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Mark's Market Blog

5-31-09: GM goes bankrupt

By Mark Lawrence

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The S&P again did nothing interesting last week, but it did it in a somewhat interesting fashion. In the chart below, we see that the S&P, the 150 day average, the 45 day average, and the channel bars are all converging to a point, sometime about three weeks from now. The 15 day average and the 200 day average hit Friday. Basically the S&P will have no choice but to move in some new direction, as this current direction is all used up. Meanwhile, Europe continues to sink deeper into recession, house prices in the US continue to fall, foreclosures continue to increase and continue to work their way up the ladder to higher and higher rated owners. And GM. . . did I mention GM?

GM will be filing for bankruptcy on Monday. PJ O'Rourke said "The phrase 'bankrupt General Motors,' which we expect to hear uttered on Monday, leaves Americans my age in economic shock. The words are as melodramatic as 'Mom's nude photos.'" GM management has worked out a deal with more than half their creditors, the UAW, and the government. The rest of us get crumbs. Obama plans to invest some $60 billion in GM and to sell its best assets including the Chevy and Cadillac brands quickly out of bankruptcy to a new company. The new deal is the UAW gets 17.5%, the bond holders get 10%, and Obama gets 72.5%. As it stands right now, the existing shareholders get wiped out totally. These numbers will change a little bit as the Canadian government will get thrown a bone too. The bondholders also get warrants to allow them to buy more stock, 25% of GM total, after the share price gets up to at least about $20. Apparently Obama means to suspend trading in new GM stock for an extended period, so if your plan (like mine) was to buy shares right out of bankruptcy and ride it up, fuggidaboutit.

My grandfather sold Oldsmobiles, and my father sold Pontiacs, so I've been a GM guy all my life. But Pontiac will die soon, and the Oldsmobile name is now owned by Toyota. Obama has arranged that I have no chance to make up my losses on GM stock. I guess I'm a Ford guy now. Or a Toyota guy. Well, I dunno, but I'm pretty clear on the idea that I've already made my own personal contribution to the UAW retirement fund, I'm done with that.

GM will be removed from the DOW, of course, and replaced with. . . Google? Try to imagine telling Alfred Sloan that his lifetime creation, GM, would be bankrupt, done in by cheap Japanese and Korean cars and expensive UAW labor. His company would be thrown out of the DOW, and replaced with a company that has no tangible product, manages searches on the Internet, has 15% the revenue of GM and in the depths of a generational recession still has double the market cap that GM had at its peak, and makes their money on mouse clicks.

A record 12 percent of homeowners - one in eight - with a mortgage are behind on their payments or in foreclosure as the housing crisis spreads to borrowers with good credit. And the wave of foreclosures isn't expected to crest until the end of next year, the Mortgage Bankers Association said Thursday. The foreclosure rate on prime fixed-rate loans doubled in the last year, and now represents the largest share of new foreclosures. Nearly 6 percent of fixed-rate mortgages to borrowers with good credit were in the foreclosure process. At the same time, almost half of all adjustable-rate loans made to borrowers with shaky credit were past due or in foreclosure. But don't worry, the banks are rock solid.

I keep talking about how this is just a false dawn in an ongoing and deepening recession. Meanwhile, I expect pretty much everyone else you hear from tells you about "green shoots" or "glimmers of light." What's up with that? Some businesses have grown for a bit in April and May due to how good they've have gotten at keeping low inventories. However, there has been essentially no hiring and layoffs continue. You know the economy is in trouble when 539,000 jobs lost in a month is cause for celebration.

Jobs won't bottom out and start growing again for some time, at least 18 months, more likely two to three years. A more accurate indicator of business health is capitol spending. Rajeev Dhawan, director of Georgia State University's Robinson College of Business, says "[Business] investment has been falling at a rate of 30% over the last six months," says Dhawan. "We can't even think about job growth until it starts to rise again."

Another positive sign will be rising consumer spending. Dhawan says that if car sales rise from the current 9.1 million units per month to 10 million units for each of three months and continue to rise, a recovery could be on its way. Another sign to look for is a sustained rise in new-home sales, which would indicate that consumers have both money to invest and confidence in the housing market. At 356,000, sales of new one-family houses in March 2009 were 0.6% below February's rate and 30.6% below the March 2008 rate.

I'm just not seeing all these little green sprouts.

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