Well – light volume and a little uncertainty has kept the Santa Claus rally from coming (so far). We moved backed slightly to those pivot levels and continue to see mixed action in the market. Remember – these are very light volume times – so we may or may not see anything from happening. With liquidity on the light side in uncertain times – it only takes a big chip stack to push a stock up or down very quickly (thus injecting some serious volatility)>
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GM - the future and the value.
There are several ways to tell if a company is doing well – and guess what (none of them are the stock price). That may shock you that I say that, but in my very humble opinion – the stock price provides only two things, the “perceived value” and method to participate in the profit/loss of a company. We buy/sell (or short) stocks based on OUR best assessment of the company vs. the value of the stock price. Remember, just because a stock price is very low – doesn’t mean it is cheap. Value and stock price are two different things. When you purchase a stock you believe the stock price is UNDER value compared to the current (and future) assessed value of the actual company.
So how to tell the actual value of a company? Well – look at the books (10k/10q filings) – this will tell you the revenue, debt, margins, tax, etc. That is what the analyst do – they review this stuff in detail and compare that information to the value of the stock – thus they draw a conclusion – the stock price is undervalued, in-line, or overvalued compared to how the company is actually doing. The Greenlight Capital Hedge fund’s model does this – in fact David Enihorn wrote a very interesting book about the process and how things can go wrong (I suggest reading it) – it is called “Fooling Some of the People All of the Time.”
The second method is not as direct, but it gives us an indication to the actual credit worthiness of the stock. It is the debt that is traded on the company. Many companies issue out all sort of bonds (from convertible – being paid back in stock, to ones that actually pay out cash) – there are all different types of bonds – but they do have one thing in common, the rate of return (interest rate). The function of interest rate traditionally (I say traditionally – because these days interest rates, if measured by what the government is doing makes little sense) – goes up when there is more risk to the underlying or default and come down when the underlying is stable. Just like you and me when we apply for a loan, credit card, etc. The better our credit score the lower the interest rate. Well the same holds true for companies, can they pay it back, do they have default risk, how is the company doing, will they be able to pay in the future, etc? Suffice to say we can make a judgment about the future of the company based on how it’s debt is trading – the higher the interest rates – the more risk of not getting paid back. As you can see the interest rate (in this case) is directly proportional to the risk of the debtor paying it back. (Unlike the target and the discount rate set by the Fed – so try not to make a comparison).
So how does this all affect GM? Well the stock is trading in the mid-low $3 range, it would SEEM cheap if we only value the company’s stock price vs. brand name. We also know from analyst that reviewed the 10k/10q filings the company’s books show lots of debt, shrinking (even negative) margins, and some serious problems. We actually don’t need the analyst to tell us that – the companies are telling us that by asking for bailout money. But now something interesting has happened, the government is injecting large sums of money. That makes analyzing the books and the business model difficult – very difficult. On several fronts – do they have enough to pay off the debts, are they fixing problems with the business plan, can they get back to break-even or profitability. It starts becoming very subjective. So the next place we can look is the debt itself and the interest rates (as to if they are expanding, contracting, or remaining the same)
The company got the money, but the credit-default swaps (the bet that they will fail to pay back their debt) started to increase. They jumped 2 percentage points. That clearly shows that the debt holder either thinks the government’s loan is not enough, it was too late, or that the business plan is still doomed to failure. The credit rating agency – looks at the books and the bonds (since it is part of the balance sheet) – they certainly can’t help but notice the increase in the credit-default swaps. That is always an age old question in the financial markets – does the ratings cut come first or the credit-default swaps increase first? I would say on any given day it depends – those more in tuned with what the company’s balance sheet and risk look like my trade the credit-default swaps first, the company that is not being scrutinized by the traders might react to the rate cut.
In this case – GM is under the microscope – I would say the credit-default swaps increase is not JUST predicated on a rating – but on the convoluted ability to pay back their debt and government debt. Add in another dark horse in this race – a change in the administration – we really don’t know what is in store for GM.
The Credit-default swaps rose 2% to 81% , in addition to the 5% a year. Bloomberg spells it out clearly – it costs $8.1 million initially and $500,000 a year to protect $10 million of GM bonds for 5 years. Tell me how that works out? The insurance costs MORE than the actual debt – if that doesn’t explain the assume risk of the debt – I don’t know what does. Pretty much the insurance (the credit-default swaps) are saying there is a very good chance that GM is going to file bankruptcy and not only wipe out the shareholders but also the debt holders.
Should you buy GM – I certainly wouldn’t. These are very questionable times – sure the government could continue to dump money into them, but how much and for how long? Could they become another AIG, Freddie, or Fannie – certainly – but how does the investor benefit?
Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=aX0LE04twYco&refer=home
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Futures Pre-market
The futures are a little mixed at the opening – the contraction of the economic news – what is going on in GM – and the light trading session is contributing to a little volatility in the morning – for the most part they are all below fair value.
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Support / Resistance
What can I say – it seems that pivot points are the magnet – FOR NOW – until they are not.
INDU 8000 (8500) 9000 (Right there – where too – who knows)
NDX 1100 / 1200-1250 (We fell just below the 1200 upper resistance band – are we heading towards the 1100 level?)
SPX 800 (850) 900 (Falling towards that 850 pivot level)
RUT 400 (450) 500 (Falling towards that 450 pivot level)
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Conclusion
Was at the Mall on Sunday – (again my small sampling and observation reflected the following) – the Sunday before X-mass, VERY LOW TRAFFIC. Also I walked into EVERY big store and by every store to take note. Sears had 50% RED tags and Yellow Clearance signs everywhere, Macy’s the same (but very low key – there marketing is different). It would stand to reason those same sales are in every mall in the US (especially if Sarasota is in one of the highest tax bracket areas) – additionally I asked myself – what would After X-mass sales look like? I have also been keeping track of 3 LCD TV prices at Wal-mart. They came down 20% at Thanksgiving – breaking the $1,000 barrier. Last weekend they came off another 10% - all of them are below or right at the $900 mark. Those are pretty steep cuts compared to last year.
Of course my sampling is very small, and thus I accept my error rate is fairly high. However – it would stand to reason that if the cuts at my mall and Wal-mart TVs in a higher tax bracket city are very real – that same thing is very likely to be happening across the entire country. Granted some areas are better or worse than others. That being said – I think the stores are feeling the consumers are pinched for credit – I don’t think we are going to see very good X-mass sales – I personally would be surprised if we did. Now is not a time to get long retail - in my very humble opinion.
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