Monday, July 27, 2009

7/10/09 (Government Motors, Recession Fades?)


Weak legs yesterday, after Alcoa and other (seemingly) good news and a good opening rally in the market it fell flat to close unchanged on the day. It seems that we are sitting in this bottom support range and that this 3 month rally has lost some of its seam. One would think that GM coming out of bankruptcy today would create a little optimism that maybe some of the bottom has been realized (especially in the auto sector). All that maybe true and a bottom has been put in, but it is now all talk about the recovery and how fast will it happen.

GM – now Government Motors

GM comes out of bankruptcy today – in probably one of the fastest (and amazing) bankruptcies in the history of the world. Of course the government had cut deals with all the creditors, UAW, and paid out billions into GM before bankruptcy. Then it was ram-rodded through the court system – as the government wanted it FAST and without issue. I am personally surprised how fast it happened, but what are we left with?
The U.S. government (tax payer) – now owns 60% (over $50 billion in debt) in GM. There is talk about an IPO next year so the government (or tax payer) can get their money back, but I am VERY skeptical that an IPO of GM next year would even yield 25% of the $50 billion. The sad reality is that our investment in GM is going to be a net loss to the tax payer. Sure the government could hold onto the company for the next several years (hoping) that it would increase in value enough to get a return. But now we are just betting on GM’s future success.

They are not going to be profitable on day one and analyst have said it will take about a year before it returns to profitably (if it can that quickly) – that means more money will probably be “loaned” to the new GM to keep it going. All eyes should be on its burn rate – which will determine how successful they will be in the short run.

The other big problem, other than trucks – they really don’t have any new products or alternative fuel vehicles that will be coming to the market soon. Can they create competitive cars? They lost some of their better selling brands (via sales during bankruptcy).

Only time will tell – but at least the big headache of bankruptcy is over. Let’s hope they can pay back the government.

Forecast – recession fades?

Economist survey expect a increase in consumer spending starting in 2010. Certainly the job losses are contracting (but still high), if the percentage contraction continues we should be in the 200 to 300 thousand by year end, while that does increase the net on unemployment to the high 9s or 10s – it also indicates that it should be topping out. The auto sector seems to have found a bottom – as far as contracting – with the bankruptcies – there is expected to be some more layoffs at GM (about 4,500) but that should be the last large cut. The housing market seems to be starting to stabilize, we will most likely seem home values to continue to contract – but more slowly and while foreclosures continue they (like the unemployment numbers) will begin to contract. While I agree that all these do show a coming end to a recession (no doubt it has to end), the recovery becomes the big question.
The economic survey indicates that consumer spending is expected to expand in 2010 as stabilization is reached. But the recovery will not be robust, but rather lackluster. New job creation will be few going forward as companies look to run leaner companies. It really comes down to access to credit – if companies can’t borrow – they can’t hire and that seems to be the choke point. It is the chicken and the egg problem, when does the company grow? Do they borrow and expand to create capacity to meet future demand? OR Do they wait until demand increases until they decided to expand? Certainly the access to debt will be a vital variable to the equation. If they don’t have access to the credit they need, they might not have the ability to grow until revenues help load the coffers.
It is now about measuring the recovery and not the recession.

Futures Pre-market

The futures are looking a little weak in the pre-market, not necessarily news driven – but following Europe’s decline. Expect a lower opening.

Support / Resistance

The market stopped it’s recent slide, but is hasn’t bounced off the bottom yet. Futures are looking slightly lower – but it will be the close going into the weekend that will create the perception that the short-term bottom is in or not.

INDU 8000 – 8250 range (This seems more like a wide support area than anything else. Unless we can get above 8250 with a little strength – this area remains rather weak with bottom support at 8000.)

NDX 1400 / 1450 (We have had a few monster moves with some issues in this index that has created some volatility and driven it down. Are the bottoms in on those big issues. Watch that 1400 area.)

SPX 880 / 900 (Again a couple of days in a row at the 880 area as if it is a support being put in. Watch the close – 880 or above to confirm.)

RUT 475 / 500 (The RUT seems weak and has room down to 470 without really breaking, but it didn’t show even the weak strength of the other indices yesterday. Watch that 475 area. A close at 480 or higher is better.)

Gold 900 (We have seen gold and silver come off in this rally – some would say profit taking. 900 is a supporting area and 850 is an accumulation area.

Silver 12 (Like gold, silver has come off. 12 is a support area and an area to accumulate.)

Oil 60 (Oil has come off fairly hard and broke down through 60 and their seems to be some big volume being put in. 60 range would seem a support – keep an eye on the close.)


The market has come off a little from its recent high and the rally legs have seem to weaken. It is almost as if we are in a pause area – waiting for some “Green Shoots” to flower, to be able to point at something and say SEE! But so far the signs are rather vague and recoveries are being pushed out into 2010 as 2009 seems to be about finding a bottom. As the “green shoot” talk fades the talk of another big stimulus is starting to make the rounds. Obama must continue to push the optimism and hope as the pitchman, while Congress, Fed, and Treasury need to get on the ball and focus on legislation that doesn’t create more debt and spurs economic recovery. Ideology seems to be clouding judgment as dollar risk, inflation risk, and economic risk is pushed to the back burner. Unfortunately the foreign central banks we rely on are less concerned about ideology and more concerned with dollar and inflation risk. We need to make sure any policies we pass carefully consider the economic impact, because while we might be saving some trees we could economic collapse our fiat currency system. Balance is key at this crucial time and I am afraid leaders like Pelosi and Frank are not concerned with debt, let’s hope the Senate has better foresight.

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