With the deal, Jones Lang would be entrusted to effectively manage the day-to-day tasks related to the operations across SunTrust’s facilities. SunTrust operates an extensive branch and ATM network throughout Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia and Washington, DC. Jones Lang’s leading position in property and corporate facility management services would enable it to improve the operational efficiency of SunTrust.

On the other hand, the deal strengthens Jones Lang’s position in the market and offers it an expanded role in the operations of one of the largest banking organizations of the country. Jones Lang is a leading full-service real estate firm that provides corporate, financial, and investment management services. The company caters to corporations and other real estate owners, users, and investors worldwide.

Currently, Jones Lang provides property and corporate management services across a worldwide portfolio of 1.4 billion square feet. Its investment management division, LaSalle Investment Management is one of the largest and most diverse companies in the real estate market and has over $46 billion of assets under management.

"The company, which intends to release its third-quarter earnings results on Oct 22, also expects its non-performing assets to accelerate, though interest income and margins are expected to improve in the second half of 2009.

Fifth Third expects net charge-offs in the third quarter to be approximately $775 million, up from $626 million in the second quarter. This would include approximately $110 million in net charge-offs related to SNC credits, compared with $17 million in the second quarter. However, management expects SNC charge-offs to fall in the fourth quarter. Non-performing assets are also expected to increase 20%.

The weakness in the overall economy and in the real estate market, including specific weakness within Fifth Third's geographic footprint, has adversely affected the company. A significant portion of its residential mortgage and commercial real estate loan portfolios comprise borrowers in Michigan, Northern Ohio and Florida.

These markets have been particularly hurt by job losses, declines in real estate values, declines in home sale volumes and declines in new home building. As a result, delinquencies and charge-offs are increasing, and the company's earnings are adversely impacted. According to management, while the Michigan market has begun to stabilize, the Florida market remains stressed.

Fifth Third's second-quarter core loss of 27 cents per share was better than the Zacks Consensus Estimate for a loss of 30 cents per share. Competitive market conditions, continuing deterioration in credit quality and collateral values within the company's geographical footprint will weigh upon results for several quarters to come, in our view.

However, despite the dilutive impact, the recent capital bolstering initiatives are viewed positively, given the stressed economic environment. Also, the cost containment measures provide some relief. Hence, we have a Neutral recommendation on the shares.

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.

In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.

Remember that at the end of 2008, the Federal Reserve Board estimated that there was $12 Trillion of mortgage debt on residential properties in the US, with the Federal government and its agencies providing about 5% of the total, individuals 9% and the rest coming from the financial sector. The Case-Shiller composite index of housing prices has fallen 1/3 from its peak in 2006 and the latest the Mortgage Banker Association survey finds that 13.5% of residential mortgages in their survey are delinquent or in foreclosure.

Even if losses in the end are only 5% of mortgage debt, that's a $600 Billion drop in equity on private sector balance sheets. It's easy to see how losses of half a trillion dollars or more could push some banks into insolvency and many into illiquidity. That's the recipe for a banking crisis. Remember that the FDIC's Deposit Insurance Fund had reserves of just over $50 billion at the start of 2008 and of which approximately zero is left today. That's the recipe for a costly banking crisis.

Like heart disease, there may be many different significant risk factors for banking crises. However, the evidence to date suggests that real estate volatility is one of the most important, if not the most important. Reducing the risk of future crises (and their drain on the public treasury) requires that something be done to address this risk factor. As I'll discuss in a minute, there seem to be lots of ways to do this, but they boil down to some combination of (1) reducing the volatility of real estate prices, and (2) reducing banking sector exposure to real estate. But first, stop and think about the kinds of proposals that are currently under discussion. There's a long list that includes things like

