GM, Oil, Deficits Sink Stocks
Rising Treasury yields have put pressure on the stock market lately. But falling Treasury yields yielded no benefit for stocks Wednesday, when a profit-warning from
General Motors
(GM) - Get Report
, another spike in oil prices and weakness in the dollar sent major averages into a tailspin.
The
Dow Jones Industrial Average
fell 1%, to 10,633.44, while the
Nasdaq Composite
dipped 0.9%, at 2015.75 and the
S&P 500
eased 0.8%, to 1188.06.
GM cut its 2005 earnings outlook by more than half, saying it expects to lose $1.50 a share in the first quarter and earn just $1 to $2 a share for all of 2005. The no.1 automaker had previously forecast a break-even first quarter and earnings of $4 to $5 a share for 2005. GM's stock closed down $4.71, or 14%, at $29.01, falling through its 52-week low of $33.69 and setting a 13-year closing low.
Beyond the Dow, the consequences of the GM profit-warning were far reaching. Treasuries rallied as investors fled the corporate debt arena, the price of the benchmark 10-year note rising 10/32, its yield falling to 4.50%. GM owns $45.7 billion in debt and has the lowest investment grade rating from Standard & Poor's, which cut its outlook on GM's debt rating to negative on Wednesday.
But how bad is the corporate debt situation in the U.S.? Is GM's warning the start of the unraveling of the great corporate bond rally in recent years?
Some say the low interest rate environment of the past few years may have allowed too much easy money and created too much risk taking, even as it helped many corporations improve their balance sheets. Even some members of the Federal Open Market Committee expressed such concerns about "excessive risk-taking" recently.
According to Bill Hornbarger, AG Edwards' fixed-income strategist, GM was only a trigger factor. "Corporate spreads have been at historically narrow levels and they had to
widen somewhat," he says.
Craig Coats, head of fixed-income at Keefe, Bruyette and Woods, says spreads will have to widen even more to make corporate debt attractive again.
GM's problems may be company-specific but on Wednesday, it wasn't just automotive-related stocks such as
Delphi
( DPH) or
Visteon
(VC) - Get Report
, that were hit. Of course, the market had a lot of bad news to digest.
The U.S. current account deficit widened to record $187.9 billion in the fourth-quarter, above expectations for a deficit of $183 billion. The deficit also compares with an upwardly revised number of $165.9 billion in the third quarter. The deficit increased to 6.3% of GDP -- also a record -- from 5.6% in the third quarter.
The dollar came under pronounced pressure upon the news, falling nearly 1% against the euro and half that against the yen.
""The question remains will the world continue to finance the U.S. deficit? That will bring continued pressure on bonds as well," says Peter Cardillo, chief market strategist with SW Bach.
Increasing oil prices late last year and surging imports caused a sharp deterioration in the balance of trade; ominously for deficit hawks, the April crude contract closed up $1.41 to $56.46 a barrel Wednesday, eclipsing its previous intraday peak of $55.67.
While U.S. crude oil inventories rose in the latest week, which should help temper oil prices, gasoline and distillates fell supplies fell, according to the Energy Department and the American Petroleum Institute.
"U.S. refinery utilization is at 90% of capacity, which is its highest level in years. The market is responding to that. There's just not enough refineries," says Michael Fitzpatrick, energy analyst with Fimat USA.
The surging price of oil brings us back to the GM, which gave hints that its sales growth and mix will be hit by rising energy costs. In short, consumers will be less attracted to gas-guzzling SUVs, which typically produce the highest margins for automakers.
Where there any good news at all today? Well, February industrial production rose 0.3%, slightly less than expected but better than a revised 0.1% increase in January. But taking a closer look at the data, we find that the February jump was mostly due to automobile production.
Hmm.
On the bright side, capacity utilization was higher than expected but remained below 80% for the month, which should keep a lid on price pressures.
There was also strong news for the housing market. Housing starts rose 0.5% in February to 2.195 million annualized units, the highest rate in 21 years. Well, the housing market clearly supports economic growth going forward. But how much is too much? The
previous writer of this column certainly thought there was a speculative bubble in the sector.
"There is no question that the economy is strong and that inflationary pressures are building," says SW Bach's Cardillo. "That puts us on a collision course between the equity market and the bond market. Once rates rise, how far and how quickly will the economy slow?"
Winners and Losers
Among stocks on the move Wednesday,
Research in Motion
( RIMM) soared after agreeing to pay $450 million to end litigation that had threatened its ability to produce the BlackBerry communicator. RIM shares finished the day up $11.87, or 11.87%, to $78.96.
Another technology company,
Opnet
(OPNT) - Get Report
, surged on news
Cisco
(CSCO) - Get Report
agreed to distribute its software and collaborate on network management products. It's Opnet's first major indirect sales channel. Opnet shares finished up $1.68, or 23.46%, at 8.84.
Biogen Idec
(BIIB) - Get Report
fell 2.3% to $37.19 after the company and the Food and Drug Administration advised doctors of the possibility of liver damage in patients taking the multiple sclerosis drug Avonex.
Finally, a day after Bernie Ebbers was found guilty on 9 charges related to Worldcom's massive accounting fraud,
J.P. Morgan
(JPM) - Get Report
announced it will pay $2 billion to settle a class action lawsuit. Previously, J.P. Morgan had maintained it knew nothing about the $11 billion accounting fraud at Worldcom when it arranged billions of dollars in loans and bonds for the telecom company, now known as
MCI
( MCIP). J.P. Morgan could have settled for $1.37 billion last year had it joined an earlier settlement but after trading as low as $34.62 intraday, shares recovered to close unchanged at $36.25.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send
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