With Wednesday's over 6% drop in the S & P 500, it is now down 45% from it's high in October '07. Among other sectors, the financials were crushed yesterday (Citicorp down 23%, to only 6 and a half bucks a share, despite already writing down non-performing assets, and lowering their work force by over 50,000. Hard to understand ...). And the commentators were using words like "irrational" and "panic selling" to describe things. Fully 20% of the S & P 500 - that's the 500 largest companies in the U.S. - are trading under $10 a share. Will the markets bounce back? Yes, of course, but no one can predict when.
The cause - probably twofold. (1) Uncertainly about the auto industry and (2) the federal reserve prediction that the business slowdown/recession will go well into 2009.
It looks more and more like there will be federal money going to the auto industry, but only after a chapter 11 (bankruptcy) filing. And of course the ramifications to companies that supply the auto industry, to car dealerships, to the one million people depending on the industry (directly or indirectly) for their jobs, and the millions of people, working and retired, whose health insurance is provided by the industry ... is murky.
Apropos to this, here is a Mitt Romney op ed in the NY Times on the automotive crisis, that is very good. I excerpted the beginning and end of the article; hit the link to read the whole thing.
IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support — banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around — and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit’s automakers.
It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. ...
But don’t ask Washington to give shareholders and bondholders a free pass — they bet on management and they lost.
The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs. The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk.
In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.
More on the meltdown to follow - and I am giving a talk on December 4th in Croton, on personal planning entitled Financial Stability: Where do you go from here?