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But it’s too much, too soon for the two largest industries in America: In the already-shaky housing market, you’re seeing how once-hot cities — Miami, New York, San Francisco, Las Vegas and others — are cooling off. And in the long-ago sinking domestic auto industry, you’re witnessing — right before your own eyes — the likely demise of two of the largest companies this country has ever created: General Motors and Ford. Just Yesterday, GM and Ford Announced I’ve never seen numbers this bad before. In this morning’s New York Times, staff reporter Micheline Maynard puts it this way:
The reaction from Moody’s was immediate. The credit rating agency dropped GM’s rating by two notches, sinking the company’s status even deeper into the “junk†category. In addition to plunging sales, Moody’s is worried that Delphi, the giant auto parts maker already in bankruptcy, will slash worker benefits. It’s worried that action will force GM, its former parent company, to pick up the tab. It’s worried that the company will be strangled by its huge debt load. And it’s obviously concerned that there’s now a real chance GM may have to file for bankruptcy. That’s the implicit — and explicit — meaning of GM’s newly- downgraded credit rating: B1. According to Moody’s it means GM’s obligations are speculative (junk) … plus … they are subject to HIGH credit risk. Meanwhile …
So far, nothing and no one has been able to hold back the decline in GM shares for very long. Huge financing incentives — zero interest, zero down and zero payments for the first several months — obviously didn’t stop the stock decline. Quite to the contrary, with financing costs much higher, those incentives have now backfired as consumers balk at the higher loan rates. Huge price incentives — employee-pricing for everyone — also did nothing to stop the tailspin. Quite to the contrary, the only lasting consequence is the horrendous sales figures for October, as consumers recoil in horror from the sticker shock. Even mega-millionaire Kirk Kerkorian, pumping a fortune into GM shares, has not made a difference. After the “Kerkorian rally†in the shares to the $38 level, they have now resumed the long-term downtrend that began early last year.
The stock, at $8.22 last night, is already at a price that most investors would have thought unthinkable a few years ago. And given the conditions now apparent in the industry, it could be on its way to becoming a penny stock in the not-too-distant future. Remember: This is the state of the domestic auto industry despite a long period of extremely low financing costs. Now imagine what’s going to happen as financing gets more expensive. No, the Fed didn’t do enough yesterday to fight inflation. But its move is already too much for GM, Ford and the many companies in America that are addicted to cheap money. They simply may not be able to survive the withdrawal pains. This is an Unmitigated Disaster and
Wall Street’s Reaction Is “Ho-Hum†A few years ago, if I told you General Motors and Ford, America’s largest auto manufacturers, would … lose billions each quarter … get downgraded to “junk†… get cut down to their smallest market share in history … get downgraded AGAIN to even lower categories of junk … and be deemed a risk of bankruptcy … what would you have thought about the future of the economy and the stock market? Would you say it’s irrelevant to jobs and the economy? Would you be looking for a new bull market to get under way any day? Not quite. Yet that’s precisely the response we’re seeing now from Wall Street. It is the epitome of complacency. And it’s based on a series of self-deceptive arguments that are no smarter than cheating at solitaire. They say, for example, that the domestic auto industry is not nearly as important to the economy as it used to be. Hah! Tell that to the hundreds of thousands whose jobs are directly at risk and to the hundreds of thousands more whose jobs are indirectly at risk. Or, some will give you the “too-big-too-fail†theory that used to be so widely accepted years ago. The government, they say, simply won’t let a company as big as GM or Ford go under. (Never mind that the largest airlines and the largest auto parts maker in the country have already proven that theory obsolete!) In the same breath, they add that other sectors, such as computers, microchips and other advanced technologies are going to hold things up. Really? Tony’s update, later in this article, throws cold water on that theory as well. Face it. The fall of GM and Ford is big. It will have a widespread impact on: – The economy. Expect a recession later next year. – The banks. On Monday and Tuesday, we told you how they’re vulnerable to rising rates. Now, tack on giant-company debt defaults. – The markets. Some investors may be fooled for some period of time. But all investors will have to wake up from the tremors when companies like GM or Ford are keeling over. – You. If you work in the United States, are retired in the United States or invest in the United States, how can you avoid being affected when American giants like these go down? I think it’s virtually impossible … unless you take … Strong Protective Action I’m not telling you to run out and sell every single stock you own … for three reasons: Reason #1. There are quite a few exceptional sectors and situations that will do well despite these troubles. Examples: Natural resources. Some foreign companies. Reason #2. There are stocks and other special investments that will do well because of these troubles. Examples: Reverse stock index funds such as Rydex Ursa to profit from a decline in the stock market … and … reverse bond index funds such as Rydex Juno to profit from a decline in bond prices. Reason #3. You can start by selling the stocks that are the most vulnerable and by finding the ones most likely to buck the trend. And, in my humble opinion, the best way to pick them out is by using the Weiss stock ratings, published by our affiliate, Weiss Ratings, Inc. Earlier this year, the Weiss stock ratings were ranked number one in performance in The Wall Street Journal, based on third-party data provided by Investars.com. Weiss