• The creation of a new Consumer Financial Protection Agency, a National Bank Supervisor, and an Office of National Insurance, which would join with several other agencies in a Financial Services Oversight Council.
• Requiring reporting of all OTC derivative transactions, as well as clearing and transparent trading of all standardized OTC derivative products.
• Expanding the mandate of the Federal Reserve to explicitly include all firms that pose systemic risks to the financial system.
• Requiring registration of advisors to hedge funds and other pools of capital.
• A reform of executive pay in the financial sector to reduce incentives for excessive risk-taking
• The provision of explicit government insurance to mortgage derivatives
• A ban on "naked" short-selling
• Restricting the sale of CDSs and similar instruments to those with long position in the underlying asset.
• [your favorite goes here]

Now ask yourself which of these will be effective in reducing the volatility of real estate prices? Which will effectively reduce the banking sector's exposure to that volatility? With the exception of #6 on the above list, it's not obvious that any of these proposals will do either (and #6 doesn't appear to be high on the public agenda as far as I can tell.) Understand that the word "obvious" is an important caveat; for example, it's conceivable that improving clearing of OTC derivatives might reduce the exposure of the banking sector to real estate collapses by preventing contagion within the banking sector, but it's hard to know how much this will help. The same can be said for most of the items of the list; they might help or there might be other sound reasons for those reforms, but there is little that looks like it will reliably reduce volatility in the real estate market or reduce the banking sector's exposure to those fluctuations.

What I find most surprising about the financial reform debate is that so much of it has focused on reform of regulatory agencies, banking laws and trading environments while so little attention has been paid to reform of mortgage regulations and mortgage-related securities. So to stimulate the debate on such reforms, let me suggest two kinds of measures that deserve further consideration.

1. Highly-leveraged mortgages increase the systemic risk in the financial sector and should be discouraged. This could be done in a number of ways, such as a tax on high loan-to-value mortgages, or compulsory insurance, or via regulation limiting the value of liens that can be attached to real estate, or simply by limiting mortgage-interest deductibility. Doing so should reduce the banking system's exposure to the real estate market by ensuring that borrowers have greater equity investments (or are backed by insurance.) The reduction in leverage may also reduce real estate price swings.

2. The insurance of mortgages and mortgage-related products (including credit-default swaps on mortgage derivatives) requires tighter regulation. Such insurance is a critical buffer between downturns in the real estate market and the solvency of the banking system. While some mortgage risk is diversifiable, a substantial portion is a macroeconomic risk that is not diversifiable. This is particularly true for mortgage-backed securities, which pool risks across many individual mortgages. In the event of a national downturn in housing prices, it is not obvious that private-sector insurers will have the resources to honor their policies. At a minimum, the government needs to impose capital requirements for mortgage insurance and related financial derivatives that require a level of financial reserves commensurate with the degree of macroeconomic risk in this market. Others (such as Mehrling 2009) have argued that the government should simply provide such insurance themselves.

This post written by Simon van Norden.

Quarterly revenue was down 16.2% to $1,432 million from $1,709 million a year ago, primarily led by lower volumes for most products. Packaging Resources sales were down 9% due to lower volume, primarily in the food service, general packaging paperboard, tobacco and liquid packaging markets.

In the Consumer Solutions segment, MeadWestvaco reported a sales decline of 16% as strong volume growth in healthcare packaging was more than offset by lower volumes in personal care and media packaging as well as unfavorable currency translation.

The Consumer & Office products business reported a 13% decline in sales driven by lower volumes for most of the products. Envelope products sales were particularly weak as the financial services customers continue to reduce direct mail offerings.

Specialty Chemical segment sales were off 21% due to lower volumes driven by weak global demand for industrial performance chemicals and lower demand for automotive carbon in North America. This was partially offset by strong demand for automotive carbons in China and asphalt products in United States, China and Brazil.

In the Community Development and Land Management segment, sales were down about 43% due to lower land sale activity. The real estate market remains challenging due to a sharp decline in consumer spending and tighter credit markets.

