MONEY WATCH.

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Author: Lim, Paul J.

The North American International Auto Show is typically an opportunity for U.S. automakers to showcase new models and technologies. Yet this year's show has become a looking glass on the continued troubles plaguing General Motors and Ford. While Lexus unveiled a luxury sedan that can automatically parallel park, Ford's big news last week was yet another cut in its credit rating. Moody's Investors Service, which had already downgraded Ford's debt to "junk" status, lowered its rating two more notches. As for GM, its major announcement was the slashing of sticker prices on 80 percent of its vehicles, including all Chevrolet, Buick, and GMC models. Yet GM stole its own thunder--if you can call it that--when an adviser to one of GM's largest stockholders said the troubled automaker needs to speed up its restructuring. Among the recommendations: Cut executive and worker salaries, dump assets (including perhaps the Hummer and Saab brands), and slash dividend payments in half.

By itself, news that the Dow Jones industrial average broke through 11,000 last week--for the first time since before 9/11--means little. "Would I rather see the Dow above 11,000 than below it? Yes," says Jim Huguet, president of the investment firm Great Companies. But is 11,000 a critical threshold? "Not really," he says. Still, the fact the Dow surged more than 325 points in the first seven trading days of the year could be a harbinger of good things, including a resurgence in blue-chip stocks. Shares of the largest U.S. companies have lagged behind other types of equities: Over the past five years, the Russell 2000 index of small stocks has gained more than 8 percent a year, while the Dow is up less than 1 percent. But the Dow's advance could also signal that the bull market is regaining strength. According to Sam Stovall of Standard & Poor's, stock market rallies tend to slow down after three years. But if bull markets survive to a fourth year--which 2006 represents--"they tend to catch a second wind," he says. The average gain for stocks in fourth years of bull markets going back to 1942 is 14 percent.

Rumors of the dollar's demise may have been greatly exaggerated--again. A year ago, conventional wisdom had the dollar weakening against the euro and the yen, on concerns about the U.S. economy. As it turned out, the dollar strengthened by some 13 percent. This year, analysts are again looking for the dollar to sag. But there's a potential monkey wrench in this forecast: the unexpected performance of U.S. stocks. This may reignite foreign investors' appetite for U.S. equities--and to buy them, they'll first need greenbacks. Joseph Quinlan of Bank of America also wonders: "If the dollar is doomed, then what other currency is in position to supplant or usurp the dollar's role as the world's reserve currency? Our answer: none."

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By Paul J. Lim