Just when you thought we were going up we come crashing back down. The GDP numbers, and the late revisions (which will continue) is showing more contraction than we initially thought. However, with this massive volatility – especially intra-day, the VIX and for that matter general options volatility has been fairly benign. The statistical volatility (actual movement in the underlying) on an intraday basis is running significantly higher than the implied volatility (options premium). Clearly – no one is panicking in the market. A good thing – but also maybe a sign that there is too much reliance on the Government to keep us from failing. And that has me concerned about the validity of the current market valuations. If we start looking at earnings (especially in the financial, building, auto, and airline sectors) things are not looking good – but the protectionism in the Financial sector is more alarming - as we are not able to make a “fair” value call if they are being artificially propped up and able to access borrowed money (which they are not normally entitled too). This means – more air into the already big bubble.
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GM $15 BILLION loss = hurl!
Yesterday GMAC numbers looked bad – but these numbers just make you want to hurl. Before we get to the numbers – most of the time we just read them without understanding what they mean – let me point something out. I want this to SINK in. A company reports EARNINGS (how much money they made or lost) per share. This makes it easy (supposedly) to judge the value of a company as per their profit/loss vs. share price. Example, a company reports $.10 cents a share profit on $10 dollar stock price, well we know it made about 1% profits based on the share price (Earnings Per Share) for the quarter, or 4% annually. It is a good gauge if the company is doing well vs. the price of their share. Many value and fundamental investors look at this as a key decision whether they should buy (invest) in a company. Now let me further point out the Net Market Capitalization of a company (if someone wanted to take over the company and buy all the shares) is simply the price per share multiplied times the number of shares. Yeah – I know we all know this stuff – it’s the basics for understanding stocks and the stock market – I just wanted to repeat it before we got to the GM numbers – so that THOSE numbers REALLY SINK IN!
Ready for it? GM just reported their EARNINGS PER SHARE as a $27.33 LOSS. That is A LOSS of $15 billion! Now here is the kicker, the stock is trading at $11 (as of yesterday’s close). So let that sink in for a second....
They loss over 2 times the amount (in 3 months) of the ENTIRE NET MARKET CAPITALIZATION of the company, WOW! By ANY measure that is a shocker.
Think about it like this - that is a 240% loss vs. the net market value of the entire company. If they had just IPOed they would now be 140% in debt vs. the IPO funding.
So now ask how they are still in business? It’s called one big FAT credit card. They have billions in loans – that means billions in interest payments. This wasn't some little loss - we are talking $15 billion in one quarter (3 months). Grab the barf bag - your going to need it.
Now to be fair to a company that should probably be out of business – they are cutting everything and anything – rumors are they are selling off Hummer Brand. They did what probably every financial firm SHOULD do – just take the big loss NOW and stop with these silly write downs every quarter.
Do NOT go out and bottom pick and get long GM! The just told you they lost more than 2x their entire net capital – that does NOT mean go out and buy them.
If GM did not have access to credit – well they would be out of business – plan and simple. Any takeover of GM would actually be a take under. A buyer of the company would need to be paid to take down the debt! The risk and outstanding debt is TOO big to pay ANY money for that company. GM can only sell off PARTS of their company because the sad truth is that NO ONE with a brain will want to buy out GM with the debt, losses, and interest payments in the billions. The risk is just too big.
Needless to say – just before the earnings release the credit ratings agency rated GM (paper) JUNK!
I hate to say it – but I don’t see GM getting out of this any time soon – if ever. I don’t think Hummer will be the first or last unit they sell off.
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Jobless Rate rises
The ADP report earlier this week gave hope that the Jobless estimates at -75,000 was too bleak and to some extent it was. Payrolls dropped 51,000 and the jobless rate rose to 5.7% (the highest in 4 years). The lay-offs at Starbucks, Coca-cola, UAL, are clearly showing signs this is not just the building/housing/finance sector that is getting the squeeze. As consumer’s spending shrink, so does the revenue at the companies, which mean shrinking margins and smaller profits. In order to stay in the black – when revenues fall – cost cutting increases.
Futures were down prior to the report, on GM’s ugly news. But some optimism entered the market – because while people ARE getting laid off it was only 51,000 people not 75,000. Yeah? So that is 7 months in a row that we lost jobs. Don’t expect month 8 to be the winner and expect more revisions down.
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The well is running dry
Corporate bond sales fall to the lowest level in 5 years. Companies that are raising money are paying record interest rates to get that money – now is NOT the time to raise money – unless you need it. Luckily for those investment banks that the Discount Window is open (very low rates) and that has been extended to January – because I think we would see some more Bear Stearns if that did NOT happen. Additionally – it harder to TRUST those rating agencies after the AAA rated CDO/SIV paper is now defaulted for the most part. Clearing money is tight, even though the FED and Treasury has the spickets WOT!You want to know what is going on in this nation? One word = DELEVERAGE!
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Biogen confirms insanity!
The drug, Tysabri, was pulled in 2005 because it caused a deadly brain disease that resulted in a few deaths. So they reintroduce the drug a year later and expect a different result? Surprise! Biogen and Elan shares plunge as more cases of a deadly brain infection have been confirmed by patients taking their multiple scleroses drug Tysabri – AGAIN!The brilliant analyst, Mark Schoenebaum of Deutshce Bank states, “This is going to be fairly disruptive to sales in the United States.”
Sorry for the sarcasm – but this IS insane.
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Futures Pre-Market
The futures were getting hit pretty good (Bad GM news coupled with the Biogen insanity) – but wait ONLY 51,000 people lost their jobs, not the 75,000 that people expected, that’s good, right? Well – the futures in the pre-market seem to think so and got a good rally. The spread is pretty volatile – so expect the Arb traders to be sidelined until the opening. Opening – unknown.
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Support / Resistance
Ping-Pong – that’s all I can say.
INDU 11,000 (11,250) 11,500 (We are making some huge moves up and down. Who knows at this point – the news this morning is not good. So I was surprised at the futures rally pre-open. So it’s anyone’s guess.)
NDX 1800 / 1850ish (We were up above the 1850 area – but saw weakness going into the close. The futures are up (a little) but at this point it’s about volatility.)
SPX 1250 / 1275 (We pulled off that 1275 area after a good run towards 1300. I think we could see either 1275 or 1250. Expect volatility)
RUT 700 / 720 (We did see treasuries rally and yields come down a couple of times this week – obviously money is running back out of the market to treasuries again. But that can change on any given day.)
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Conclusion
This has been a very volatile week – up, down, up, up, down, down, up. Big volatility is BAD – because it clearly shows that NO ONE has a clue as to what is going on – that is because NO ONE KNOWS how big the problems truly are. The government protectionism is in full swing. The chart of the money being loaned at the Discount Window yesterday showed a MASSIVE spike up – not even parabolic – just straight up!So I guess not REAL BAD news, but just BAD NEWS in the jobless claims is a good thing? Well – the futures thought so.
Stay hedged – enjoy the weekend – go buy some silver and gold!
Know one knows where this roller coaster is headed!
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