Demand conditions are expected to remain distressed for the next couple of quarters. The company is expected to post lower revenue for the year due to significant decline in volumes for most of its products. MeadWestvaco aims at offsetting some of this negative impact on earnings through cost-reduction activities and productivity improvements.

In January, the company announced a series of cost-cutting initiatives to reduce overhead costs. By the end of the year, these efforts are expected to result in the elimination of about 2,000 positions, or 10% of MeadWestvaco’s workforce and the closure or restructure of 12 to 14 manufacturing facilities.

By the end of the second quarter, the company had eliminated 1,250 positions and had either completed or was in the process of restructuring 12 facilities. This has resulted in year-to-date cost savings of $46 million. The company now expects to exceed its initial cost saving target of $125 million by at least 10%.

OPPORTUNITIES

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle, and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. General Motors (GMGMQ) and Chrysler both have filed for (and are currently emerging from) bankruptcy, and will become more competitive in the long run.

WEAKNESSES

Earnings are below expectations and have been for some time. Demand for autos is down 35% due to a weak economy and weakening real estate market.

Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. Also, the presence of unions has led to costs being much higher than seen in other countries.

Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

BUY/SELL RATINGS

AutoZone (AZO)

OPPORTUNITIES

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle, and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. General Motors (GMGMQ) and Chrysler both have filed for (and are currently emerging from) bankruptcy, and will become more competitive in the long run.

WEAKNESSES

Earnings are below expectations and have been for some time. Demand for autos is down 35% due to a weak economy and weakening real estate market.

Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. Also, the presence of unions has led to costs being much higher than seen in other countries.

Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

BUY/SELL RATINGS

AutoZone (AZO)

Chicago, IL – July 10, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and US Bancorp (USB).

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Here are highlights from Thursday’s Analyst Blog:

CRE Mauling to Continue

Clearly, as more companies downsize and retailers close their doors, small and regional banks may experience substantial risk of severe losses from commercial real estate loans. The pressures are not expected to improve until economic improvements are experienced -- specifically, when consumers and businesses start spending money again.

With unemployment hitting 9.5% in June 2009, new construction projects have come to a virtual standstill, which moderates the number of construction jobs that are being worked on and moderates tax revenue for local governments. Currently, the national commercial real estate market is not expected to hit bottom for at least three years.

Recently it was noted that the Federal Reserve has been focusing commercial real estate loans banks' books as losses from the sector continue to expand. As such, the Fed has expanded its training of its bank examiners in order to be prepared to deal with rising losses from the commercial real estate industry.

While small and regional banks would experience hits, institutions such as (but not limited to) Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and US Bancorp (USB) as well.

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The real estate market continues to be difficult and credit markets did not improve much in 2009. The adverse environment continues to affect Move (MOVE), which provides a wide range of real estate services through a family of websites.

The ongoing global financial crisis affecting the banking system and financial markets has resulted in a severe tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in credit and equity markets. This in turn has affected other industries in the economy. The U.S. residential real estate market is currently going through a significant downturn due to downward pressure on housing prices, credit constraints inhibiting home buyers and an exceptionally large inventory of unsold homes. This is the worst crisis that the industry has faced in decades and there seems to be no turnaround in the near future.

Amidst all this, Move continues to strive hard to rise from the ashes. The company has appointed a new CEO, Mr Steve Berkowitz, who outlined a major reorganization plan in the first quarter earnings call. The vision is on target but execution is the key and results will take time. Earlier, the company undertook a restructuring plan to eliminate duplicate resources and redundancies and implemented a new operating structure to lower total operating expenses. This resulted in a $20 million reduction in operating expenses in the first quarter.

Management is pursuing value-enhancing initiatives but there is not much the company can do given the circumstances. Real estate advertising is down 71% from its peak. The company faces competition from newspapers in that respect. But with newspapers failing all around, one can expect a mass shift to internet-based real estate advertising, which happens to be the company's sweet spot. However, the real estate industry is yet to find a bottom and a lot more inventory has to work through the system before one can see a meaningful increase in housing starts.

