GM's huge loss will keep the Fed in check

By Charley Blaine and Elizabeth Strott

General Motors signaled loudly and clearly Friday that the domestic auto business is in deep trouble.

The stock market moved lower on the news. And odds are that the discussion about what to do about it will grow louder next week and will force the presidential candidates to talk about it up until November.

General Motors (GM, news, msgs) reported a $15.5 billion loss for the quarter (roughly the equivalent of two Corvettes a minute), and its July sales fell 32% from a year ago. GM sold less of all its brands, with Hummer sales alone falling 62%. Auto sales were off 11% and truck sales were down 23.3%.

Other automakers showed similar sales results and for the same reason: You can't sell trucks and SUVs right now.

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Chrysler sales were was down 34% to 98,109 in a week that saw it get out of the auto leasing business entirely. Chrysler was once the third-largest automaker in terms of sales; it's now fifth and in danger of being overtaken by Nissan (NSANY, news, msgs).

Ford Motors (F, news, msgs) sales fell 21% to 161,530. The damage even hit Toyota Motor (TM, news, msgs), down 19% 197,424, and Honda Motor (HMC, news, msgs), down 9% to 138,744. Nissan's sales were up slightly but only because it aggressively pushed incentives on SUVs.

"The second quarter this year has been one of the fastest-changing markets I have ever seen," GM Chief Financial Officer Ray Young told reporters when the company reported its earnings.

Jim Farley, Ford's sales and marketing chief, told The Wall Street Journal, "We expect the second half of 2008 will be more challenging than the first half as economic and credit conditions weaken."

Meanwhile, the Dow Jones industrials fell 52 points to 11,326. The Standard & Poor's 500 Index was down 7 points to 1,260, and the Nasdaq Composite Index dropped 15 points to 2,311. GM was the laggard among the 30 Dow stocks and 5th worst among the S&P 500 stocks, falling 7.6% to $10.23.

Higher oil prices and a jobs report showing unemployment at a five-year high also kept the bulls in check.

But the automakers' woes almost certainly mean that the Federal Reserve won't raise its key rates when it meets on Tuesday. Its federal funds rate -- the rate banks charge each other for overnight loans -- has been at 2% since April 30. While there are concerns about what to do about rising inflationary pressures caused by higher oil and food prices, the weakness of the economy will trump inflation.

The problems at GM, Ford and Chrysler are likely to be part of the dialogue next week -- and maybe explicitly at the Fed meeting -- because investors are now worried that these companies will run out of cash. GM says it has plenty until the end of 2009. But that's not cheering anyone. In fact, Reuters reported Friday that bond traders in New York bet there's a 90% chance that GM will default on its debt in the next five years.

Chatter about GM will compete for attention with the talk about oil and gas prices. The Bush Administration -- and Sen. John McCain -- wants Congress to end its ban on offshore drilling to boost domestic supply. The polls seem to indicate voters agree. One question is whether there are any rigs actually available to drill.

Crude oil finished up $1.02 to $125.10 on Friday; the big break in prices since July 11 seems to have lost energy.

Only 10 of the 30 Dow stocks were higher on Friday, along with 188 S&P 500 stocks and 27 stocks in the Nadaq-100 Index ($NDX.X), which tracks large-capitalization Nasdaq stocks.

For the week, the Dow was down 0.4%, its second weekly loss in a row and its sixth weekly loss in the last seven weeks. The blue-chip index is down 14.6% for the year.

The S&P was up slightly on the week but is still down 14.2% on the year. The Nasdaq was basically flat for the week; the index has fallen 12.9% this year. The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,326.32	11,370.69	-0.39%	-14.61%
S&P 500	1,260.31	1,257.76	0.20%	-14.17%
Nasdaq Composite	2,310.96	2,310.53	0.02%	-12.87%
Russell 2000	716.16	710.34	0.82%	-6.51%
Crude oil per barrel	$125.10	$123.26	1.49%	30.34%
10-yr. Treasury yield	3.95%	4.11%	-3.96%	-2.16%
Gold per troy ounce	$917.50	$926.80	-1.00%	9.49%

GM's very ugly loss

GM's $15.5 billion loss worked out to $27.22 a share, down from a net profit of $891 million, or $1.56 a share, a year ago. Revenue fell 18% to $37.67 billion from a year ago.

