Morning Update

Failed Auto Rescue Bill Hits Stocks

The failure of the Senate to pass legislation supporting the Big Three automakers is having negative consequences across the globe today, sending shares in Asia, Europe and the US sharply lower amid fears that a bankruptcy by one or more major firms could further exacerbate an already weak economy. Elsewhere, Bank of America plans major layoffs, United Technologies offered soft guidance, and Best Buy commented on the holiday shopping season. In economic news, the readings on the Producer Price Index and retail sales were nearly in line with forecasts, while Treasuries are higher.

As of 8:35 a.m. ET, the December S&P 500 Index Globex futures contract is 29 points below fair value, the Nasdaq 100 Index is 29 points below fair value, and the DJIA is 197 points below fair value. Crude oil is down $3.44 to $44.54 per barrel, and gold is down $10.80 per ounce at $815.80. The overnight LIBOR rate was unchanged at 0.12%. The three-month LIBOR rate dipped another 8 bp to 1.92% in anticipation of a rate cut by the Fed next week.

Shares of General Motors (GM $4) and Ford (F $3) are under very heavy pressure after the Senate was unable to reach a compromise on the $14 billion package of emergency loans to the three US automakers. Ford declined to comment, but GM, which is in a more precarious condition than Ford, said it is "deeply disappointed" and will assess "all of its options" to continue its restructuring and to obtain the means to weather the current economic crisis.

In response to the failed effort to support US automakers, Fitch Ratings said it placed the issuer default ratings of seven auto suppliers on watch for a possible downgrade because it believes a resulting contraction in production caused by a GM bankruptcy would cause widespread shutdowns and bankruptcies throughout the supply chain. There is also a growing concern that nervous parts makers could begin to demand faster payment, which would exacerbate an already delicate situation, especially with GM. Meanwhile, some lawmakers are asking the Bush administration to use TARP funds to support the industry. The Treasury Department did not comment on the bill's failure in the Senate.

Bank of America (BAC $15 ¹) said it plans to eliminate 30,000-35,000 jobs over the next three years due to the weak economic environment and its pending merger with Merrill Lynch (MER $13). The expected layoffs will come from both companies, eliminate redundancies, and affect all lines of businesses, BAC said. Details have not been determined.

Best Buy's (BBY $24) CEO said sales have slowed since Black Friday but he sees business picking back up as Christmas nears. He did not provide specifics on recent trends but said he is pleased with traffic. Last month, the leading electronics retailer said it had seen "rapid, seismic changes in consumer behavior."

Falling retail sales and wholesale prices

Retail sales fell 1.8% in November, versus the Bloomberg estimate of a decline of 2.0%. Ex-autos, sales dropped 1.6%, compared to the consensus of a drop of 1.8%, but October was revised downward by 0.2 percentage points. Excluding autos and sales at gasoline stations, sales were up a modest 0.3%, which seems to be a bit of a surprise given the steep downturn in employment and consumer confidence.

The Producer Price Index fell 2.2% in November, near the Bloomberg forecast of a 2.0% decline. The core rate, which eliminates food and energy, was up 0.1%. Pricing pressures in the earlier stages of production continue to fall at a rapid pace. Year-over-year, the headline rate slowed dramatically, dropping from 5.2% to 0.4%, and the core rate eased from 4.4% to 4.2%.

Preliminary University of Michigan consumer sentiment will be released at 10:00 a.m. ET and a drop from 55.3 in November to 54.5 in December is anticipated. Business inventories for October will also be out and a 0.2% decline is forecast.

Europe hammered by failed auto bailout, banks

Following the Senate's rejection of the auto rescue package and sour comments from the CEO of JPMorgan Chase (JPM $30) that came after the close of European trading, stocks are under very heavy pressure in afternoon action, with banking companies and automotive parts leading a broad-based decline that has all 37 industry groups in the red. JPMorgan Chase's CEO Jamie Dimon told CNBC late yesterday that December has been "terrible.". Shares of UK mortgage lender HBOS (HBOOY $1) are trading much lower and receiving some unwanted attention following the disclosure that impairment charges and market losses totaled 8 billion pounds at the end of November. News that Bank of America plans to eliminate jobs is adding to the negative tone.

Sentiment in Asia takes a beating

The failed auto bailout bill in the US took a heavy toll on Japanese stocks, bringing an end to the four-day winning streak. Automotive stocks led the 5.6% sell-off in the Nikkei 225 Index, with shares of Honda (HMC $23), Isuzu (ISUZY $13), Nissan (NSANY $7), Mazda (MZDAF $2), and Toyota (TM $65) all losing between 10-13% following the collapse of the auto rescue package in the US Senate. Toyota commented that a major bankruptcy in the US would be undesirable and would worsen an already severe business environment.

After the close, the Japanese government unveiled a series of new measures designed to support demand. Japan's prime minister said the economy has worsened "far beyond our expectations," and the country is not going to escape from this "big tsunami" but the damage can be minimized. Actions that Japan will take include a loan program for laid-off workers and measures designed to help companies boost liquidity. Elsewhere around Asia, shares came under heavy pressure.