Given the challenging real estate market in the US and lack of a near-term catalyst, we think the shares will remain range-bound. Accordingly, we continue to rate the shares of Move a Hold.

A synopsis of today's Industry Outlook is presented below. The full article can be read at http://at.zacks.com/?id=2678.

Earnings are below expectations and have been for some time. Demand for autos is down (35)% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.

However, the previous two points will be addressed in part by the bankruptcy filings of General Motors (GMGMQ) and Chrysler. Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

AutoZone (AZO) is a Buy due to improving same store sales and a resurgence in the used car and auto parts market. TRW Automotive (TRW) is a Buy due to restructuring.

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The performance of the Zacks Rank portfolios shown above for annual and year-to-date periods are the linked monthly total returns (price changes + dividends) of equal weighted hypothetical portfolios, consisting of those stocks with the indicated Zacks Rank, assuming monthly rebalancing and zero transaction costs. These are not the returns of actual portfolios. The hypothetical portfolios were created at the beginning of each month from Jan 1988 forward based on the values of the Zacks Rank available to Zacks' clients before the beginning of each month.

The portfolios created monthly from 1988 through September 2006 exclude ADRS and are comprised of stocks that have the indicated Zacks Rank and were covered by at least two analysts at the time of the stocks inclusion in the portfolio. Starting in October 2006 and going forward, the portfolios are comprised of all stocks with the indicated Zacks Rank and do not exclude ADRs, which is more reflective of the list of stocks that customers will find on the Zacks web sites. 2007 returns are for the period of Jan 1 - Jun 30, 2007. These performance numbers have been audited from 1995 through 2003 by Autschuler Melovan, a division of American Express Financial.

OPPORTUNITIES

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually. Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. GM and Chrysler both have filed for bankruptcy, and will emerge more competitive in the long run.

WEAKNESSES

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.

However, the previous two points will be addressed in part by the bankruptcy filings of General Motors (GM) and Chrysler. Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

BUY/SELL RATINGS

AutoZone (AZO)

OPPORTUNITIES

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually. Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. GM and Chrysler both have filed for bankruptcy, and will emerge more competitive in the long run.

WEAKNESSES

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.

However, the previous two points will be addressed in part by the bankruptcy filings of General Motors (GM) and Chrysler. Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

BUY/SELL RATINGS

AutoZone (AZO)

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market).

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road.

Back in December of 2008, President Bush approved an emergency bailout of the U.S. auto industry, offering $17.4 billion in rescue loans in exchange for tough concessions from the deeply troubled carmakers and their workers. The government will have the option of becoming a stockholder in the companies, in effect partially nationalizing the industry.

If the carmakers fail to prove viability by March 31, 2009, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans. Under terms of the loan, General Motors (GM) and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price. In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.

This is a band-aid, but not the surgery this industry needs. In essence, we see this as the first step towards a long-term solution, which will include the following:

