SUMMARY:
- GM giveth and GM taketh away, but market survives.
- Retail sales deemed 'sluggish,' but the winners keep winning.
- Productivity easily beats expectations, gives Fed some breathing room for 'measured' pace.
- What impact will GM have upon Greenspan?
- Very solid day of rest after Wednesday follow through.
- Jobs report dominates headlines, but not the overall market outlook.
GM gets 'junked' by S&P but that does not alter the overall moved the tender offer sparked.
There were a lot of 'I told you so' comments Thursday as S&P downgraded GM and F to junk status and the market suffered a midday jolt as a result. The large caps were knocked back pretty hard, but after the initial drop, stocks held their ground above support and posted a modest rebound into the close. They did not reach positive overall, but the losses were quite modest. Volume was modest, breadth was modest, and losses were modest. The market took a potentially damaging piece of news and figured it did not mean major trouble for the economy.
Thus stocks held up just fine following a solid upside session that provided follow through to Friday's rebound from year lows on NASDAQ. It was rather amusing to hear the financial station market reports bemoaning the 'lack of follow through' to the Wednesday surge. Wednesday was the follow through session to a rally that had already started. There can be more follow through sessions, indeed the more the better. Thus the lower volume flat session Thursday did no damage to the move in progress. Similar to the early 2003 pullback where many heralded the return of the bear market but we saw as just a low volume consolidation, Thursday was just a low volume consolidation. It showed some guts as well as stocks basically shrugged off two of the big three auto makers (maybe just the big 2 now that Daimler owns Chrysler) were basically lowered to speculative status. Once the market gets past the jobs report it should be ready to move higher once more.
The domestic auto makers must change fundamentally or fail.
Speaking of GM, it has a lot of problems that Kerkorian cannot fix unless there are major changes in its labor structure. It is a healthcare company and a finance company that also builds cars. Do we have that backwards you may ask. Well, just look at what GM can and cannot do in making cars. If the car market slows or it cannot compete with other manufacturers say from, I don't know, JAPAN, what can it do? Most companies would try to get better product and make necessary cuts to better compete. New product development takes time, so that means the interim step is to cut costs. Because of its labor contracts, however, GM CANNOT idle certain plants or lines. In short, no matter what the market conditions are, GM has to run certain plants. The labor is telling management how to run the company; the tail is wagging the dog.
Thus, just like the federal government, it has entitlement spending that it cannot get rid of unless there is fundamental change. Put another way, there has to be new, realistic attitudes toward the world and the market today. The auto market is no longer a three ring circus run by the US makers; the US makers are losing to the foreign makers. That is not new, but the rate of change is rising and the US makers, because of their labor agreements that are throwbacks to the 'big 3' days, cannot keep up and compete. Unless there is fundamental change in the structure of the domestic auto business it will not survive. Steel had to change and it did, helped by surging demand. That made it easier. GM and F have no easy road ahead, but the Kerkorian 'threat' may engender the realization that change is needed, and they had better do it themselves or have it done for them.
GM tender offer may not save GM but it sure helped change the market attitude.
While the Kerkorian offer may or may not spur the needed change in GM, it did spur the market. Many say Kerkorian could 'unlock value' in GM by forcing a split, e.g. selling the valuable Cadillac brand. What his offer did for the market was unlock value; in other words it opened some eyes that stocks could be a bit low in price. If Kerkorian thinks GM is at a price where it is ripe for buying and harassing into change then other areas and businesses in the market could be equally ready. Right now big money is poring over potential breakup buys. Sounds like the 1980's and Gordon Gecko's 'greed is good' speech, but it may be a big player in how this market proceeds. Don't believe this is like the 1980's? Well recall that back then there were California freeway shootings just as there are now. The parallels make you shiver, huh? Human behavior runs in cycles and is reflected in the markets and how we treat each other. Anyway the M&A activity is up with companies loaded with cash. They are looking to use the cash to buy, cannibalize, keep the strong, toss the chaff. It is a way to run the market higher, though it is no one's favorite. |
