- The Washington Times - Wednesday, March 16, 2005

Wall Street markets nose-dived yesterday after oil prices and the U.S. deficit with the rest of the world surged to new records and General Motors reported its biggest loss in 12 years.

The Dow Jones Industrial Average fell 112 points to 10,633, and other major indexes were down by 1 percent after the price of premium crude hit a new high of $56.46 a barrel despite a pledge by major oil producers to increase supplies. Gasoline prices at the pump also are within pennies of a record.

GM revealed that it has become the biggest victim of high oil prices, which are cutting into sales of its large, gas-guzzling models and augmenting inroads into the American market by more fuel-efficient Japanese cars.

GM predicted a first-quarter loss of $1.50 a share, slashed its estimate of annual profit by more than 50 percent and restated a 2004 fourth-quarter profit as a loss.

“In the past the expression has been that as goes GM so goes the rest of the market,” said Art Hogan, chief market strategist at Jefferies & Co. “It’s an old, hackneyed phrase, but it’s proving true today.”

The GM announcement caused a 14 percent drop in GM shares, the biggest decline since 1987, and led stocks broadly downward, while the possibility that the giant automaker’s debt may fall into junk status rocked the bond market.

Standard & Poor’s Corp. lowered its outlook on the company to negative and Moody’s Investors Service said it is reviewing GM. The biggest American automaker is the third-largest issuer of corporate bonds, and its woes sent investors scurrying into the Treasury bond market for cover.

“This may be saying to the world that the economy is slowing down,” said Owen Burman, director of equities at Riggs Investment Advisors. “The higher level of growth that we’re expecting may not be achievable.”

The seeming perfect storm of bad news started out yesterday morning with a report from the Commerce Department that the current account deficit exploded 25 percent last year to $666 billion — an unprecedented 6 percent of economic output.

The deficit, which largely reflects the inroads by Japanese, Chinese and other manufacturers that have captured 40 percent of the U.S. market for consumer goods, represents a massive drain on the American economy and jobs.

“The current account remains quite worrying,” said Joshua Shapiro, chief U.S. economist at MFR Inc. Short of an unlikely “growth miracle” in other nations or a slump in U.S. demand for imports, the deficit “seems destined to continue to widen,” he said.

The rapidly widening trade gap prompted a sharp fall in the dollar against the euro and other major currencies, as investors worried whether the United States will be able to keep attracting the $2 billion a day needed to finance the accumulating debt.

Some analysts said those worries were overblown, however, as the Commerce report showed an influx of funds from abroad during the last quarter of 2004 that far exceeded the amount needed to support the deficit.

Financing for half of last year’s trade gap came from $355 billion of dollar and bond purchases by foreign central banks, primarily in Asia, the figures showed. But private investors also piled into U.S. securities with the revival of the U.S. stock market at the end of the year.

“There is a resilient appetite for U.S. assets around the world,” said Lara Rhame, strategist at Credit Suisse First Boston.

Peter Morici, business professor at the University of Maryland, said the dollar purchases by Asian banks amount to a 31 percent subsidy on Asian imports that is distorting trade.

Japan and China were the largest buyers of U.S. dollars last year, but such currency manipulation also “is a key factor in the continuing gains enjoyed by Korean automakers in the U.S. car market,” he said.

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