Friday's employment number was as bad as we could have expected. The markets responded accordingly by being down for most of the day but a strong rally reversed the decline and propelled stocks higher as we entered the weekend. Congress continued to debate the fate of the auto companies on Friday and throughout the weekend. It seems like the Government will bail out the auto industry in some form of a loan. Congress is also looking to change management of GM and perhaps Chrysler also.
As we have said in the past, we believe a restructuring of the debt and labor contracts is needed to go along with the loan. Any new management will spend some time analyzing the operations of these companies and realize there is too much debt and the cost structure is too high for General Motors to become profitable and deleverage. On Friday, General Motors' outstanding loans were trading at fifty cents on the dollar. This implies that a government loan of $10 billion to General Motors will be worth $5 billion on day one. Taxpayers will not like that loss. Hopefully, Congress will figure out additional compensation to make up for those losses.
President-elect Obama once again produced some weekend magic as he promised a very large stimulus package to jump start the economy. Infrastructure companies and commodity producers will certainly love that plan. Markets overseas were thrilled to hear the news as will the U.S. markets which look to be up strong in pre-market trading. This market continues to be volatile and good news brings plenty of short covering and a pop in stocks. The economic news should continue to get worse and the markets will continue to evaluate each dour report.
The bottoming process will work its way through the market and it may be painful but in time, we look to see the light at the end of the tunnel. We fear that this process may be longer than some pundits think but the misery will end at some point.
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