GM's results were affected by $9.1 billion in charges it took in the quarter, including $3.3 billion for buyouts for U.S. factory workers, $1.6 billion to cover the declining value of leased vehicles and a $1.3 billion impairment charge from its former financing arm, GMAC.

The loss is distressing no matter how you slice it:

• $170,329,670 a day.

• $7,069,069 per hour.

• $118,284 per minute.

• $1,971 per second.

There was "some pain in the second quarter to get inventories adjusted," GM Chief Executive Officer Rick Wagoner told CNBC on Friday. "Production was down about 27% in the second quarter . . . and then the mix of sales changed dramatically," Wagoner said. "We feel comfortable" about the company's liquidity level, he added.

In July, GM announced plans to extend its restructuring plans to try to cope with soaring gasoline prices, which have prompted consumers to shift away from more-profitable SUVs and trucks. Light trucks represent about 60% of GM's sales.

• Talk back: What's your take on GM's huge loss?

"It's naive to think that we're going to see really positive, good news from GM," auto analyst Rebecca Lindland of Global Insight said Friday. It's all about "managing expectations" at this point, Lindland said, adding that she thinks GM will report poor results for at least the next six quarters.

The worst quarterly loss for a U.S. company on record was the $54.2 billion loss from the former AOL Time Warner -- now just Time Warner (TWX, news, msgs) -- in the first quarter of 2002, Bloomberg News said.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$125.10	$124.08	$1.02	0.82%	30.34%
Heating oil (per gallon)	$3.4368	$3.4387	-$0.0019	-0.06%	29.72%
Natural gas (per million BTU)	$9.3890	$9.1190	$0.2700	2.96%	25.47%
Unleaded gasoline (per gallon)	$3.0843	$3.0709	$0.0134	1.19%	23.83%

Oil rises on Iran worries

Crude oil closed up $1.02 to $125.10 a barrel, pulling back from an earlier $4-a-barrel spike after Israeli Deputy Prime Minister Shaul Mofaz made some distressing comments about Iran. The country is on a path toward a "major breakthrough" in its nuclear program, Mofaz said, which is "unacceptable."

"It is an existential threat," Mofaz said at the Washington Institute for Near East Policy. "We have to make sure we are prepared for every option."

Oil jumped earlier this week when Israeli Prime Minister Ehud Olmert said he would not seek re-election next month, with investors betting that internal political churn might hinder Mideast peace efforts.

Tensions have been growing in recent weeks over Iran's nuclear capabilities despite comments from Iranian President Mahmoud Ahadinejad to NBC News this week that the country is "not working to manufacture a (nuclear) bomb."

Jobs report better than expected

The jobs picture was brighter than economists had expected in July.

Nonfarm payrolls fell by 51,000 last month, the Labor Department reported this morning; economists had expected a decline of 70,000 jobs. But it was the seventh straight month of decline.

The unemployment report ticked up to 5.7% in July from 5.6% in June -- the highest level in four years.

Payrolls shed a revised 51,000 jobs in June and 42,000 in May.

"While the drop in non-farm payrolls was less than expected, the 0.2% jump in the unemployment rate was worse," wrote Nomura Chief Economist David Ressler in a note to clients this morning. "The increase reflected higher jobless rates across all major age, sex and race cohorts except adult, white women whose unemployment rate fell 0.1%."

Average hourly earnings rose in July, in line with expectations, up 6 cents, or 0.3%, to $18.06. Average pay is up 3.4% in the past year, but the rise has not kept up with the 5% jump in consumer prices.

While monthly job losses have averaged 73,000 in recent months, that's still nowhere near as painful as the typical 200,000 monthly decline seen during recent recessions.

Friday's jobs number comes two days after a surprising report on private-sector jobs from ADP that showed an increase of 9,000 jobs in July.

Manufacturing is flat

Another reading on the economy showed a flat picture.

The Institute of Supply Management's manufacturing index came in at a reading of 50 for July, indicating that the same number of firms said business was growing as said business was weak. Readings above 50 indicate expansion, while readings below indicate contraction.

