General Motors and leading banks sent another major ripple through US equities Thursday. GM warned of a possible bankruptcy which was not welcomed news given that the company has already received a significant amount of bailout funding. The company says that it is burning through cash so quickly that it might not be able to stave off the tough economy beyond 2009. The company has recently stated that it needs additional bailout funds, a request not well-received by Americans.

GM stock fell 15 per cent to $1.86 Thursday (March 5), adding to the growing collection of big name companies at rock bottom prices. GM closed the day $.06 higher than fellow Big 3 car company Ford, which is now worth $1.81 per share. Of the Big 3, Ford appears the best positioned to last beyond 2009. Ford has yet to use any bailout money and expects to be able to make it into 2010 with cash, based on its current position. A loss of one of the other industry giants might help keep Ford alive as well.

The GM discussion was the leading catalyst in a full day of negative news that helped push the Dow and the NASDAQ each down over four per cent. The Dow now sits at a 12-year low and is about 7,500 points below its all-time high of over 14,100 from one and a half years ago.

Record mortgage and foreclosure data from the fourth quarter also cast a dark cloud over the economic situation. According to the latest data, about 12 per cent of all home owning Americans, or nearly 5.4 million homeowners, is affected by foreclosure. This means they were at least one month late on their mortgage or already in foreclosure at the end of 2008. What exactly does this mean? It means that one out of eight homeowners is struggling with the mortgage calamity.

Citigroup served as the latest headliner to portray the ongoing chaos in the credit sector. Citi stock fell below $1 to $.97 at one point Thursday before climbing to a close of $1.02. This is virtually half of the company’s value from a year ago. Just how normal are “penny stocks” (Stocks trading below $5) these days? The New York Stock Exchange relaxed a rule this week that typically leads to delisting of sub-$1 stocks. Previously, if a stock fell below $1 per share for 30 consecutive days, the company had about six months to return to more healthy levels or face delisting from the stock exchange. The NYSE decided that in the current volatile climate, it would not be prudent to follow this same guideline. In other words, Citi and others may settle in below $1 for a while.

Cutbacks in consumers spending also continue to dampen the economy. Americans still seem scared and very reluctant to spend money on anything that is not essential to everyday living. This contributed to the February retail report that shows sales across the sector are still declining. Many investors and citizens are anxious to see what the Friday unemployment report shows. Unemployment is currently about 7.5 per cent and worst-case expectations continue to suggest a ten per cent unemployment rate is in the billing by late 2009.

The hits keep coming from all directions to the US economy. Many investors still seem concerned that President Obama’s policies are not likely to product the long-term improvements the economy needs. However, economic icon Warren Buffett, among others, has lended support to the Obama plan, despite pessimistic views for the economy in 2009.

Market Recap

Stocks gave the markets some hope Wednesday with a 149 point gain in the Dow. However, the market was higher earlier in the day before a dip late. Oil climbed up to the mid-$40s range. Thursday, harsh reality struck again as the Dow and NASDAQ were each down 4 per cent on the day. The Dow lost 281 points to close below 6,600 points. GM says it still fears bankruptcy might be inevitable despite government bailout assistance. Retailers reported February sales declines. Mortgages suffered again during the fourth quarter.

Neil Kokemuller
10:08 PM EST
Thursday, March 5, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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