Yesterday we came down to those support levels – in some cases they broke. However, going into the close we had a decent rally (light volume and seemed more like covering) – but it did get off those support levels. The news about the S&P downgrading the UK and possibly lowering their AAA credit rating, created concerned. Bill Gross (PIMCO) said the US will eventually lose their AAA credit rating and US debt will reach 100% GDP. Geithner, in response said on Bloomberg that the US must reduce its deficit by at least 3%. Of course that seems to me predicated on the optimistic growth forecast by the administration economist. I would think it would be closer to 15% - if any measure of inflation is to be added to that calculation.
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Sears shocker!
Sears, the largest U.S. department store was expected to have a loss this last quarter as consumer spending, jobless claims, and retail sales continued to slow. However, Sears dug deep – with huge cuts to advertising, lay-offs, and inventory management. Additionally they amended some credit agreements as well as restructured debt. No doubt that revenue is contracting and it is about margins – Sears seems to have management in place that understands that is the core formula.
Expectations were for losses of 87 cents per share, so when Sears reported a PROFIT of 38 cents a share – a jolt to the stock in the pre-market sent it up fast and hard. Stock is up over $10 (currently $61 a share). An analyst on Bloomberg wants to take a closer look at the credit agreements to see how much of the profit maybe a onetime event. Concern going forward is also contracting revenue going forward – which is forecast lower. However, he concluded – that if Sears is able to continue to manage the margins efficiently they could maintain decent profit levels – even in a contracting revenue landscape.
Sears is driving higher and has pulled up some the index futures in the pre-market. Maybe the government could take a lesson from Sears and realize it is about MARGINS!Personally – I love wondering around Sears tool section. I remember decades ago my dad said that if a Craftsman tool broke you could take it back and they would give you a new one, they are guaranteed for life. I didn’t REALLY believe that, so I had chipped Craftsman screwdriver and took it to them (to SEE if my father was telling me the truth) – the guy a Sears didn’t say anything and just gave me a new one with a smile. They had me for life! Now if I could just take in my broken DVD player and get a free replacement….
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GMAC – a failed company that continues to function.
Rumors about GMAC’s demise has been making rounds the last couple of weeks. A couple of articles (in Calculated Risk and Seeking Alpha) indicated that they actually FAILED the “Stress Test”. GMAC was not just LOW on capital they have NEGATIVE capital. They are technically DONE! Talk on the street was about the coming collapse and bankruptcy. The private sector would not touch them and so it would be hard to raise money.
While Wells Fargo, Bank of America, and others (also needing money to meet “stress test” levels) sold stock, sold assets, and raised debt – to meet those obligations. However, GMAC had nowhere to go. So to many people’s surprise the Treasury just gave them ANOTHER $7.5 billion to expand auto lending at Chrysler and also cleared to sell government-backed debt. WHAT? Their debt is rated at junk and they have negative capital. This is just insane…
A closer look reveals the truth – we all know they didn’t pass muster – a large portion of the “Funds to originate loans” is REALLY to meet capital requirements – to get them from negative capital to positive capital. The government is also going to let them sell debt that is backed by the FDIC. Also access to more money from the Federal reserve.
The spin coming out the administration is that it is to “stabilize” GM and Chrysler and help consumers finance vehicles.
Look – I understand the “Stress Test” and the need to raise capital. Other banks are now going it alone – selling assets, selling stocks, raising debt. Why did the government just dump MORE money into GMAC (and not other banks), allow them (while the debt is rated junk) to sell FDIC backed debt, and give them access to MORE money from the Federal Reserve?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRAYMq4..L8w&refer=home
Speaking of auto related companies – the story that GM may get some Treasury funding to help them pass the June 1st deadline to avoid bankruptcy. It’s just a rumor – but after reading about GMAC this morning – I wouldn’t be surprised if we give GM a 4th chance to get there business fixed and give them a few 10 billion more.
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Futures Pre-market
Futures are slightly up above fair value – Sears helped. But the possible credit rating drop in the UK and possibly the US is causing some concern. Also many don’t want to go home long positions.
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Support / Resistance
INDU 8250 / 8500 (We tested 8250 – but it held and rallied – do we revisit today and hold?)
NDX 1350 / 1400 (We got close – but also rallied off of 1350.)
SPX 881 (The 881 level is the talk on CNBC and Bloomberg – we closed above it)
RUT 470 (Again – rally at the close )
Interesting going into the 3 day weekend – we might have light volume – question is do we see people getting out of positions before the weekend or looking at yesterday’s sell off as an opportunity.
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Conclusion
Good news is that some companies (Wal-mart, Sears, etc.) are getting done and dirty – cleaning up their business with the massive contraction of revenue. They KNOW it is about margins that determine profit/loss. Sure we maybe in a recession, but that doesn’t mean to give up – it means that you have to tighten your belt.
Bad news is that our Administration, Congress, and Federal Reserve continues to toss 10s of billions at these FAILING companies. The government is already planning on wiping out the 50+ billion of debt they loaned GM if it files bankruptcy (that is permanent loss money to the tax payer). UK was downgrade and is facing a high possibility that they lose their credit rating and Bill Gross (PIMCO) – not to be ignored – said they US will eventually lose their credit rating. Sound crazy, maybe – but if we (and Congress) doesn’t even have a clue as to the kind of money, risk, and losses over at the Federal Reserve and they continue to print money and loan them to the likes of GMAC – it IS inevitable. Geithner asking for a 3% reduction in the deficit is a paltry suggestion as if that would make a difference.
Our Congress needs to get down and dirty like Wal-mart, Sears, and other companies that KNOW you can’t spend money right now and need to get on top of the balance sheet. If we don’t we WILL lose our credit rating.
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