• Getting a bankruptcy attorney and filing ASAP -- this measure extends this until March 31. Then healthcare and pension issues can be removed and this would go a long way towards making Detroit competitive with foreign manufacturers
• Separate dealerships from the rest of the company. The parts and service issue can be guaranteed by the US Government and these companies can be separated and recapitalized from the rest of the Big Three. We find it hard to believe that consumers would buy something from a bankrupt company
• Get a labor attorney and have a nasty confrontation with the UAW while in bankruptcy. This would be the worst labor showdown in out memory and may involve the Supreme Court at some point
• Have the US Government be a DIP [debtor-in-possession] financer, as opposed to writing blank checks to the auto manufacturers. They are there to support -- but not nationalize -- the industry. The challenge will be when to get these companies out of the private sector hospital, which is the US Government
• Focus on only 35+ MPG vehicles. Transition from SUV to AFV (Alternative-Fuel Vehicles)
• Remove the top 50 officers of the all of the Big Three and replace them with outsiders. Encourage creative and dynamic thinking
• The US Government should look at tariffs and quotas to protect these companies as they restructure. Also, this would force foreign manufacturers to build plants in the US rather than export, which would make a worker-retraining issue a worker-relocation issue, which is far easier to deal with
• Consumers should be allowed to deduct automotive interest, which would increase demand for autos and alleviate the credit issue that surrounds the industry now. Perhaps this can be for AFVs and 35+ MPG vehicles only. There should be a punitive tax on SUVs which will make them unaffordable for consumers. These tax revenues can fund growth of the AFVs and high MPG vehicles with tax credits
• Global alliances should be forged among the manufacturers to take advantage of global economies of scale. These new "super-car" companies would be able to tap into the Chinese and Indian markets, where the car industry is a growth business and billions of people are screaming for a new car, not just a second hand retread from the US or Europe. Economies of scale/Rationalization and China/India increasing the global baseline demand for cars may permanently increase profitability for the industry and avoid this situation from happening again

Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers.

The presence of unions has led to costs being much higher than seen in other countries. Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

Auto sales were very weak in February, but this is a continuation of an ongoing trend. Overall sales are down 41% and were the worst since 1981. The average incentive was $2900, which is up 8% and was unable to stimulate sales. Ford (F) sales were off 50%, mainly due to a tired product line and weak F-series sales. GM (GM) sales were down 53%, with weakness in the SUV part of the product line. Chrysler sales were down 44%, even with average incentives of $5,500, which is 20% of the price of a car.

Honda (HMC) sales were off 38%, which is 3% higher that the market and shows why they are the best of the "Big-4" automakers (Honda sources more of its content from the USA than even Chrysler). Nissan (NSANY) sales were down 37%. Toyota (TM) sales were off 40%. We suspect sales were weak in the SUV part of the product line. Hyundai continued to buck the trend and had flat sales, which implies that their "return your car if you lose your job" program is having huge success.

BUY/SELL RATINGS

Autoliv (ALV) is a Sell due to the slowdown in the auto market and weak pricing. AutoNation (AN) is a Sell due the slowdown in the auto market and exposure to California. American Axle and Manufacturing (AXL) is a sell due to the slowdown in the auto market and costs related to the new UAW agreement.

Ford and General Motors are Sells and bailout candidates that need a major restructuring. CarMax (KMX) is a Sell due the weak auto market and falling prices. Lear (LEA) is a bankruptcy candidate. TRW Automotive (TRW) is a Sell due to the weak auto market. Zacks Investment Research

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market).

There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road.

Back in December of 2008, President Bush approved an emergency bailout of the U.S. auto industry, offering $17.4 billion in rescue loans in exchange for tough concessions from the deeply troubled carmakers and their workers. The government will have the option of becoming a stockholder in the companies, in effect partially nationalizing the industry.

If the carmakers fail to prove viability by March 31, 2009, they will be required to repay the loans, which they would find all but impossible. A firm will be deemed viable only if it can show positive cash flow and can fully repay the government loans. Under terms of the loan, General Motors (GM) and Chrysler must provide the government with stock warrants giving it the option to buy GM and Chrysler stock at a specific price. In addition, the automakers would be required to agree to limits on executive pay and eliminate some perks such as corporate jets.

This is a band-aid, but not the surgery this industry needs. In essence, we see this as the first step towards a long-term solution, which will include the following:   