Ratings’ ratings of publicly-traded companies beat the performance of every major Wall Street brokerage firm and every independent research provider covered by the Journal. Plus, they beat the S&P 500 by a full nineteen percentage points. Can Weiss Ratings deliver this same number-one-in-the-nation performance every single day of the year? No. That ranking will vary because there are also other good, independent research companies that move in and out of the number one slot. Naturally, I’m biased in favor of Weiss Ratings. But the objective facts are undeniable: Weiss Ratings is the only company that provides high-performance stock ratings AND the accurate safety ratings on insurance companies, banks and other financial institutions. Plus, it’s the only one that will send you an e-mail alert on your stocks, insurance companies, banks — and mutual funds — whenever a rating changes. My recommendation — follow these steps: Step 1. Register at www.WeissWatchDog.com. Step 2. Make a list of every stock or mutual fund you own and every financial institution you do business with. Step 3. If you’re considering buying — or doing business with — others, add them to your list. Step 4. Count the total number of companies on your list, and sign up for the level of Weiss Watchdog service that is right for you. Step 5. Create your personal Weiss Watchdog list at the site, and view the latest ratings instantly. Step 6. If a stock is not rated B- or better, sell it now. If a financial institution is not rated B- or better, switch to a stronger institution if you can. (Bear in mind that not every rating will exactly match my, Tony’s or Larry’s opinion on the company. The Weiss ratings are based on objective criteria that transcend any one individual’s opinion or forecast and do not necessarily consider bull or bear market trends.) Step 7. If a rating changes — for better or for worse — you will get an immediate e-mail alert from “the Watchdog.†The Watchdog will give you the new rating and tell you what further action, if any, to take. Step 8. Even high-rated stocks can go down in a falling market. So in times like these, consider reducing your exposure or hedging with the reverse index funds I mentioned above. These steps are your best defense! And remember: The malaise we see today is not limited to autos, banks or sectors directly impacted by rising interest rates. As Tony explains now, it is also spreading to other areas as well …
Some people seem to think that tech companies are immune to the rising-inflation-rising-rates syndrome we’ve been warning you about. Not so. The troubles in this industry now appear to be spreading more quickly, as you can see from the bad news we just got this week from Dell. Long-time readers know how skeptical I have been about the PC business. And Dell confirmed my pessimistic view when it warned that its Q3 results would be below expectations. Dell now says that it will report 39 cents of third quarter profits, down from the 39 to 41 cents it previously forecast and even below the 40 cents that a not-so-giddy Wall Street was forecasting. The problem is simple: weaker-than-expected sales. Dell has promised Wall Street that it would pull in $14.1 to $14.5 billion of Q3 sales. Oops, says Dell. Now, only $13.9 billion of sales are expected. The rest of the facts are even more dismal:
At best, the PC industry has matured into modest growth business, similar to what happened to microwave ovens and calculators in the 1980s. At worst, it’s on the threshold of another big wreck. In either case, this type of mature industry is not worth the sky-high multiples that Wall Street still values them at. Would you pay 20 times earnings for a microwave oven company? No, right? Then you also should not pay that much for a computer company — even for a masterfully-managed one like Dell. Dell is now selling for under $30, a price it hasn’t seen since May 2003. But it still has a long way to fall before I’d say it’s fairly priced. Masco + American Standard = Housing Slowdown Kitchen cabinet and faucet maker Masco reported a 27% drop in Q3 profits. In Q3 of 2004, Masco made 80 cents a share of profits, but only reported 61 cents this year. And those 61 cents of profits were a penny below Wall Street’s lofty expectations. More importantly, Masco doesn’t expect business to get better any time soon either. The company told Wall Street to expect 48 to 52 cents of Q3 profits and $2.20 to $2.24 for the full year. Too bad. The Jack-and-the-Beanstalk crowd was expecting 57 cents and $2.30 for the year. What’s the problem? Higher energy and raw materials costs and weak consumer confidence. Again. Lastly, if you connect this dot with the worse-than-expected Q3 result we heard from toilet maker American Standard in mid-October, you should start to see a clearer and clearer picture: A rapidly slowing housing market. Steel Tech Reports Steel Technologies (Nasdaq: STTX) makes flat-rolled steel that’s used to build cars, appliances, and construction beams. Now, it has reported a 90% plunge in quarterly profit. Ouch! The problem: Excess inventory and softer prices. “Our margins†says the company, “were affected by utilizing higher-cost material in a declining-price environment. In addition, the July-August seasonal softness was more pronounced this year due to excess inventory throughout the supply chain.†So can you see what I mean when I say the malaise is spreading? And all this was while the Fed funds rate was in the 3% – 3.75% range. What happens now with the Fed promising to get them up to 5%, or higher, as soon as it can? Time to batten down the hatches! Best wishes, Martin D. Weiss, and About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. © 2005 by Weiss Research, Inc. All rights reserved. |
GM, Ford, Dell and YOUR Best Defense
Yesterday’s meager, quarter-point rate hike by the Fed was too little, too late to stop the ongoing surge in inflation. 
GM Shares Are Now in a Virtual Tailspin. Next Likely Stopping Point: Low Teens!
Ford’s shares are following the same pattern, with the sole difference that there was no Kerkorian clone to give them a temporary boost in April. 
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