December car sales at the "Big Three" are likely to fall about 7% according to a survey by Bloomberg. That would put total vehicle sales in the US at about 16.1 million for 2007, the worst year since 1998.

The obvious causes for the dropping demand for new cars are the housing crisis and high fuel prices. What is less apparent is that a recession in vehicle demand could wipe out the value of most of the cost savings that GM (NYSE: GM), Ford (NYSE: F), and Chrysler have gotten from cost cutting and new UAW contracts.

GM claims that it has cut annual costs by $9 billion. It has also transferred the liabilities of its health plans for workers to a new UAW fund which should drive further expense reductions.

Now, two forces are working against auto company revenue. The first is falling demand which could cut US car sales another million units in 2008, according to some industry experts. The second is that Detroit may need to offer larger incentives to keep the Japanese from getting more market share. Those incentives will eat into profit margins.

Ford and GM trade near multi-year lows now, and that could get much worse.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• Next year Nestle USA will sell Jamba Inc's (NASDAQ: JMBA) Jamba Juice at stores in eight states in the western U.S., according to the Wall Street Journal.
• Last May Canadian information provider The Thomson Corporation (NYSE: TOC) bought Reuters Group Plc (NASDAQ: RTRSY) for GBP8.7B. While the deal was beneficial to Reuters, the credit crunch could have a severe impact on its bottom line over the next few years, the Wall Street Journal's "Heard on the Street" said.

OTHER PAPERS:

• The Detroit News reported that the United Auto Workers signed a new contract with Ford Motor Company (NYSE: F).

WEB SITES:

• Jeffrey Zucker, General Electric Company's (NYSE: GE) NBC Universal media unit would be interested in DreamWorks SKG if it were to become available, Bloomberg reported.
• According to 21st Century Business Herald's website, Baosteel Group's Chairman, Xu Lejiang, said the company is considering making a bid for Rio Tinto Plc (NYSE: RTP).

Even with a good contract with the UAW nearly in hand, Ford Motor (NYSE: F) is warning that with its falling sales a better union contract may not be enough to balance costs with revenue.

The deal with the union calls for Ford to operate six plants it was going to close. That will cost a lot of money, but it was a necessary concession to get the contract signed.

Ford is warning that overall US car sales may drop next year. Mark Fields, head of the company in the Americas was quoted by The New York Times as saying, "If you look at all the indicators out there, there is more risk than opportunity," And Ford will have to put up more than $13 billion in cash to start a new UAW fund to cover worker health costs.

That leaves Ford in a bit of a bind. Its monthly sales figures in the US have been down 13 months in a row. On a good day it has about 15% of the US vehicle market. US and Japanese competitors are unlikely to give it a break. Auto parts suppliers have probably been pushed to the limit in terms of giving Ford better prices. Some of them have been driven into bankruptcy.

So, Ford can cut more of its white collar work force and fire most of its temporary work force. But once that is done, there is very little left. Which means, if Ford cannot hold its current market share, it has a really big problem.

Douglas A. McIntyre is an editor at 247wallst.com.

With United Auto Workers union leaders having endorsed a new agreement, and the company also announcing it had agreed to pay $15.4 billion to create a health-care fund with the UAW, it's appropriate to evaluate Ford's (NYSE: F) progress and prospects.

One has to view the (tentative) contract agreement, and any fully-ratified deal, as a positive data point. Among other contract features, if ratified the agreement would enable Ford to hire up to 20% of its work force under a lower-tier wage structure that would substantially reduce its hourly wage structure, Reuters reported Monday, in exchange for Ford's sparing from closure six plants it had planned to close. In short, if ratified, Ford will have made considerable progress in three key areas: labor costs per hour, work rules, and health insurance cost containment. Ford's shares closed Monday down 28 cents to $8.67.

Now that the UAW contract with Chrysler is all but ratified, the big union gets to sit down with Ford (NYSE: F). In some ways, bargaining with America's second-largest car company may be the toughest negotiation of all. Ford is in worse shape than its peers, and its revenue problems get worse as each month passes.

Ford may be able to afford putting $30 billion into a health-care fund that the union would manage. That would improve the company's earnings in future quarters. But it would also deplete Ford's balance sheet and give it less cash to fund a turnaround of its U.S. operations. Selling off Jaguar or Rover could bring in more capital, but the process to dump the two brands is slow and the current credit environment will not help Ford get a good price.

Ford had hoped that new products would improve its prospects, but its car sales have dropped about 20% in its home market each of the last two months. It is not clear that Ford can ever make a profit if its U.S. sales do not recover from current levels. It needs sharp cuts in its labor costs in addition to a better sales picture.