• Getting a bankruptcy attorney and filing ASAP -- this measure extends this until March 31. Then healthcare and pension issues can be removed and this would go a long way towards making Detroit competitive with foreign manufacturers    
• Separate dealerships from the rest of the company. The parts and service issue can be guaranteed by the US Government and these companies can be separated and recapitalized from the rest of the Big Three. We find it hard to believe that consumers would buy something from a bankrupt company    
• Get a labor attorney and have a nasty confrontation with the UAW while in bankruptcy. This would be the worst labor showdown in out memory and may involve the Supreme Court at some point    
• Have the US Government be a DIP [debtor-in-possession] financer, as opposed to writing blank checks to the auto manufacturers. They are there to support -- but not nationalize -- the industry. The challenge will be when to get these companies out of the private sector hospital, which is the US Government    
• Focus on only 35+ MPG vehicles. Transition from SUV to AFV (Alternative-Fuel Vehicles)    
• Remove the top 50 officers of the all of the Big Three and replace them with outsiders. Encourage creative and dynamic thinking    
• The US Government should look at tariffs and quotas to protect these companies as they restructure. Also, this would force foreign manufacturers to build plants in the US rather than export, which would make a worker-retraining issue a worker-relocation issue, which is far easier to deal with    
• Consumers should be allowed to deduct automotive interest, which would increase demand for autos and alleviate the credit issue that surrounds the industry now. Perhaps this can be for AFVs and 35+ MPG vehicles only. There should be a punitive tax on SUVs which will make them unaffordable for consumers. These tax revenues can fund growth of the AFVs and high MPG vehicles with tax credits    
• Global alliances should be forged among the manufacturers to take advantage of global economies of scale. These new "super-car" companies would be able to tap into the Chinese and Indian markets, where the car industry is a growth business and billions of people are screaming for a new car, not just a second hand retread from the US or Europe. Economies of scale/Rationalization and China/India increasing the global baseline demand for cars may permanently increase profitability for the industry and avoid this situation from happening again

Earnings are below expectations and have been for some time. Some of these companies may be bailout candidates, which would leave equity holders with no value. Demand for autos is down (15)% due to a weak economy and weakening real estate market.

Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers.

The presence of unions has led to costs being much higher than seen in other countries. Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

Auto sales were very weak in February, but this is a continuation of an ongoing trend. Overall sales are down 41% and were the worst since 1981. The average incentive was $2900, which is up 8% and was unable to stimulate sales. Ford (F) sales were off 50%, mainly due to a tired product line and weak F-series sales. GM (GM) sales were down 53%, with weakness in the SUV part of the product line. Chrysler sales were down 44%, even with average incentives of $5,500, which is 20% of the price of a car.

Honda (HMC) sales were off 38%, which is 3% higher that the market and shows why they are the best of the "Big-4" automakers (Honda sources more of its content from the USA than even Chrysler). Nissan (NSANY) sales were down 37%. Toyota (TM) sales were off 40%. We suspect sales were weak in the SUV part of the product line. Hyundai continued to buck the trend and had flat sales, which implies that their "return your car if you lose your job" program is having huge success.

BUY/SELL RATINGS

Autoliv (ALV) is a Sell due to the slowdown in the auto market and weak pricing. AutoNation (AN) is a Sell due the slowdown in the auto market and exposure to California. American Axle and Manufacturing (AXL) is a sell due to the slowdown in the auto market and costs related to the new UAW agreement.

Ford and General Motors are Sells and bailout candidates that need major restructuring. CarMax (KMX) is a Sell due the weak auto market and falling prices. Lear (LEA) is a bankruptcy candidate. TRW Automotive (TRW) is a Sell due to the weak auto market.

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market). There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road. The automakers have been receiving TARP funding from the Treasury to cover cash burn issues. The exact amount continues to be a moving target.

WEAKNESSES

Earnings are below expectations and have been for some time. Some of these companies are nationalization candidates, which would leave equity holders with no value. Demand for autos is down (15-20)% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment.The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry.

Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage. Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.

Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

Our Sell-rated names in this space have been and continue to be plentiful: Autoliv, Inc. (ALV), AutoNation, Inc. (AN), American Axle and Manufacturing (AXL), Ford Motor Company (F), General Motors Corp. (GM), CarMax, Inc. (KMX), Lear Corp. (LEA), TRW Automotive (TRW) and Visteon (VSTN).Zacks Investment Research