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US House Rejection of Bailout Drives Auto Stocks, Oil Price Down

30 September 2008

In the wake of the US House of Representatives torpedoing the $700-billion Wall Street bailout on Monday, the Dow plunged 777.68 points (6.98%), to close at 10,365.45, its lowest close in nearly three years. The dive bested the record for the largest single trading-day decline set on 17 September 2001, when the market reopened after 9/11. On a percentage basis, however, it was only the 17th biggest single-day decline for the Dow, much less severe than the 20+% drop in 1987.

Auto stocks were pummeled, with GM dropping 12.8% to $8.51; Ford falling 13.3% to $4.17; Daimler AG down 10.3%, to $50.84; Honda Motors down 9.6%, to $28.93; and Toyota Motor falling 7.9%, to $83.56.

Light sweet crude for November delivery dropped 8.9%—more than $10 a barrel—to $96.37 on the NYMEX. This was the second largest drop in dollar terms on an active contract.

The Detroit News noted that GM stock fell to its lowest close since June 1954, according to the University of Chicago’s Center for Research in Security Prices. GM’s market cap fell is now at $4.8 billion.

Ford Motor Co. stock hit its lowest close since February 1986, and now has a market capitalization of $9.43 billion.

September 30, 2008 in Brief | Permalink | Comments (3) | TrackBack (0)

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This mainly US and European crisis-of-bad-debt is going to hit particularly hard on firms that are heavily leveraged because these firms will need to refinance their debt on a continuing basis and this is getting increasingly harder as this crisis unfolds. GM is very vulnerable in this regard and so are many other vehicle producers. The previously announced 25 billion USD loan package for US automakers should be viewed in this context. It is needed right now to prevent bankruptcy among US automakers that increasingly cannot find capital to refinance their heavily leveraged balances. It is not really so much about promoting the retooling of factories to produce more efficient cars that are in demand but if you give large loans that is a natural requirement to increase the chance that these loans will actually be fully redeemed. Time will tell whether this auto loan package is enough to prevent bankruptcy.

Anyway, expect to see an unusual high number of bankruptcies also among non-financial firms in the next 12 months at least. This is more serious than anything else I have seen in my life and it is going to get worse by every day as long as prices in the property market keep falling because that will cause more banks to bankrupt, emergency merge or to be nationalized. A real recession appears to be inevitable now but it will not be nearly as serious as in the 1930’ies because that crisis was foremost caused by global protectionism and consequently a complete collapse of global trade. If we can avoid protectionism and trade wars most of us will be just fine and the crisis will be manageable.

Looks like it is time to start collecting more stocks - they are on discount!

Unfortunately, I have seen nothing to insure that the credit markets will become healthy again any time soon. You can buy their bad loans secured by devalued assets, but you can not make them lend again, even to fully qualified borrowers.

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