Crisis Diary as it unfolds ….

08-Dec-08 to 14-Dec-08: GM, China, fat stimulus and bear bottoms

The news of the week includes failed auto bailout, further deterioration of Chinese economy, talk of fat Obama Stimulus and has the market bottomed?

Auto bailout

Finally, Bush gov’t little reluctantly presented bill for auto bailout in Senate inspite of strong republican opposition. Well, the democrats were pushing really hard – how can you ignore main street when you bailout wall street yada yada yada. But hardass republicans defeated the bill in senate and rightly so. The details of aftermath are here.

Some fun facts about the bailout,
– the bailout was in the form of bridge loan and amounted to only $14B
– It was intended to keep 3 American companies – GM, Ford and Crysler – afloat until Obama takes control
– It included a provision of so called ‘car czar’
– Bush decided to open TARP money to help automakers temporarily. The proposal is under consideration.

There are several reasons why this bailout made no sense.
– The principal problem facing US car industry is that of overcapacity. Somebody has to go down for market to become competitive and profitable again. That’s how market economy works. This was not the case with banks. Credits were freezing up and survival of banking system was crucial.
– From unemployment point of view, many experts and economists were suggesting chapter-11 prepackaged bankruptcy. This column by Joseph Stiglitz says it all.

Regardless of what they do with the three auto makers, I’d like to see the equity getting wiped out before gov’t injecting any capital and take losses on tax payers’ money.

Obama Stimulus

How big is going to be Obama stimulus? The buzz is around 1T$ – mostly in infrastructure and green energy. Although some economists like Greg Mankiw are suggesting a supply side stimulus in form of payroll tax cut. Although it is also an interesting proposal, but it is more likely that Obama and his economic team will go for more classical Keynesian package. SPDR for metals and mining XME is suddenly looking attractive considering Obama stimulus.

Market Bottomed?

Has the market bottomed at November lows? Actually its practically impossible to predict bottoms. Every new bit of information that hits the market can take market lower and you never know till what level. Nouriel Roubini is predicting bottom at S&P 600-720 (EPS=60 and P/E between 10 and 12). At the end of this week, S&P was at 880 and Dow Jones was at 8630. But Nouriel can get earnings forecast right, he can never predict P/E and the market may bottom much higher even of earnings forecast holds good.
All the signs are pointing that market might have bottomed in medium term (1-2 years). Of course, any unexpected negative surprise will invalidate that argument. But expected negative news like rising unemployment, sliding consumer confidence, fading quarterly earnings are probably all priced in. What can really shatter the market is another round of write-downs in banking and financial institutions and big hedge fund or mortgage blow ups.

If this bottom holds good we have market bottom at,
Dow Jones 7600 (S&P 750)
Oil $40
EURUSD 1.26 (USD peeked)
GBPUSD 1.46 (USD peeked)
Crisis watch for the week

TED Spread: 1.9
S&P: 880 (-2.93%)
VIX: 54.28

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December 15, 2008 - Posted by | Weekly News | , , , , , , ,

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