Updated from 4:11 p.m. ESTStocks in New York managed to close in slightly positive territory Friday despite news of a stalled relief plan for U.S. automakers. The Dow Jones Industrial Average, down as much as 217 points early on, ended up 64.59 points, or 0.8%, at 8629.68. The S&P 500 edged up 6.15 points, or 0.7%, at 879.74, and the Nasdaq gained 32.84 points, or 2.2%, to 1540.72. For the week, the Dow lost 0.1%, the S&P added 0.4%, and the Nasdaq added 2%. A federal rescue plan for Detroit's Big Three automakers failed to pass the Senate late Thursday after the United Auto Workers union refused Republicans' demand for aggressive wage reductions. The House had already approved the plan to provide aid to Ford ( F), General Motors ( GM) and Chrysler. The Senate voted 52-35 against the bailout in a procedural vote. It needed 60 votes to pass. According to Washington officials, the bill might not resurface until the new year. Chrysler and GM, though, have said they may have only weeks of sustainability remaining. Even before the vote failed, GM hired advisers to help it decide whether to file for bankruptcy, according to a report in The Wall Street Journal. "It would have been a stop-gap measure for a few months, not a bailout," says Michael Strauss, chief economist and market strategist, Commonfund. "But Washington officials are politicians, and unfortunately they focused on a political agenda, not a solution to the problem."
"The systemic effect of what
letting the automakers file for Chapter 11 would produce is pretty dangerous," says Strauss, noting the third-party implications and how those in turn would effect competitors, the rest of the industry and the economy. Investors reacted to the likelihood of the automaker aid throughout the week and into Friday. "The market sold off pretty heavily Friday morning on worries that we wouldn't have anything happen, there was some recovery on the fact that you're putting them in intensive care until January -- now you're left with a lot of uncertainty," says Bill Stone, chief investment strategist at PNC Wealth Management. Stone says that the longer the measure is put off, the better the chance that the automakers are going to get help. We're unlikely to see any positive economic data between now and year-end, and as numbers deteriorate lawmakers will be more encouraged to avoid the grave economic consequences of letting these companies fail, he says. Shares of Ford added 5.2% to $3.04, while General Motors shed 5.1% to $3.91. In other autos news, No. 2 Japanese automaker Honda ( HMC) said it's making more production cuts in North America as it adjusts to lower demand. Shares of the company, which is striking production by another 119,000 vehicles after a lesser cut earlier this year, lost 4.6% to $21.95 Friday. Also, auto and mortgage finance company GMAC was trying Friday to raise enough capital to become a bank holding company, and thus qualify for some of the money allocated under the U.S. Treasury Department's $700 billion TARP.
GMAC, which hoped to swap cash, preferred stock and new debt securities in exchange for $38 billion of its outstanding notes, extended its self-imposed deadline to 5 p.m. EST today. The Federal Reserve has required GMAC to, among other things, achieve a minimum amount of total regulatory capital of $30 billion in connection with its application for TARP funds. If GMAC is unable to raise the the funds by the deadline, the company said it will withdraw its application and explore other options. A smattering of economic data also hit the market early Friday. Retail sales fell 1.8% in November overall and 1.6% excluding automobiles, while the consensus was for greater declines of 2% and 1.8%, respectively. The so-called control group, which is made up of retail sales excluding sales of automobiles, gasoline and building materials, increased 0.5%. This figure plays a prominent role in estimations on quarterly data on personal consumption expenditures, Tony Crescenzi, chief bond market strategist for Miller Tabak, wrote on his RealMoney.com blog. "It is obvious what is happening here: the fall in the price of gasoline has increased consumer purchasing power substantially," says Crescenzi. Strauss agrees that, in an interesting twist, the sharp drop in energy prices may be providing help to other areas of nondiscretionary spending. "There were some interesting rebounds in a period of extremely challenging economic conditions," he says.
Moreover, according other data released on Friday, the University of Michigan Consumer Sentiment index increased to 59.1 from 55.3.
Consumer sentiment is still structurally weak, but this bounce "is impressive given how horrendously bad the labor markets have been," says Strauss. "There may be an aspect of consumer confidence in middle America or industries that aren't tertiary to the financial and housing markets -- people in those areas might feel a bit better on a weekly basis because they're spending less for gasoline," he says. Meanwhile, the Producer Price Index, which measures prices of goods at the wholesale level, fell 2.2%, slightly more than economists had predicted. The core PPI increased 0.1%, in line with expectations. The biggest news on Wall Street Friday morning, however, was the arrest of market-maker Bernie Madoff on charges of securities fraud. The SEC alleges that the 70-year-old Wall Street fixture lost some $50 billion of client money in what they say amounted to a giant Ponzi scheme. "Did we need to lose anymore confidence in the financial system?" Stone asks. "I don't know how much it's hurting -- but it's not helping." In company news, late Thursday, Bank of America ( BAC) said it will cut up to 35,000 jobs over the next three years, including some from newly acquired investment bank Merrill Lynch ( MER). Bank of America shares captured 2 cents to $14.93, while Merrill Lynch lost a penny to $12.66. Shifting to commodities, crude oil fell $1.70 to settle at $46.28 a barrel. Gold added 30 cents to settle at $820.50 an ounce.
Longer-dated U.S. Treasury securities were creeping upward in price. The 10-year was rising 7/32 to yield 2.6%, and the 30-year added 5/32, yielding 3.1%. The dollar was weaker against the euro and the yen, and recently stronger against the pound. Overseas, European markets were down -- the FTSE in London and DAX in Frankfurt gave up 2.5% and 2.2%, respectively. In Asia, Japan's Nikkei and Hong Kong's Hang Seng both ended lower.