For Auto Sector, Brakes Gave Out In 2008

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For the auto sector - and many of its stocks - 2008 was nearly the end of the road.

First came the record-breaking rise of gas prices this summer. Next came the end of leasing. Then, the credit markets froze and consumer confidence plunged. The story reached dramatic heights as the Detroit Three, running out of cash and facing the prospect of bankruptcy, flew off to Congress to beg for a bailout, only to be turned down. Humbled, they made a return trip to Washington - this time by car - and the White House grudgingly came through with aid.

Now, gas prices have collapsed, but new car sales remain in free fall as Americans deal with a deep recession and layoffs.

"It's been a year unlike anything most people who follow the industry have seen," said Efraim Levy, auto analyst for Standard & Poor's Equity Research.

GM shares have plunged 84 percent in 2008. That means an investor who bought 100 shares of GM at its 2007 close of $24.89 - an investment worth $2,489 - would be left with paper worth just $366 as of Tuesday's close. Ford has fared little better, falling 66 percent.

The Standard & Poor's 500 index shed 39 percent in 2008, while the Dow Jones Total Return index lost 40 percent.

The first sign of trouble for the industry was a summer surge in gasoline prices. Gas peaked at an all-time high of $4.11 a gallon in July, sending car customers fleeing for the fuel economy of small cars and hybrids and dumping their trucks and sport utility vehicles - the bread and butter of U.S. automakers.

As auto sales swooned, carmakers began to move away from once-popular leasing, saying the residual value of returned cars was so low the practice was no longer profitable. Chrysler LLC announced in July its financial arm would stop financing leases altogether, while other automakers have said they have scaled back leasing dramatically.

As the months wore on, the dominoes began to fall. The collapse of the financial industry touched off the freeze-up in the credit markets. With banks afraid to lend, auto sales collapsed as consumers found it increasingly difficult to finance the vehicles they wanted to buy.

"Starting in July and August, (sales) began to really decline," said Tom Libby, senior director of industry analysis for the Power Information Network, a branch of J.D. Power and Associates. "It was precipitated first of all by the leasing situation and then by the credit situation."

At the U.S. automakers, the losses started to mount. In August, General Motors Corp. posted a $15.5 billion second-quarter loss and followed that up three months later with a loss of $2.5 billion. Ford Motor Co. also said it lost $129 million in the third quarter. Although Chrysler LLC doesn't report earnings, it has issued several warnings about its dire financial shape as well. GM and Chrysler said that without government aid, they might not survive into the new year.

The Bush White House finally approved $17.4 billion in short-term loans for GM and Chrysler in December, stepping in after Congress refused to grant the automakers aid. Ford, for its part, told the government it needs no bailout for now because it has access to enough credit to outlast the industry slump. Nonetheless, it joined its crosstown rivals in their bid for help, echoing their claim that a failure among a single automaker would disrupt the entire industry.

While federal bailout will tide over GM and Chrysler to at least early 2009, it isn't a permanent solution. The companies are required to submit by March 31 a restructuring plan for how they will return to "viability" or they risk having the loans called in.

Meanwhile, auto sales show no signs of picking up as consumers remain more concerned about the fate of their house or their job than the draw of a new car. Auto sales in the U.S. plunged 38 percent in November to their worst level in more than 26 years.

Auto parts suppliers have fared just as poorly as their automaker customers, who have steadily slashed production to cope with weaker demand. American Axle & Manufacturing Holdings Inc., whose workers went on strike for nearly three months, saw its shares plunge 87 percent in 2008. Visteon Corp. shares have lost 93 percent of their value, while Lear Corp. stock withered 96 percent.

The few auto-related companies whose stocks rose in 2008 were auto parts retailers, which have done a brisk business in car parts as consumers wear out their old cars. Shares of AutoZone Inc., for example, are up 14 percent. Shares of Monro Muffler Brake Inc. climbed 23 percent.

"When the economy is weaker, it's generally good for the aftermarket business because people, instead of buying a new car, they'll fix up their car or buy a used car," S&P's Levy said.

Asian automakers have generally performed in line with the broader U.S. market. U.S.-traded shares of Toyota Motor Corp. are off 39 percent for 2008, while Honda Motor Co. has lost 36 percent. Nissan Motor Co. has been the exception, tumbling 67 percent.


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