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Stock Market, Gold and Oil Fall on Auto Bailout News

Stock-Markets / Financial Markets Dec 19, 2008 - 06:47 PM GMT

By: Anthony_Cherniawski

Stock-Markets Best Financial Markets Analysis ArticleGM and Chrysler will get $13.4 billion in loans. General Motors Corp. and Chrysler LLC will get $13.4 billion in initial government loans to keep operating in exchange for substantially restructuring their businesses under a rescue plan announced by President George W. Bush. The money will be drawn from the Troubled Asset Relief Program set up to bail out financial institutions. An additional $4 billion would be allocated in February provided the second half of TARP's authorized $700 billion is released by Congress. The funds would allow GM and Chrysler to keep operating until March.


Overall, the deal appeared to represent a modest step in the administration's efforts to put the auto makers on a long-term path to viability. By forsaking a trip to bankruptcy court, the White House gave up its most powerful weapon to extract concessions from the companies and their workers, suppliers, dealers and creditors.

But it likely will achieve what officials recognized as a more important -- and perhaps conflicting -- goal: preventing a collapse of one of the country's most important industries, at a time of broad economic weakness. The administration was particularly worried about what it termed a "disorderly" collapse of the industry.

Fed Cuts Rate to Zero-0.25%, Will Use All Tools. But will the banks go along?

The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is needed to end the longest recession in a quarter-century and revive credit. However, banks show no sign of easing rates for borrowers. Libor, that banks charge each other for three-month loans and Treasury bill rates is six times wider than before markets began to seize up in June 2007.

Buy on the rumor, sell on the news?

U.S. stocks gained, extending the second straight weekly advance, as President George W. Bush 's rescue plan for carmakers assuaged concern that a collapse of the industry would threaten millions of jobs. Treasury Secretary Henry Paulson urged Congress to release the second half of the $700 billion financial bailout program to “support financial market stability” after exhausting the first $350 billion in less than three months. A formal request to use the money would have to come from Bush. Is the news enough to sustain the rally?

 

 

Bond holders not happy with bailout.

-- Treasuries pared their losses in early afternoon trade Friday after some of the euphoria over the U.S. auto bailout moderated, though yields on mid-term maturities made sizeable one-day rises. Treasuries have been rallying and yields have been falling, giving bondholders their biggest quarterly return in 26 years. Treasuries remained higher on the week, with rates on three-month bills at 0.001 percent as investors sacrificed returns to preserve capital amid the worst financial crisis since the Great Depression.

 

 

 

Gold loses its luster as safe haven.

Gold fell the most in almost three weeks in London as the dollar strengthened against the euro, reducing bullion's appeal as an alternative investment to the U.S. currency. Oil headed for its second-biggest weekly decline in more than five years as a deepening global recession saps demand, dimming the metal's allure as a hedge against inflation. The dollar is rebounding from a 12-week low set this week when the Federal Reserve slashed interest rates. Gold typically moves inversely to the U.S. currency.

 

 

 

 

Rally over. What's next?

-- Japan stocks fell, led by commodity producers, as the deepening global recession drove oil and metals lower, countering the central bank's efforts to boost the economy. “The Nikkei 225 Stock Average fell 78.71, or 0.9 percent, to close at 8,588.52 in Tokyo, trimming a 4.3 percent weekly gain. The broader Topix index dropped 4.26, or 0.5 percent, to 834.43, reducing its weekly advance to 2.6 percent. Shares briefly rose after the Bank of Japan cut its benchmark rate to 0.1 and said it would buy corporate debt as the recession chokes off funding.

 

 

Chinese investors sense limit in rally.

-- Most Chinese stocks rose in active trade on Wednesday but softness in banks and other large-cap shares dampened the main index. The Shanghai Composite Index .SSEC ended up 0.09 percent at 1,976.819 points, well off the day's high of 2,003.375. It was the fourth time since last month that the index had risen above 2,000 points. In the previous cases, many investors were willing to take profits above that level, which suggested 2,100 points might be the limit of any rally in response to Tuesday's U.S. interest rate cut and hopes for a cut in China.

 

 

 

The dollar starts its rally.

The U.S. dollar rallied against the euro on Friday, extending gains stemming from Thursday's European Central Bank's deposit rates cut, which eroded the appeal of the euro zone currency. The dollar also gained versus the yen after the White House said it will provide loans to struggling U.S. automakers. The greenback earlier drew support from the Japanese central bank cutting interest rates to nearly zero.

 

 

 

 

Should the Housing Policy be revamped?

“America shouldn't waste the current housing crisis . With prices plummeting, foreclosures soaring and the mortgage market in disarray, the country should rethink a federal housing policy that has failed.

The policies that got us here, like Freddie Mac, Fannie Mae and the home mortgage interest deduction , put too much faith in subsidized borrowing.

 

 

 

Floating platforms take the limelight in the Gulf.

The Energy Information Administration reports that, “ When it comes to oil production, what's bigger than the state of Louisiana, made of metal and concrete, and floats? Thunder Horse! EIA's Short Term Energy Outlook (STEO) is forecasting increasing 2009 oil production for the United States ( December 2008 STEO ). Most of this increase will come from three Federal Offshore Gulf of Mexico platforms. The Thunder Horse, Atlantis, and Tahiti platforms will account for two-thirds of the total national increase in 2009.”

Natural gas prices decreased for the week in the lower 48 states.

The Energy Information Agency's Natural Gas Weekly Update reports, The coldest temperatures of the season to date covered much of the northern half of the country this report week, boosting demand related to space heating on both coasts and across the Northern Plains and Midwest population centers. Prices increased throughout the country outside the Northeast, with the biggest increases occurring for supplies from the Rocky Mountains (particularly for delivery into the Northwest). During the report week, the Henry Hub spot price increased $0.11 per million Btu (MMBtu) to $5.79.”

Bonuses were real, profits were not .

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they had to be propped up with billions of dollars of taxpayer money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street's pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino -- and let them collect their winnings while the roulette wheel was still spinning.

"Compensation was flawed top to bottom," said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. "The whole organization was responding to distorted incentives."

We're on the air every Friday.

Tim Wood, John Grant and I are back in our weekly session on the markets. The market has been a real roller coaster ride this week. You will be able to access the interview by clicking here .

New IPTV program going strong.

This week's show on www.yorba.tv is packed with information about the direction of the markets. I'm on every Tuesday at 4:00 pm EDT . You can find the archives of my latest programs by clicking here .

Please make an appointment to discuss our investment strategies by calling Claire or Tony at (517) 699-1554, ext 10 or 11. Or e-mail us at tpi@thepracticalinvestor.com .

Anthony M. Cherniawski,
President and CIO
http://www.thepracticalinvestor.com

As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

Anthony M. Cherniawski Archive

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