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Market View: GM Holds The Cards

November 15, 2008 9:15 AM

business-sunset.jpgListening to Cramer last night I could see the extreme skepticism of the market. It was just flat out obvious. He knows, as well as I, that Thursday’s move was short covering at the close that got completely out of control. In addition, he commented that the future of GM will likely determine whether these lows hold or not. I agree with this.

If GM files for bankruptcy, I believe Ford and Chrysler will follow suit. The reason for this is simple. First, without a massive bailiout, all three probably have no choice. Second, if one files, then the other two will follow because they do not have to be concerned with the stigma of being the car company that filed bankruptcy.

Ok, so if they file, where is the market likely headed? Very likely lower. Much lower. Cramer believes the Dow will go to 6,000. I agree. Why 6,000? I mentioned some time ago that if you look at the charts, their is a ton of support in that area. That is why I think Cramer continues to pick that number. Right now, as I see things, we have the current Dow low, we have the 2002 lows, and we likely have Dow 6000 below that.  If Dow 6000 area does not hold, then get your soup can out as you will likely need it. You may need it anyhow the way things are going.

Here is the very, very troubling part of this. People think, well, I am out of the market, what do I care? Uh wrong. Nobody is out of the market.  Pension funds, state retirement funds, insurance companies, etc. all are based on an estimated positive return on the market to pay out estimated future benefits. If these returns do not happen, then they are what is called “underfunded”. This means that they do not have enough money to pay future claims and benefits. Therefore, the stability of the stock market has huge consequences for the entire country. While most people are strongly opposed to the government bailouts that we are seeing, and most opinions are clear - let them fail - I believe the government likely had no choice.

However, here is the primary problem with a bailout of the Big Three, when compared to the bank bailout. The bank’s business models are just fine, once prudence is followed and they clear their bad loans. They will likely make money in the future - at some point. Therefore, the bank bailout can likely be repaid - eventually. However, I do not believe that even with massive government loans that the Big Three can survive, long term, unless dramatic changes are made. So it is very unclear whether loans will do anything other than delay the inevitable. At the very least, if a bailout happens, it will require huge money because this downturn could last for a long time. If it does, all three will have negative cash flow until the economy turns. Therefore, loans will basically be used to cover the negative cash flow and not help turn them around for the future.  This is a big, big problem and not sure how it can be solved. One thing is very clear, they better replace all management at all three firms and get some very, very bright people to run the ships.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

Comments

One Response to “Market View: GM Holds The Cards”

  1. henry horschel on November 17th, 2008 1:55 am

    Remote control cars will get the automakers and tech’s going again. Mass transit with these cars. It will boom the market’s like the .com did. But I do think short term automakers go BK, along with a falling market.imo

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