The UAW can do a great deal of damage to Ford by insisting on modest job cuts. Ford can ill afford a strike now that the other two U.S. car makers have deals and Japanese rivals pick up market share most months. But the union's rank-and-file came close to rejecting the Chrysler contract because it guaranteed too little in terms of jobs and pay in the years ahead.

UAW workers are likely to take the position that it is not their job to keep Ford in business. And that attitude is the most likely one to put Ford's future in harm's way.

Douglas A. McIntyre is an editor at 247wallst.com.

The approval of the UAW contract with Chrysler is going badly. Several local chapters of the UAW have voted it down. The workers at these plants are upset that the car company will continue to produce cars in Mexico and lacks concrete product plans for some of the manufacturing locations in the U.S.

If workers are going to give concessions on pay, they expect more from Chrysler in terms of future car-building in the U.S.

Chrysler wants to rescue the contract and avoid a strike. It appears to be willing to go to great lengths to do so.

Reuters writes that "Chrysler has guaranteed that it would keep some U.S. factories running well beyond the 2011 expiration of a proposed contract with the United Auto Workers union if the deal was approved." That is a big concession to get the union to vote in favor of the contract on the table.

While this maneuver may work for Chrysler, it will put Ford (NYSE: F) in a tough position. Ford may now be the weakest of the Big Three. Its unit sales have dropped about 20% each of the last two months. If the UAW thinks it can get Chrysler to buckle under on promises for the future of certain large plants, it is likely to ask Ford to make the same expensive pledges.

Being the last of the U.S. car companies to cut a deal with the UAW may cost Ford more than it wanted to give.

Douglas A. McIntyre is an editor at 247wallst.com.

The United Auto Workers went on strike against Chrysler this morning, according to the AP. The strike involves 48,000 workers at Chrysler's American factories.

There has been some speculation that Chrysler's new owner, Cerberus Capital Management, may be not be willing to make a deal with the union, at least not any time soon. Union officials are reportedly preparing for what could be a long strike.

Neat trick. Build automotive plants where there are few UAW members. Honda (NYSE: HMC) appears to have it down to a science. According to The Wall Street Journal the Japanese car company recently built a plant in Indiana, but was only willing to hire employees from counties that outside the ones where "most of the state's thousands of unionized laid-off auto workers" were located.

It seems that foreign car companies are adroit at avoiding geographic areas where the UAW has members or people are likely to organize. It may be why so many of these plants are located in the South. Right-to-work rules tend to be lenient there. Companies like Honda are willing to take local tax breaks, but often don't hire workers who may be inclined to join a union.

There is a reason that most foreign car factories are not staffed by UAW members, and the move to locate in regions where worker's rights are modest may be a part of that.

As the UAW slowly dies due to downsizing at big US car companies, it would be a huge benefit if it could organize workers in foreign car plants. But, one of the reasons that Japanese car companies have a lower-costs-per-vehicle is that they do not have the legacy pension costs that Detroit does. These costs are the byproduct of decades of living with the UAW.

And, companies like Honda are not inviting the UAW in.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Bear Stearns Companies (NYSE: BSC) -- implied volatility decreases after EPS as BSC rallies. BSC is recently up $4.23 to $118.96. BSC October option implied volatility of 40 is below its 26-week average of 43 according to Track Data, suggesting decreasing price movement.

Ford Motor (NYSE: F) -- implied volatility-risk collapses on tentative UAW agreement. Ford is recently up 33 cents to $8.67. General Motors Corp. (NYSE: GM) and the United Auto Workers announced a tentative agreement on a new national contract. Dow Jones reported, "The cost of protecting $10 million of fellow U.S. automaker Ford bonds fell to $590,000, after being in the $630,000 area on news of the strike at GM, according to a market participant. F's 7.45% notes due 2031 were up 1 point to 78.75 cents, according to MarketAxess." F October option implied of 35 is below a level of 52 from last week and below its 26-week average of 49 according to Track Data, suggesting decreasing risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

General Motors Corp. (NYSE: GM) is recently trading up $1.46 to $35.93. GM and the United Auto Workers announced a tentative agreement on a new national contract. Alex Brown says, "this contract represents an inflection point for GM. We believe this should significantly improve competitiveness, cash flow, and valuation." GM October option implied volatility of 61 is above its 26-week average of 46 according to Track Data, suggesting larger risk.

Chevron Corp. (NYSE: CVX) is an integrated energy company with a market cap of $195 billion and quarterly June 2007 revenue of $56 billion. CVX closed at $91.88. CVX announced a program to acquire up to $15 billion of common stock over a period of up to three years. Crude oil futures are up 0.79% to $80.16, according to Bloomberg. CVX overall option implied volatility of 27 is above its 26-week average of 24 according to Track Data, suggesting larger risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

MarketWatch reports that the United Auto Workers (UAW) ended its strike against General Motors Corp. (NYSE: GM) due to a settlement reached early this morning. 74,000 production workers will return to work. GM shares are up 8% in pre-market trading. This deal will benefit the reputation of Lazard Ltd. (NYSE: LAZ) which represented the UAW.