"Manufacturing has maintained a reasonable level of activity during a period in which other sectors of the economy have been in recession," Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee, wrote in a press release. "While the PMI indicates little to no change has occurred during this period, it would be hard to convince manufacturers who are faced with higher costs and uncertain demand that there is little change taking place."

Northwest to add $80 fuel surcharge

The recent decline in oil has done little to ease the nerves of airline companies. Northwest Airlines (NWA, news, msgs) late Thursday confirmed that it will add an $80 fuel surcharge to roughly 7,000 flights starting Jan. 10, 2009.

Northwest shares closed up 1.9% to $9.33 Friday.

Northwest's move was notable because the carrier normally does not initiate fare increases, according to Rick Seaney of FareCompare.com. There have been 21 fare increases so far this year, according to FareCompare.com; airlines attempted to raise fares 23 times last year.

US Airways (LCC, news, msgs) began charging fliers $2 for bottled water and sodas and $1 for teas and coffee.

First class members, trans-Atlantic passengers and a select group of others are exempt from the extra fees. US Airways shares rose 2% to $5.16.

MS drug linked to brain infection

Shares of Elan (ELN, news, msgs) and Biogen Idec (BIIB, news, msgs) plunged today after the companies confirmed a link between their multiple sclerosis drug and a deadly brain infection.

Two patients taking the drug Tysabri developed a brain infection called progressive multifocal leukoencephelopathy, or PML, the companies said in a filing with the Securities and Exchange Commission late Thursday. Tysabri had been pulled from the shelves in 2004 after the Food and Drug Administration found links between the drug and three deaths. Tysabri was allowed back on the market in 2006.

Elan shares plummeted 50.5% to $9.93; Biogen shares fell 28.3% to $50.01.

Chavez to nationalize Banco de Venezuela

Venezuelan President Hugo Chavez late Thursday announced plans to nationalize Banco de Venezuela, a unit of Spanish banking giant Banco Santander (STD, news, msgs).

"I want to get it back because it's the bank of Venezuela -- that's its name," Chavez said in a nationally televised address. "We'll put it at the service of Venezuela, because the bank was very profitable."

Banco Santander bought 93.4% of Banco de Venezuela in 1996 for $351.5 million.

"The government sees logic in expanding its network of banks in the country, and Santander may benefit, as it has a buyer and can exit," Lehman Bros. economist Gianfranco Bertozzi told The Wall Street Journal.

This isn't Chavez's first move to nationalize a company: Chavez last year took control of ExxonMobil's (XOM, news, msgs) and ConocoPhillips' (COP, news, msgs) oil operations in Venezuela. He also took control of Electricidad de Caracas as well as the country's biggest telecommunications company, CANTV.

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

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.630%	1.635%	-0.005	0.00%	-48.09%
5-year Treasury note yield	3.228%	3.266%	-0.038	-1.01%	-6.57%
10-year Treasury note yield	3.948%	3.979%	-0.031	-0.50%	-2.16%
30-year Treasury bond yield	4.569%	4.603%	-0.034	-0.57%	2.47%
Currencies
U.S. Dollar Index	73.550	73.420	0.130	0.18%	-4.10%
British pound in dollars	$1.9755	$1.9841	-0.0086	-0.38%	-0.69%
Dollar in British pounds	£0.5062	£0.5040	0.0022	0.38%	0.70%
Euro in dollars	$1.5569	$1.5613	-0.0044	-0.20%	6.52%
Dollar in euros	€ 0.6423	€ 0.6405	0.0018	0.20%	-6.12%
Dollar in yen	107.61	107.83	-0.22	-0.25%	-3.79%
Canadian dollar in U.S. dollars	$0.976	$0.978	-$0.0017	-0.13%	-1.69%
U.S. dollar in Canadian dollars	$1.025	$1.023	$0.0026	0.21%	1.73%
Commodities
Gold	$917.50	$922.70	-$5.20	-0.56%	9.49%
Copper	$3.5785	$3.6615	-$0.08	-2.27%	17.68%
Silver	$17.5200	$17.7900	-$0.27	-1.52%	17.43%
Corn	$5.6500	$5.8750	-$0.23	-3.83%	24.04%
Crude oil (NYMEX) (per barrel)	$125.10	$124.08	$1.02	0.82%	30.34%