The Week Ahead

First, a follow-up on Detroit. We wrote earlier that GM and the rest must be allowed to fail, figuring why pour good $ after bad. There is no way we taxpayers can finance their cash burn rate. Let them go into bankruptcy, taking their miserable unions with them. The world liquidity crisis is not the cause of their problem. The Three Stooges started losing billions years ago when the economy was healthy. And there is no equivalent in the scope of contagion compared to that of the just-past liquidity crisis. Naturally failure will impact the rubber, carpet, iron, glass industries, all the rest. But we are not yet Western Europe. Bite the bullet.

But wait cautions one acquaintance, be realistic. That is not politically viable. It’s not going to happen in Washington Bob. And what about owners of cars with no warrantee for example?

OK, maybe our friend has a point. A better option may be that detailed in yesterday’s WSJ: Paul Ingrassia, the paper’s Detriot bureau chief agrees that giving GM (apparently in the worst shape of the three, with the other two close behind) a blank check would be a grave mistake. "The company would just burn through the money and come back for more. Even more jobs would be wiped out in the end" (our earlier point). "Instead, in return for government aid, the board and the management must go. Shareholders should lose their paltry remaining equity. And a gov’t-sponsored receiver - someone hard-nosed and nonpolitical - should have broad power to revamp GM with a viable business plan and return it to private operation as soon as possible." Ingrassia continues, "That will mean tearing up existing contracts with unions, dealers and suppliers, closing some operations and selling others, and downsizing the company. The same basic rules should apply to Ford and Chrysler." And we might add that when in the process of restructuring, look to the so-called Detroit South where Toyota, Hyundai, and other foreign auto makers have expanded car production in recent years, although in states where unions are practically non-existent and labor is cheap.

Thus, if our plan is not politically viable, then as Ingrassia concludes, "a complete restructuring under a government overseer or oversight board has to be the price". Fine. Let’s do it. Democrats, are you listening?

The Week Ahead

World leaders will meet Nov/15. Watch the price of oil as an indicator of the odds for success. Crude is a useful tool in this regard. For example, one key reason crude rose just under 3% in after-hours trading Sun was the news that China has enacted a massive stimulus package, the view she might remain an engine for global demand. Oil is now softer, partly on today’s poor world corporate earning news which has temporarily at least, trumped that view. The price will reflect the tug-of-war between economic reality, and, hope for international cooperation to re-fire economic activity.

Friday’s Oct Retail Sales is this week’s key focus in the mind of the mkt crowd. Expectations are for a dismal figure. If there is a risk to this release, the figure may not be as bad as expected but it will be plenty bad nevertheless. Until Friday, look for more signs of corporate grief.

In the meantime, inter-bank liquidity continues to thaw, that initial crisis on the way to becoming history.

Robert Craven