Details have not been revealed. On the surface it appears that the UAW got something it wanted as did GM. The new four-year contract agreement gives the UAW an independent retiree health-care trust -- estimated to cost GM $51 billion. The Associated Press reports that it would also give workers bonuses and lump-sum payments. Meanwhile, GM will be able to boost its competitiveness -- getting more flexibility to hire new workers at lower costs -- helping to reduce what GM claims is a $25-per-hour labor cost disparity with its Japanese competitors.

The health care trust GM is establishing would pay about 70% of GM's $51 billion pension obligation, or $36 billion, into a Voluntary Employees Beneficiary Association (VEBA). The UAW would manage the VEBA for 340,000 GM hourly retirees and spouses. If the VEBA's investments appreciate enough in value, those 340,000 pensioners will have their pension obligations satisfied. If not, it will be the UAW's fault.

To reach $51 billion in, say, five years, the VEBA will need to achieve a 7.2% annual rate of return -- sounds like a profitable job for Lazard!

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. His brother, William D. Cohan, is the author of a book on Lazard, The Last Tycoons.

The UAW told the media at a 4 AM press conference that it had reached an agreement with GM (NYSE:GM) on a four-year labor contract. The deal now goes to UAW members for a vote.

While the union did not give details, the pact is said to include a two-tier payment system and a new fund for healthcare payments that will be managed by the union.

Douglas A. McIntyre is a partner at 24/7 Wall St.

General Motors (NYSE: GM) and the United Auto Workers today resumed bargaining talks hours after the union called its first strike at the automaker in nearly 40 years.

Though a labor agreement may not come today or tomorrow, odds are good that it will come fairly soon because the only winner in a protracted work stoppage would be Toyota Motor Corp. (NYSE: TM) which continues to take away market share from GM, Ford Motor Co. (NYSE: F) and Chrysler. But even if the strike is short-lived, it will still cost GM billions of dollars, according to MarketWatch.

Both sides are already on the same page on the key issue of transferring the $50 billion in future retiree health care costs to a union-administered fund. Whether the union can do a better job at controlling health care costs than the company or anybody else for that matter is an open question GM also wants new union members to have 401 (k) plans instead of pensions, according to Bloomberg News. That's a concession that the UAW will have difficulty fighting since many large companies are trying to phase-out their plans or get the federal government to take them over.

By calling a strike, UAW President Ron Gettelfinger wanted to show that the union can still flex its muscles. With that point being made, he now has to show that he can negotiate a deal that serves his members and keeps GM competitive in today's fiercely competitive auto market.

Ford Motor Co. (NYSE: F) shares are trading higher today as automakers are getting a boost this morning before the General Motors (NYSE: GM) 11 AM strike deadline with the United Auto Workers. Investors believe that this deadline means an agreement will be reached today. Furthermore, the auto sector is seeing continued gains based on optimism created by the Fed's rate cut last week. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on Ford.

After hitting a one-year high of $9.70 in June, the stock has sagged a bit over the past couple of months, though it has been moving higher recently. Ford opened this morning at $8.47. So far today the stock has hit a low of $8.36 and a high of $8.59. As of 10:55, Ford is trading at $8.57, up $0.34 (4.1%). The chart for Ford looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $7 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.1% return in just 3 months as long as Ford is above $7 at December expiration. Ford would have to fall by more than 18% before we would start to lose money.

General Motors Corp. (NYSE: GM) -- GM is recently up 80 cents to $35.76. The United Auto Workers set a deadline of 11 a.m. EDT today to conclude a new national contract with GM. GM October option implied volatility of 64 is above its 26-week average of 44 according to Track Data, suggesting larger risk.

ValueClick Inc. (NASDAQ: VCLK) -- call volume and volatility up on unconfirmed Time Warner Inc. (NYSE: TWX) buyout chatter. ValueClick, an online marketing services company, is recently up 65 cents to $21.15 on unconfirmed chatter that Time Warner is interested in purchasing ValueClick for its AOL unit. Time Warner Chairman and CEO Richard Parsons stated at Goldman Sachs Communacopia conference on September 18 that more acquisitions could occur to help AOL grow its platform. ValueClick call option volume of 3,042 contracts compares to put volume of 109 contracts. ValueClick October option implied volatility of 52 is above its 26-week average of 47 according to Track Data, suggesting larger risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.