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Mark's Market Blog

10-19-08: GM drops, Buffet Buys Stocks

By Mark Lawrence

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Well, another unpredictable week. Last week I predicted this week would spike up; meander up would probably be a better description. I expect next week to continue to be quite volatile, but to again meander up more.

GM and Chrysler continue their merger talks. I missed an important point in this: Chrysler has about $10B in cash, and GM would love to get their hands on that cash. Chrysler is currently owned by Cerberus, an investment firm, and those guys have no clue how to run a car company. They are under strong pressure from their bankers, including JP Morgan Chase, to make a deal. The lending banks obviously are worried that in six more months their loans will be worthless. The deal looks like it will be something like GM trades their 49% stake in GMAC, their financing corporation, for Chrysler and more cash, something like $3B-$4B. Cerberus already owns the other 51% of GMAC. GM is losing better than $500M / month on GMAC, so this is a big win all around for GM: cash comes in, negative cash flow goes out. If the deal goes through, I would expect GM stock to jump up, based on GM's greatly improved market share and cash situation. If it happens you can expect Chrysler to be basically shut down; Dodge Ram trucks and SUVs will continue to be sold, as will the minivans; and Jeep will replace Hummer as GM finds a buyer for the latter. The UAW is fighting this deal, as they understand clearly this will result in another huge loss of union jobs; there will also be massive closures of dealerships, as there are probably 1000 excess GM + Chrysler dealerships in this country right now.

I continue to be very bullish on GM in the long run: people need cars, and the current low sales will be made up in 2010 and 2011. GM will be extremely well placed to make these delayed sales; much better positioned than Ford, for example, who has mostly dated products and no money for development. Curiously, auto analysts claim that there is currently no big problem for buyers to get a loan on a new car. The issue is foot traffic in the dealerships: prospective buyers are scared and want to hold on to their cash. This will not change in a couple of months.

Warren Buffet put an op-ed piece in the NY Times saying this was a great time to buy stocks: he is. A few quotes from his piece: "In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary." "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful, and most certainly, fear is now widespread, gripping even seasoned investors." "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price." It's been pointed out that it's unclear if Buffet represents the little guy or the house in this deal. Getting Joe Plumber to move 401k money back into the market would certainly have a huge benefit for Buffet. None the less, I personally agree with his points.

Asia did not participate in last week's market run-up. I continue to think that they have much larger problems than have been recognized to date - aging populations, poor ratios of workers to retirees, huge dependence on exports with meager home consumer markets, coming recessions in the US and Europe, and immature government-dominated financial markets. I expect their markets to fall further in the coming months. Long term India, China, Brazil are where the action will be, but short term they have a lot of problems to face.

I believe we're in a bear market run-up: I expect US stocks to continue to go up for a few weeks, but this is nothing like over. There will be another spike downwards, perhaps two or three more.

I also think we're in a long term bear market: I expect the stock market to fluctuate between a DOW of about 8000 and about 14,000 for the next 8 years or so. The history of the stock market supports this: in the last 100 years we had bull markets from '21-'29, '49-'65; '82-'00. We had bear markets, basically a flat market with oscillations from a fixed low to a fixed high and back, from '01-'21, '29-'49, '65-'82, and now from '00 to today. A typical bear market, if there is such a thing, lasts 16-20 years, and we're about 9 years into this one.

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