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Automakers' Stocks Hammered Again

Wall Street: Concerns about consumers, the economy and gas prices have investors worried.


DETROIT — Automakers' stocks were hammered for a second day Wednesday amid concerns about an expected decline in the auto market this year and next, and uncertainties over consumers' purchasing power, the economy, possible war with Iraq and potential instability in gasoline prices.

Shares of General Motors Corp. and Ford Motor Co., the world's two largest auto manufacturers, both fell 7.7% from Tuesday, when they hit their lowest levels in nearly 10 years. GM closed Wednesday at $31.01 and Ford at $7.15, while DaimlerChrysler closed down 6.4% at $30.17.

"You have a compounding set of uncertainty with respect to the [possible] war, the overall economy," said David Cole, director of the Center for Automotive Research in Ann Arbor, Mich. "You've got uncertainties over what the election might portend. Wall Street hates uncertainty and really doesn't know how to deal with it very well."

Credit Suisse First Boston on Tuesday downgraded its target price for Ford's stock to $10 from $20. In the bond market, speculation was rife that Ford's credit rating might be cut below investment grade, to "junk" status, even though the company said its financial picture was solid.

Morgan Stanley on Wednesday cut its 2003 earnings-per-share forecast for the Big Three, lowering GM from $5.40 to $5, Ford from 55 cents to 45 cents and DaimlerChrysler from 3.40 euros to 3.30 euros.

The last year has been marked by unprecedented incentives from the automakers, including interest-free financing and generous rebates.

Because the firms lose more money with higher incentives, there has been concern on Wall Street that sales have been artificially boosted at the expense of profitability and are unsustainable.

Automakers "are charging their customers less, allowing them more time to pay off the loan and allowing them to borrow more money relative to the value of the vehicle," Morgan Stanley analyst Steven Girsky wrote in a report Tuesday. "All else being equal, the auto companies may be taking on more risk to attract customers."

But the no-interest loans and rebates aren't behind the stocks' tumble this week and are not likely to lessen any time soon, said David Littmann, chief economist of Comerica Bank in Detroit.

"I think [the market reaction] is more related to the likelihood of a calendar year 2003 of 300,000 to 500,000 units below what this year has been," Littmann said.

U.S. auto sales streaked to a record high 17.4 million in 2000 and a second-best 17.1 million last year. Littmann sees 2002 coming in at about 16.9 million, and 2003 sinking further to 16.6 million at most.

But to Littmann it's the unsustainable boom in home mortgage refinancing, brought on by historically low interest rates, that is behind the turbulence in auto stocks.

The frenzy of mortgage refinancing "is equivalent to a tax cut of upward of $100 billion this year," he said. "The liquidity surge we've seen all this calendar year simply won't be with us next year to the same degree, and that I think is what is underscoring the renewed uncertainty in the auto market."

European and Asian auto stocks also slid Wednesday, but the Big Three were the big losers.

"I think it's concerns about a new recession, worry about the price of gasoline skyrocketing if we get into a war with Iraq, concern about the pension funding of the companies--all of it overdone, I think," said Daniel Healy, auto analyst for Burnham Securities.

Mike Marin, general sales manager at Gateway Chevrolet in La Mirada, agrees that the worries are overdone.

He said Wednesday that although he's heard all the negative reports, he's not seen or heard anything from his customers to back them up.

Not even the prospect of a war in the Persian Gulf is stemming what he called "a really good" stream of customers. "But we're a Chevy dealer, and we have a largely middle-class customer base," Marin said. "I don't think that kind of stuff hurts the middle class. It's the upper end, people with a lot of money in stocks and real estate, who are affected first."

He acknowledged that he's not sure how long the car makers can keep luring customers with costly incentives, but he added that "a lot of times, all this stuff the economists and analysts are saying turns out to be them talking to each other. They create situations that unsettle people who are getting ready to go out and make a purchase."

Times staff writer John O'Dell in Los Angeles contributed to this report.

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