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Stock Markets Crash to New Lows as Congress Says No to Auto Bailout

Companies / US Auto's Nov 20, 2008 - 10:45 PM GMT

By: Nadeem_Walayat

Companies Best Financial Markets Analysis ArticleStock Markets crashed in the last hour following law makers saying NO to the $25 billion bailout requested by the big three US Auto corporations, Ford, General Motors and Chrysler, as the once thought of too big to fail are increasingly teetering at the brink of bankruptcy as law makers on capital Hill (Nancy Pelosi) had been seeking to allocate part of the $700 billion bank bailout funds at the auto industry so as to prevent bankruptcy and mass unemployment as a chain reaction hits suppliers that would impact on nearly 4 million US Jobs. Given the magnitude of the debts and losses of the big three, the initial estimates of $25 billion would soon have mushroomed to over $100 billion.


The Dow Jones crashed by 5% that took the market below the October low, and busted through the 2003 Bear Market closing low of 7532, after closing at 7552 on the day. Other indices such as the S&P and Nasdaq have already busted through these critical lows which confirms the new downleg for the stock market following the bear market rally since October in the face of an economy that is already in a deep recession. Clearly the next steps for the Dow are to close below 7532 which would then target a trend towards 7000. However the MACD indicator has yet to fully unwind the extremely oversold state which is supportive of the market in the immediate future i.e. suggestive of a trading range behaviour rather than a fresh deep market crash, therefore implying a bounce.

Congress Rejects Auto Makers $25 billion Down Payment

Representatives of the big three were criticised for wasting tens of thousands of dollars on flying in on corporate jets whilst their companies teeter on the brink of bankruptcy. Additionally the three could not adequately answer the specific questions asked by law makers as to exactly how long they could survive on x amount of dollars, what they would do to limit executive pay and what stake the government would take in the corporations, instead the auto representatives waffled and angered the frustrated members of the financial services committee. The big three were given until 2nd of December to present a revised plan that would be acceptable to congress.

General Motors which is burning through reserves to the tune of $1.5 billion per month closed at just $2.88 a share at less than 4% of its $77 high. The General Motors chart clearly shows that not only is the stock heavily oversold trading at the downtrend line but also that frankly there is not much further downside left in the price, as the next stop is zero, i.e. bankruptcy. Should General Motors survive the credit crisis and recession by avoiding bankruptcy then based on previous trends the stock price could target an eventual trend towards $20. However the company is in probably the worst state of the big three auto manufacturers and therefore at serious risk of going bankrupt.

Ford is not far behind in terms of capital destruction burning through $1 billion a month and closing at just $1.34 down 96% since 1999. The stock chart, even more than that of General Motors illustrates the weak state of the corporation where there is no sign of any recovery on the horizon with so much overhead resistance generated over the last 5 years in the region of $5 that effectively puts a cap on the stock price should the corporation survive bankruptcy through the aid of tens of billions of bailout cash.

Charts Courtesy of stockcharts.com

Mighty Citigroup Collapses To New Low

Once the worlds largest bank has seen its capital base all but destroyed again crashed lower to a new low of just $4.71 that puts the market capitalisation of the bank on par with the $25 billion of capital injected into the bank by the U.S. Treasury, never mind the other $50 billion from other sources such as sovereign wealth funds that has evaporated into thin air. The banks officers clutched at straws by blaming the price crash on short-sellers, however the collapse in citigroup is a trend that has been in motion for over a year and indicative of the critical state of the banks balance sheet.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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