There was little merriment for investors on Monday as
on the road to junk, raising the prospect of a much more challenging environment for corporate financing overall.
As oil prices gyrated Monday -- closing up 39 cents after being down $1 early in the session -- stocks were still reeling from Ford's gift just before the weekend. The automaker issued a profit-warning after the close Friday, which prompted Standard & Poor's to cut its outlook on Ford's debt to negative from stable on Monday.
Dow Jones Industrial Average
ended down 12.78 points, or 0.12%, to 10,448.56; the
rose by a fraction to 1,992.12; and the
fell 7.23 points, or 0.36%, to at 1,992.12. After rallying for four straight sessions last week, the market is now stumbling into earnings season and is getting signs that conditions will get worse down the line.
Ford's warning made it hard for investors to rejoice even as oil prices were sliding in morning trade. Stocks received less help from lower oil prices, perhaps, because now is the "shoulder season" between winter's strong demand for heating fuel and the gas-guzzling summer driving season. It would be normal for oil prices to cool off a bit, in the near term anyway.
But oil prices did come back in afternoon trading after finding support below the key $53 level.
In the meantime, the price of the barrel is still above $50 after sliding 8% last week, and gasoline is still above $2 per gallon. And as first-quarter earnings start trickling through, the realized, ongoing, and expected impact of surging energy costs on bottom lines become clearer.
(After the bell Monday,
reported first-quarter earnings that
exceeded expectations by 4 cents a share; the stock fell 1.8% to $56.60 in regular trading.)
Actually, Ford and GM's problems are partly stemming from expectations that sales of high-margin SUVs will dwindle as consumers are expected to shun gas-guzzling vehicles. And last Friday saw the end of a four-day upswing for the major indices after a steep profit-warning from trucking company
The Dow Jones transportation index fell another 1.94% on Monday.
The Ford and GM stories, of course, have deeper implications for the market. Though analysts still refrain from talking about bankruptcies for the two automakers, the huge debt they carry is now less likely to be repaid, and that's creating a reconfiguration along the credit-quality scale.
Credit spreads -- the difference between the safety of Treasury bond yields and those of corporate debt -- widened to about 3.6 percentage points in March, according to J.P. Morgan. And the Ford news fueled another flight-to-safety bid into Treasuries on Monday, with the benchmark 10-year note gaining 8/32, while its yield fell to 4.44%.
According to Tony Crescenzi, Miller Tabak's bond strategist and
contributor, spreads will continue to widen after the Ford story although GM's profit-warning last month did most of the damage already.
"Corporate America does share the same issues
as GM and Ford over pensions and health care costs, but it's not on the same scale. Corporate balance sheets overall remain in great shape," Crescenzi commented, noting that Moody's count of corporate defaults remains very low.
The problem for companies is that the problems at GM and Ford -- together with
tightening, increasing signs of speculation in real estate and
-type scandals -- are going to make credit much harder to come by for everybody else. "The widening of spreads will hurt the U.S. economy as fewer companies will be able to sell bonds, or will have to pay more for them," Crescenzi says.
Mid-cap and small-cap stocks, which tend to be the most leveraged, are likely to suffer the most. That could be problematic given that the post-2002 bull market has been led by these stocks, while blue chips and the major indices have treaded water.
At Raymond James, equity strategist Jeffrey Saut has been recommending since 2001 that investors put their money in actively managed mutual funds and stocks concentrating on the mid- and small-cap universe. But now that many of these stocks have recorded new all-time highs, their "outperformance has erased all the valuation mismatch that previously existed between the mid- and large-cap indexes," Saut says. "Consequently, we entered this year with a cautious view on all equities, a stance we regrettably still embrace."
The good news is that widening credit spreads may be doing some of the Fed's job. Tremors like those experienced after GM's and Ford's profit-warnings can dry up liquidity more convincingly than the Fed's jawboning about inflation.
Talking the Talk
Speaking of the Fed's jawboning, Tuesday will reveal more about Fed members' thoughts on inflation as the minutes of the March 22 FOMC meeting are released. The market could very well rally if it turns out that inflation fears were overblown.
But judging from the recent comments made by numerous Fed officials, the notes are likely to reflect the market's reaction. Merrill Lynch chief North American economist David Rosenberg expects the minutes to be "on the hawkish side," with Fed members "expected to talk tough on inflation."
That "tough talking" may be the only thing protecting the dollar right now, as the Fed is showing it is determined to tackle inflation, according to Miller Tabak's Crescenzi. In that context, tomorrow's release of March's trade deficit figures may have less of an impact, he says. But on Monday, the dollar fell 0.3% against both the euro and the yen, on expectations that the deficit widened to $58.4 billion from $58.3 billion last month.
Winners and Losers
Chairman Warren Buffett was interviewed in New York on Monday by prosecutors investigating the accounting scandal at American International Group, which rose 19 cents to $52.01.
agreed to pay $1.1 billion to buy out
largest shareholder, Mexican investor Carlos Slim Helu, as part of its effort to acquire the whole company for $7.6 billion. The agreement is an end-around past
, whose latest $9 billion offer was rejected by MCI's board last week. MCI rose 17 cents, or 0.66%, to $26.01; Verizon finished lower by 17 cents, or 0.49%, to $34.90; Qwest lost 11 cents, or 2.8%, to $3.82.
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