Thursday, February 24, 2011

Stock selloff starting to reflect reality of spending cuts

Look at the stock charts of General Motors and Ford, two companies that are very closely tied to personal consumption. These stocks peaked in early January when the new Congress was sworn in. GOP members of the House have been pushing deep spending cuts since then and look at what has happened to these automakers: GM has lost 15% of its value and Ford has lost 20%!

The action in these stocks suggests to me that the market is starting to appreciate--and fear--the spending cuts. This is a clear signal that overall demand in the economy could contract sharply.


Matt Franko said...


Cars and homes.

Census has housing numbers out for Jan and new sales have collapsed again to SA 284K and actual sales for January hit just 19,000 units (implies 228k annual), pathetic.

Number of US households: Approx 110M.



I have a hunch that GDP for quarter ended Jan would be negative if they measured it that way.


mike norman said...


Bob said...

Taken from CBOE website,
No need to worry about anything that used to represent a way to measure the economy, the unregulated Credit Default Swap Market and soon the retailing credit default swap coming to a world near you. Please read below:

Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy). Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.

A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

The CBOE, which first began trading single-name and basket Credit Event Binary Options in 2007, recently received SEC approval to amend the Credit Event Binary Options rules.

One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout.

The size of the CEBO contract payout if a credit event occurs has also been revised. If a bankruptcy occurs prior to expiration of the contract, the amount of the payout will be $1,000 per contract.

The ten companies that will first see bankruptcy contracts traded are the following:

•AK Steel Holding Corporation
•Advanced Micro Devices, Inc.
•Arvinmeritor, Inc.
•American Axle & Manufacturing Holdings, Inc.
•Hovnanian Enterprises, Inc.
•Huntsman Corporation
•MBIA Inc.
•The PMI Group, Inc.
•Smithfield Foods, Inc.
•Tenet Healthcare Corporation
One thing that is certain: this development will throw a wrench in long-established equity-credit cap arb models, as the sudden opening of the market to retail bets on corporate bankruptcy will have huge bilateral repercussions on every single asset class. It also means that every single quant model and factor driven investing system will have to be massive recalibrated. It also means that equities will no longer be a direct representation of corporate health, and equity and credit disconnects, long discussed on Zero Hedge over the past 2 years will suddenly be made glaringly obvious to everyone with just an equity account.

Oh, and by the way, if you thought institutional-only CDS trading ended in tears, just wait until every housewife in the world can bet on the solvency of the individual components of the S&P... We, for one, can't wait.

Matt Franko said...


"equities will no longer be a direct representation of corporate health"

I'm no longer sure this was ever the case....


Tom Hickey said...

Housing rolling over. Double-dip is baked in.

Brent hit 120 in London.

Government shutdown looms.

US state and municipality budgets are in trouble and states and municipalities are cutting back, effectively canceling federal injections.

EZ in turmoil. Portugese bonds tanking.

China trying to quell inflation and is clueless how.

Food shortages are causing rioting worldwide.

That's just what's going on right now, disregarding the unforeseen.

The good news. ??? Oh, right, the equities market is soaring, short interest is nil, bullish sentiment is way high, and the VIX is way low. I guess they must know something. :o

Matt Franko said...


You cant make this stuff up:

"Geithner Takes Victory Lap, Claims Financial System "Much Stronger" vs. Before Crisis"



Sounds like Goldman is finally wising up.... if the economy prints a negative GDP #, I dont believe interest rates will rise out the curve.

Bob said...

The last time the big media declared victory was the Barrons article by Christopher C. William,
I refer you to the Cover Story with a full front page picture of Dick Fuld.

Barrons Front Page article May 15,2006 page 27.
Article by Christopher C. Williams
with captions "Uner Chairman Dick Fuld No.1-ranke Lehman has become a Wall Street star.
Great contrarion indicator, as everyone under the sun knows Timmay the tax dodge should be breaking rocks along with Greenspan instead of taking medals and honors. If the time line is similar look for a big dump in two months.