and the value of the deal might not be in the best interest of Lehman shareholders."

But people close to the company said that there is no sale on the horizon, according to The Wall Street Journal.

Slowdown hits Fortune Brands

Shares of Fortune Brands -- the maker of products ranging from Moen faucets and Kitchen Craft cabinetry to Jim Beam whiskey and Titleist golf balls -- were slumping today after the company said late Monday that second-quarter profit would fall short of its forecast.

Fortune Brands said it expects earnings per share to decline by as much as 20% from the $1.51 it earned in the same quarter of 2007. The consensus estimate is for $1.35 per share.

The company blamed gas prices and the slumping housing market. It also reported that the Australian government raised its tax on ready-to-drink spirits by 70% in late April.

AT&T to offer iPhone without contract

AT&T (T, news, msgs) this morning said it will offer Apple's (AAPL, news, msgs) new iPhone 3G without a service contract -- but it'll cost you an extra $400.

Commitment-phobes can buy the new no-strings iPhone without having to sign an AT&T service contract for $599. Apple introduced the newest version of its iPhone in June for $199, which requires a two-year commitment to AT&T's service.

AT&T fell 1.2% to $33.30 today.