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S&P Downgrades, Spillovers to Cars and Negative Reserves

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February 04, 2008 – Comments (6)

Everyday the financial news just seems to get worse.  This past week the S&P had its best one week rally since 2003, but I strongly question the wisdom of people buying into this rally.  If you look at 2007 earnings of the S&P were down a whopping 48%.  The get-it-wrong-more-than-right analysts are predicting a 21% increase in 2008 over the 2007 numbers.  That would put the 2008 S&P earnings at about 63% of 2006 earnings.

The S&P low in 2006 was about 1230 and the high was about 1430.  The numbers suggest the S&P has hardly corrected at all, and it is in for a significant correction.

The Collection Agency did a very good summary of what is happening with car sales.  I don't get a sense of the total market as a whole decline from the post, but what I think is missing is the higher margin, higher ticket price SUVs and such are declining at a faster rate than cars. 

Another one on my reading over the weekend showed a 0.4% increase in cars compared to a 6% decline is SUVs.  I'm not going to try and dig it up, and I don't remember if it was for a single company or the industry as a whole, but with high energy costs I expect that people are steering away from the higher carrying cost vehicles.  So, there may be money to be made in a car maker with economically priced smaller vehicles, but I really don't know the marketing mix of the various players, just those less dependent on the larger vehicle sales will probably outperform the industry as a whole, but it is hard to say whether they can make money with the overall declines.

And for the third item, this is the second post I saw on this issue and I think it is extremely serious.  The federal reserves are show negative.  I can't stress enough that if you have more than $100k in an account you need to open an account in other institutions and spread your money around.  Indeed, this looks so serious even with less it might be an idea to spread your savings around in case your bank gets into trouble and deposits end up frozen.  In this case if the amount is under $100k you would expect to get it back, but if you had any spending plans for it, well, it would be rough and the plans would have to change.

Also, greed is the stupidest thing going in this market.  Those banks with the highest deposit rates are the most in trouble and they are trying to attract capital, but what they are doing is unsustainable.  It is criminal that the regulators allow it.  I worked for two financial institutions that no longer exist.  I remember one being in trouble with the regulators because of the reserves and the deposit rate was restricted to something like 1% less than the Bank of Canada rate, or something like that.  These banks that are in trouble are offering more than the federal rate.

6 Comments – Post Your Own

#1) On February 04, 2008 at 11:50 AM, StockSpreadsheet (74.73) wrote:

Ford and GM are the automakers most dependent on SUV sales to make profits, so they are the automakers that are most hurting.  Honda and Toyota have lots of small cars and few SUVs, (though Toyota has been moving into the larger truck and SUV market over the past few years), so they would probably benefit the most by a move away from SUVs.  At least this is true from an American car sales perspective.  If you look at the European market, Volkswagan would probably be a better choice than Toyota or Honda, but I don't know the European market so I could be wrong on that.  Toyota is either the first or second largest car company on international volume, (GM said they sold something like 3,000 more vehicles in 2007 from what I read, though I don't know if I trust those numbers), so Toyota might be the biggest beneficiary of a move to smaller cars, but a lot depends on the world economy as a whole.  If the U.S. goes into recession, (if we are not already there), then car sales will probably fall off, (as they also might do due to tighter lending standards/lack of available capital at banks), so this pullback could hurt all car manufacturers, considering that the U.S. is the world's leading car market.

Just my thoughts.  No links to back it up, but I believe all of the above is true.

Craig 

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#2) On February 04, 2008 at 12:26 PM, dpa123 (65.41) wrote:

DWOT, I agree throw the homebuilders in there too. From a technical standpoint, Homebuilders are past the top each of the bollinger bands and today's correction is just the start of a donward correction that can extend to 30%. I am a seller in the short term.

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#3) On February 04, 2008 at 1:21 PM, Imperial1964 (97.93) wrote:

As I understand it, the negative reserves is a misunderstanding.

The banks still have more reserves than required.  Bank reserves to not indicate bank solvency.  They only indicate liquidity (i.e. can they pay you when you ask to withdraw your money).  The figure non-borrowed reserves is total reserves less borrowings from the Federal Reserve.  It's kind-of an apples to oranges comparison.

I don't think you can draw a conclusion about solvency or liquidity from the non-borrowed reserves figure.  The conclusion you can draw is that the banks are borrowing huge amounts of money from the Fed, for whatever reason.  This could be because nobody else will lend them money or it could simply be because the Fed's rates make the loans cheaper than other sources of cash.

The only thing you can be certain of from this information is that the Federal Reserve is succeeding in manipulating short-term interest rates for banks, and without Fed action credit would be more expensive and less widely available.

Let me know if I misunderstand the situation.

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#4) On February 04, 2008 at 5:36 PM, AnomaLee (28.88) wrote:

...and now entering into the game Tata Motors

"The S&P low in 2006 was about 1230 and the high was about 1430.  The numbers suggest the S&P has hardly corrected at all, and it is in for a significant correction."

Personally, I think that's about the range we'll trade in. As of now, I can't find a reason the S&P should remain below 1230 for long, or higher than 1400 at all. When comparing the valuations of 2006 vs the market of today you have to consider the devaluation of our currency. The dollar is significantly weaker today. I'd even bet that reported numbers overall for the S&P in 2008 will likely be higher compared to 2007. So, from a valuation standpoint I think the lows we tested around MLK day  (below 1300 for the S&P) were around a fair target value for the stock market, before the FED went into "Print, Liquidity"-mode. But,

The stock market only stays down for relatively short periods, and will consistently rise due to the fact that there's always been added money pouring into it. And we'll continue to print more money and there will continue to be more "floating capital" to throw into the market to offset 20% slides thanks to Helicopter Ben and the monetary policies of the U.S. ever since Paul Volcker.


Even though I think our economy is in a sad & whimpering state I think our economy and its (greedy, corrupt) governing system still remains (one of) the most flexible in the world.

Things are bleak, but my outlook remains that --- in the long-term you can't go wrong when you play where the banks play.  It's like going to a casino with them and they're passing out free chips all the time. The chips are in your favor, you just have to know how to play.

Hell, we all could do okay with our chips if we just consistently bought an ETF. If you were satisfied with okay then you'd never have to worry about CAPs?

Fool on...

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#5) On February 05, 2008 at 12:24 AM, dwot (97.03) wrote:

Stockspreadsheet, upon thinking about it, I bet the margins contract big time.  Toyota the lesser loser?

dpa, I wonder what their marketing mix is -- How do they make money?

Imperial, you may be right.  I don't understand this, it just freaks me out, you might say...  It doesn't look good.  Two sites that I saw called it negative bank reserves.

Anomalee, I am not sure how you figure the devaluation of the currency fits in.  If you factor in the devaluations in the currency, the "value" of the earnings is even less.

Good luck with your choices... 

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#6) On September 17, 2009 at 3:43 AM, BrandonPaulChevy (< 20) wrote:

Well, seems like most of the automakers are hurting on their sales revenue because of the economic recession. I think all the strategies have been made. Some manufacturers even admitted that they have lowered the quality of their auto parts  just to lessen their expenses.

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