General Motors ( GM), the poster child of the flagging U.S. automotive industry, has kept the equity and credit market nervous this year, and with reason. But on Monday, news of GM's progress in its negotiations with the UAW brought a sense of relief to blue-chip stock proxies and corporate bond markets as well.

In that sense, Monday was the polar opposite of the unrest that occurred last May, when the possibility of the auto giant going bankrupt roiled U.S. financial markets. At that time, credit rating agencies cut GM's rating to junk, raising the alarm bells over its unsustainable cost structures and dwindling sales of sport-utility vehicles.

On one of these fronts, at least, the carmaker seems to have made progress. On Monday, GM announced it reached a significant deal with the United Auto Workers to curb its ballooning health care costs. The deal paves the way for more union concessions on health care costs and other issues, at least for GM and its rivals in the auto industry, analysts say.

Still, the automaker's road to a return to profitability remains full of challenges, as shown by GM's staggering $1.6 billion third-quarter loss, its fourth quarterly loss in a row.

Under the agreement with the union, which still needs to be ratified by UAW members, GM would reduce its health care expenditures for hourly GM retirees by $3 billion on a pretax basis, generating annual savings of $1 billion. Overall, GM estimated that the deal would generate cost savings of $15 billion, or 25% of its hourly health care liability.

The automaker also announced it would close more plants and cut at least 25,000 jobs by 2008. In addition, GM will seek offers for a controlling stake in its financing unit General Motors Acceptance Corp.

"The bigger news is really that the UAW is willing to be flexible," says Morningstar auto analyst John Novak.

The news boosted GM to an intraday high of $31.50 and the stock finished up 7.5% at $30.09. Ford ( F) rose 0.5%, and DaimlerChrysler ( DCX) gained 1.5%, on strong expectations that the GM rivals will be able to receive similar cost-cutting deals with the UAW.

In concert, auto-parts maker Visteon ( VC) rose 3.7%, and Dana ( DCN) soared 13% after being upgraded by UBS.

Strength in GM -- and Altria ( MO) -- helped the Dow Jones Industrial Average rise 0.6% to 10,348.10 Monday while the S&P 500 rose 0.3% to 1190.10. The Nasdaq Composite added 0.3% to 2070.30.

(After the bell, tech bellwether IBM ( IBM) reported third-quarter earnings that handily beat analysts' estimates, but the company failed to match sales expectations. Still, shares of Big Blue were recently up 1.2% in after-hours trading.)

No Rescue Helps

To a large degree, GM forced the hand of the union by refusing to come to the rescue of its ailing unit, Delphi Automotive ( DPH), which filed for bankruptcy last week. Beyond aiding other automakers in their own union negotiations, a "more flexible" UAW reduces the risk that GM itself may have to file for bankruptcy, Novak says.

The price of GM's 2033 corporate bond also soared Monday, rising to 78 from 71-72 on Friday, according to Miller Tabak. (Bond quotes are percentages of the bond's face value of $1,000.)

When GM's debt rating was cut to junk in May, its shares and bonds tumbled. But some investors were caught flatfooted when corporate financier Kirk Kerkorian announced he would buy more a stake of in GM stock at $31 per share. Rumors of the possible collapse of a hedge fund swirled but proved untrue.

GM's announcement Monday also helped change the tone in credit markets, which were made uneasy last week amid signs of foul play at derivatives brokerage Refco ( RFX), according to Darin Feldman, fixed-income portfolio manager at Aladdin Capital.

"The market was definitely encouraged by the GM news, which has set a fairly constructive tone," he says. With corporate bonds improving, the 10-year Treasury slipped 2/32 in price to yield 4.49%.

Beyond staying out of bankruptcy, what's now of interest to GM share and bondholders is if -- and when -- the company can return to profitability. For GM's share price, one of the first stumbling blocks remains the uncertainty over how much the automaker will have to pay for sacrificing Delphi to save its own skin.

In a conference call Monday morning, GM Chief Executive Rick Wagoner estimated the liabilities to Delphi at anywhere between zero to $12 billion, while recommending that analysts shoot for the middle. "The costs, liabilities and risks associated with Delphi's bankruptcy are likely to be viewed by investors as a substantial offset" to the benefits of the UAW deal, wrote Lehman Brothers analyst Darren Kimball.

These concerns, he says, might be offset by GM's opportunity to buy parts more cheaply elsewhere.

Another immediate uncertainty for GM is the wisdom of trying to sell a controlling stake in GMAC, which was one of the biggest cash generators for the company. In an interview on CNBC, Wagoner recognized that the move would reduce the percentage of cash it would receive from GMAC. But he bet that once freed from some of GM's debt concerns, GMAC could flourish, and GM would then have "a smaller percentage of a bigger pie."

Some have speculated that the GMAC move may have resulted from pressure by Kerkorian, who has vociferously criticized GM management and wants a seat on the GM board after raising his stake in the automaker to 9.9% last week.

Wagoner declined to comment specifically on the matter in the CNBC interview.

Another threat for owners of GM stock, but which would make GM bondholders happier, is the possibility that GM reduce its dividend.

But there are more persistent and key issues for GM. First, interest for its gas-guzzling SUVs, its main revenue-driver over the past few years, is dwindling amid soaring gasoline prices. Higher raw material costs are also hurting GM's profits, and in the meantime, competition, especially from Asian manufacturers, remains intense.

"GM's market share is still shrinking, the future looks bleak for SUVs and they're still stuck with a very weak product lineup," says Morningstar's Novak. The company has made plans to produce more hybrid models and more fuel-efficient vehicles, but these won't start making a difference until late 2006 or 2007, he says.

Although Novak hadn't reached a decision yet, he said that Monday's news from GM would inspire him to lift his $25 fair-value target on the stock only by "a couple of bucks."

To view Gregg Greenberg's video take on today's market, click here .

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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