With the consumer no longer in a spending mood, many weak and over-leveraged retailers will be at risk of folding. Names circulating include Circuit City, Eddie Bauer, Claire’s Stores and Krispy Kreme Doughnuts. These retailers offer non-essential items and have high levels of debt. If the holiday season turns out to be weak and the economy continues to struggle, some of these retailers might no longer be around. The de-leveraging of the US economy continues.
According to an interesting article in BusinessWeek, two-thirds of Congress’ most vulnerable members, both Republicans and Democrats, choosed to protect their seats on Election Day rather than follow their party leaders and vote for the very unpopular $700 billion economic bailout package. This group would rather protect their jobs than do what is right for the economy. It is no wonder that people have lost faith in politicians to do the right thing.
With no confidence between financial institutions, they are not lending to each other. As a result, individuals and businesses are having difficulties getting loans to fund their activities. Without credit, the economy will surely slow down. Third and fourth quarter GDP will likely see a contraction. The US is likely to go officially into a recession. Stock prices are falling as a result. There are plenty of bargains that are surfacing. Among them is in the financial sector, energy and materials. We are getting closer to a bottom but we are not there yet. Patience is needed.
The Poster Child of the credit crisis Citigroup has agreed to acquire Wachovia bank in a deal supported by taxpayers and brokered by the Federal Deposit Insurance Corporation to avoid another major corporate failure. It seems that the Fed is determining who can fail and who cannot in this credit crisis. The too big to fail financial institutions also include JP Morgan and Bank of America. The stock is trading above its 50 day moving average. If it holds, the stock is poised to hit $27 and ultimately $30.
When JP Morgan exited the toxic subprime and CDO makets back in 2006, most people thought they were mad. In hindsight, they were way ahead of the pack. With a well funded balance sheet, they are making acquisitions at fire sale prices. They have taken over Bear Stearns and now Washington Mutual. With the demise of big name competitors such as Lehman Brothers, strong institutions such as JPM are well positioned to grow. The stock is clearly in an upward trend and is poised to retest and eventiually break its 52 week high of $49.95.
This week, the House of Representatives approved funding of a $25-billion loan program to help the auto industry build more fuel-efficient vehicles. This will buy the Big Three, Chrysler, Ford and GM, time to come up with more vehicles that the market wants. With higher fuel prices, demand for pick ups and SUVs crumbled. These vehicles were the bread and butter of the Big Three. There are many headwinds that Detroit faces. They are weak demand for new vehicles, unrelenting competition and a reputation for inferior products. To win back customers, Detroit needs to come up with incredible products.
Despite reporting strong Q2 earnings, the stock is off over $14 to $83.40 in after hours trading. Despite high double digit growth in the top and bottom line, the stock sold off on lower forecasts for operating margins. With worries about losing corporate customers due to the turmoil in the financial sector, RIM cannot afford to disappoint. Looking at the charts, if $80 breaks, the next target is in the low sixties. At that level, the stock looks interesting. The company is still gaining new subscribers and is currently spending money to launch new products.
GE today announced it is cutting its earnings forecast and suspending stock buybacks due to very weak results from its finance division. The freeze in credit markets and a slowing global economy are having adverse affects on GE. The key for GE stock is whether it will hit a new 52 week low. It is currently at $22.16. Major support for the stock lies around $21. Currently, the stock is just off $0.44, down to $24.14. The market could be already discounting the worst for GE and a bottom could be forming. If so, GE could be a good long term investment.
This oil services company got caught in the sell-off in oil and gas. The 52 week range for the stock is $30.00 - $55.38. The stock is presently trading at $35.10. Oil is back over $100. We are entering the seasonal pick-up for energy demand. Demand is weaker as the US is struggling economically. Supply is not growing either. The Democrats recently lifted their ban on off shore drilling, potentially goods news for companies such as HAL. Given the longer term trend for higher energy prices, the stock is an attractive buy. Looking at the charts, the stock is oversold. It could bounce back up to $43.
Famed billionaire investor Warren Buffet is putting in $5 billion into Goldman Sachs. Anybody that follows the Oracle of Omaha knows that he is the ultimate value investor. His move also signals that it could be a bottom for financial stocks. The weakest players are being taken out. The ones that remain will do okay. It is a signal that the worst of the financial crisis has past. Buffet is finally putting his substantial cash to use.
