08-08-2011, 04:14 PM
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Auto stocks crash with broader markets; GM, Ford plunge over 8%
DETROIT -- The auto industry wasn't spared from today's crash on world stock markets.
As of mid-afternoon, the Dow Jones industrial average plummeted to 11,044, down 3.5 percent.
Investors dumped auto stocks on fears of a significant slump in demand after Standard & Poor's last week downgraded the U.S. credit rating. The move by S&P has heightened concerns the already fragile U.S. economy could slip into recession again if it prompts a cut in government spending, and similar cutbacks by anxious consumers and businesses.
An increase in borrowing costs and stagnant unemployment growth are compounding the issue and threaten to thwart the industry recovery, experts say.
As of 3:15 p.m. EDT, General Motors stock had plunged 8.5 percent, Ford Motor Co. was down 8.1 percent, and AutoNation Inc. fell 5.3 percent.
Among other dealer stocks, Penske Automotive Group plunged 6.8 percent, CarMax dropped 7.6 percent, and Group 1 fell 6.1 percent.
Suppliers, which largely outperformed the S&P 500 last year, were down more than 8 percent in early afternoon trading. The S&P 500 was down 4 percent.
Magna International shares fell 7.6 percent. Federal-Mogul Corp. and Meritor Inc. led the fallout with shares of each company down more than 12 percent.
"It's tough to say how hard they'll be hit by this decline, but it's not good," said Sean McAlinden, executive vice president of research and chief economist at the Center for Automotive Research in Ann Arbor, Mich. "If we continue this slide and dip below 10,000 on the Dow Jones, we could be heading back to whence we came."
Automakers and suppliers benefitted during the last 12 months from rising U.S. demand and healthy balance sheets. Several automakers were counting on U.S. sales to hit 13 million light vehicles this year.
However, as the market drops, so does demand. McAlinden said CAR will downgrade its projections to at least 12.5 million units for the year and expects others to follow suit.
"This would be a severe hit if demand falls back in the 11 million sales level," he said. "That's not good for suppliers and, once again, capacity and jobs would be cut."
Richard Hilgert, automotive securities analyst for Chicago-based Morningstar Inc., said the sell-off creates ample opportunity for investors.
"I was expecting a sell-off in the later half of the year, so we're looking at this as a long-term buying opportunity for investors," he said. "In the three-year outlook, we're going to see demand recover globally and in here in the U.S. to 15 million units."
Some of the pain for suppliers could be mitigated by commodities prices, which are also dropping with the stock market, alleviating severe cost pressures on the supply base.
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Steel and aluminum prices are expected to fall off slightly, after months of rising prices, McAlinden said.
Crude oil saw the largest fall off, dropping to the lowest level since November.
While prolonged savings at the pump could somewhat offset a decline in consumer auto demand, there's no clear answers as uncertainty over the situation continues, McAlinden said.
"A dollar-a-gallon plunge would leave a consumer confused in the midst of stock market uncertainty," he said. "Everyone is going to have to sit tight for a week or two and see how this thing plays out."