With a lack of major catalysts expected in the coming week, market observers say that traders and investors could very well be on bankruptcy watch as several companies continue to struggle. General Motors ( GM) shares slid to $1.27 on Friday -- their lowest level in more than 70 years -- after the automaker's auditors expressed doubts about the company's viability given its staggering losses. On Friday, word spread that General Motors was becoming more open to the idea of bankruptcy. Fellow Dow Jones Industrial Average component Citigroup ( C) crumbled during the previous week, sending shares into penny stock land, as nationalization fears persisted. A rash of Chapter 11 bankruptcy filings were announced in the past week, including telecom shop TelePlus World, horse track owner Magna Entertainment ( MECA), RV maker Monaco Coach ( MNC) and speaker maker SLS International, among others. Reports also surfaced that auto parts supplier Visteon ( VC) could file as early as next Tuesday. "We're getting to where we could have some big failures of banks and big industrial failures," said Steven Sheldon, CFA and principal with SMS Capital Management. "We're not there yet, but we're looking for something to grasp to that would suggest we're stabilizing."
Tom Lydon, president of Global Trends Investments, said that with all eyes on the situations with GM, Citigroup and the other banking stocks, Main Street might reach its breaking point and will start pushing for the government to stop bailing out troubled companies. Simply put, Lydon says that during the coming week the U.S. is on bankruptcy watch.
"I think most people are feeling that we have to let an automaker go or we have to let a bank go," Lydon said. "That's not to say it's going to happen last week. But if you look at some of these stock prices, we're not that far away from zero. We know that the cash burn rate is pretty quick and they could ask for more cash. Will the government continue to step up and offer the hatful of money?"
Black Cloud of Financials LingersIt comes as no surprise market observers point to the financial sector as the major trouble spot for the market, or that it will continue to pressure Wall Street over the coming week. Among the various troubling signs for the financial industry, the KBW Bank Sector Index closed below $20 for the first time ever this last week. Several financial companies now trade below $10 a share, including Wells Fargo ( WFC), Bank of America ( BAC), US Bancorp ( USB) and UBS ( UBS). A year ago, each of those names was above the $30 watermark. "With so many trading under $10, you get to a point where there's nobody left that is perceived as a real, strong bank," Sheldon said. "If the government starts to seize one of them, you would see them all go down rapidly. That scenario needs to be off the table. Something has to happen. There is still no clarity. I don't see how you can say we've plugged the hole."
Mark-To-Market Catalyst?One source of good news for investors over the following week is the upcoming hearing on a bill sponsored by Rep. Ed Perlmutter (D., Colo.) and Rep. Frank Lucas (R., Okla.) that seeks to create the Federal Accounting Oversight Board, a new government body that would wield the power to change the so-called mark-to-market accounting rules. A House Financial Services subcommittee has scheduled the hearing for Thursday.
The proposed FAOB would approve and oversee accounting principles and would be comprised of the Treasury secretary and the heads of the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corp. and the Public Company Accounting Oversight Board. Currently, the Financial Accounting Standards Board oversees accounting changes and has been blamed for introducing FASB rule 157, which established the mark-to-market rules. Many investors argue that the lack of timely and effective action on mark-to market accounting in particular has been a key factor in exacerbating the current economic crisis. The American Bankers Association has thrown its support behind any measure that would help alter the current mark-to-market accounting rules. The ABA argues that financial institutions have been forced to report market losses rather than economic losses, resulting in a continuous downward spiral of market prices and further losses. "The Perlmutter-Lucas bill represents much-needed reform that will help address systemic risks that accounting standards can have on the economy," said Edward Yingling, ABA president, in a statement. "This bill also calls for a proper cost benefit analysis before changes are made to accounting standards." While there is hope amongst market participants that a change to mark-to-market accounting rules would come swiftly and offer some relief to trouble institutions, Lydon warns investors not to get too excited yet. "The question is whether it'll happen quick enough or not," he said. "The mark-to-market rule isn't going to change soon. Hearing and talking about it may be positive and may actually buoy the market to some degree, but it won't help the dire situation a lot of these companies are in."