The economic news isn't much better but investors seem to remain optimistic. GDP was down 6% but consumer confidence perked up. The swine flu seems to be spreading and raising global concerns but the stock market is discounting its economic effect. If that news isn't negative enough, will the imminent bankruptcy of Chrysler create any waves?
We have said many times that the auto companies need to restructure their operations, deleverage significantly, and lower their employment costs. Everybody seems to have moved in that direction but the only stumbling block is how the stakeholders divide up the company ownership. Fierce negotiations and high stakes poker are typically involved in massive restructurings and it is no different for Chrysler and GM. Shareholders will get virtually nothing and the debtholders, unions, and government are just fighting for their fair share. The result will be more competitive companies that will have a fighting chance to prosper when economic conditions improve.
We are seeing some positive earnings reports from Starwood, Proctor & Gamble, Owens Illinois, and DOW Chemical. This will surely lead to some higher stock prices. We continue to own core stock positions but remain cautious on the economy for the rest of the year. Stocks don't go up forever just like they didn't go down forever. The key is to understand what is happening between the relationship of stock prices and future earnings. Bear rallies can last awhile and produce sharp spikes in stocks. We believe that is what is going on now but we are happy to ride the wave with fear every day. Don't forget that the banks still own many toxic assets, the commercial real estate problems are around the corner, and consumer loan defaults are rising.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment