GM bankruptcy to sober up Wall Street
Posted on 27 May 2009 with no comments from readers
OK the police have arrived. Party over ladies and gentlemen. Time to go home.
Whatever way you look at the imminent bankruptcy of General Motors this is going to test the spin doctors of Wall Street to the limit. And coming at the time when the market is at the top of a massive rally, this might well be one challenge too much.
For the GM obituaries will have to face up to some unpalatable facts: redundancies, plant closures and repercussions for suppliers and even the housing sector. It will be difficult to portray this as a necessary pain before an almost immediate gain.
GM implosion
Indeed, the bankruptcy of the largest company in the US by many measures is likely to sober up the investment community which has become drunk on its own waffle over the past two months. There has been a stream of negative data as long as your arm and yet the party has gone on and on with nobody listening.
Now that the police have been called to break up this noisy rabble, what can be expected? A calm and dignified response, or a mad rush for the exit?
My money would be on the latter, with animal sprits recovering a little by late September only to be dashed back again by a crisis in October in another part of the world, most likely a European banking crisis on the scale of Lehman’s collapse.
Bull euphoria
After a major market rally like the one since the March 6th low there is always an awkward moment for bears when the bulls appear to have won. They can bellow for a few days and write rude comments back to articles like this. But the bear has the last laugh as the bull gets slaughtered, and the Wall Street croupier takes the cash.
This rally has been driven by Wall Street for its own recovery, and one good effect is that it leaves the banks better capitalized from rights issues. They will be able to take the strain of the future that much better. But who knows what that future will hold? And that is the abyss that shareholders are about to enter.
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Now this from Rick’s Picks is spot on:
Now, one might have thought that such news would cause some sober reflection on the Street, since, as some readers may recall, deflation in the real estate sector was what started the U.S. economy on the path to Depression. But if anyone found this news depressing, it wasn’t apparent in the behavior of investors, nor even among consumers. In fact, Joe Sixpack astounded the rest of us yesterday with the most upbeat consumer confidence numbers since who-knows-when. The Conference Board reported that its index of consumer confidence had risen to 54.9 in May, up from 40.8 in April. The spinmeisters lost no time drawing the wrong conclusion: “While confidence is still weak by historical standards, as far as consumers are concerned, the worst is behind us,” said a spokesman for the Conference Board Consumer Research Center. We prefer the explanation of our colleague Bob Hoye, a student of history who remembers the wild days of the Vancouver Stock Exchange. “So long as the price is going up – the public can believe the most absurd story,” Hoye noted in his most recent dispatch, “Great Depressions Are So Methodical.”
A Vacuum of Disbelief
And so it goes. We can’t think of a more misleading indicator on which to base the inference that the U.S. economy is somehow improving. Like the Pied Piper of Hamelin, the stock market is luring the gullible toward trouble, presumably in the form of an encounter with risk that will make the economic damage so far look relatively mild in comparison. Nearly all of the gurus we respect think the bear rally is within days, or weeks at most, of drawing its last breath. We think so, too. But as long as we’re all so sure of it the short squeeze seems likely to continue, drawn higher into a vacuum of disbelief.