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WSJ – Four at Four: Investors Take the Wheel

November 7, 2008, 4:35 pm
Posted by David Gaffen

The automotive companies notwithstanding, the market got it together to close out the week, after the Dow lost 9.7% over the past two sessions in what was the worst two-day performance for stocks since the 1987 crash. “It feels like the market is telling us something is much worse than we are expecting, anticipating or being told,” says Keith Springer, president of Springer Financial Advisors in Sacramento . Through the morning of November 7, earnings aren’t looking terrible, in a way. Excluding financials, earnings are up 4.7% from the year-ago period, but the rest of the economy is starting to feel the impact that the long declines in the housing market and the dislocations from the credit crisis have caused. Cisco Systems warned this week of lackluster technology spending, and retail sales and employment figures were terrible. With the jobless rate ticking up to 6.5%, the highest in 14 years, there was plenty to get upset about, but it appears the market got in front of those losses Thursday, and “buying the news,” as it is said, on Friday. Mr. Springer referred to the activity as a “simple technical bounce,” noting that 90% of stocks ended lower on both Wednesday and Thursday, and termed it unsurprising that the market should show such a recovery. He still does not hold out hope for a sustainable rally, saying “we’re going to probably retest the lows.”

History, as it is said, repeats itself, first as tragedy, then as farce. But if one looks at the demise of the Internet bubble as this decade’s first incarnation of an industry that ran short of cash and time, that seems more like the farce, and the fate of the automotive giants is the tragedy. General Motors and Ford Motor are caught in a maelstrom, where cash is an unsustaining necessity, where borrowing costs continue to rise, and the companies in question continue to try to dump pieces of their company to stave off the wolves while the stocks head into oblivion. Ford and GM, combined, burned through $14.6 billion in cash for the third quarter, and both companies are watching their cash position dwindle to the point where ongoing operations become an issue. GM, for instance, needs $11 billion to $14 billion to fund normal operations, and it has a cash position of $16.2 billion at the end of the quarter. Naturally, more asset sales, employee reductions and borrowing is on the way, at a time when consumers don’t want cars, least of all the cars these two are selling. Meanwhile, both companies saw their credit ratings chopped by ratings agencies, which will only increase their already onerous borrowing costs further. GM is in worse shape, as Ford pledged certain assets for capital prior to the credit crisis. GM’s CEO Rick Wagoner warned of “dire” consequences for the U.S. economy if GM was forced to seek protection from creditors, but it seems all of this is dire enough as it is.

As bad as the news was this morning on the jobs front, it could get worse. Job losses in the U.S. , which have accelerated in the last two months, have pushed the unemployment rate to a 14-year high, and that could prolong and add to the economy’s problems, bloggers say. Additionally, government interventions may not be enough to prevent further contraction from occurring in the economy. Barry Ritholtz, chief executive at FusionIQ, an online quantitative research firm, wrote on his blog Friday that the market should expect job losses to accelerate through the next six months; the unknown, he says, is “how much of the weakness, and coincident earnings recession, has been fully priced into the markets.” A further cause for concern – if the downturn lasts longer than anticipated – is the Fed’s won’t have much room to maneuver on monetary policy, said James Picerno, of The Capital Spectator blog. He noted high interest rates didn’t cause the downturn and low interest rates won’t help the economy out of a recession. “The excess that built up across the economy over a generation is unwinding, and the correction will be as painful as the boom was pleasurable,” Mr. Picerno said. “The government will pull out all the stops to ease the pain, as it should, but this time out there’s no sidestepping the purge.”

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