Insights & Advice


Markets Maintain Higher Levels despite Bad News

Despite Friday’s blow up of the Detroit bail-out, the massive lay-offs from every corner of America and the revelation of an alleged $50 billion Ponzi-scheme from one of Wall Street’s top brokers, Bernard Mad off, the U.S. market is hanging in there. Can investors continue to shake off bad news and for how long?

The on-going drama between the politicians and the car makers rivals the on again, off again circus of the first $750 billion Wall Street bail-out we lived through a few months back. Ostensibly, the $14 billion deal struck in the House came apart in the Senate Thursday night when the UAW’s Ron Gettelfinger refused to bow to the Senator’s demands that the union reduce wages ($75/hour) to a level prevalent among non-union shops ($43/hour).

Underneath the GOP Senator’s “free market” resistance to the bail-out is an age-old rivalry between Republicans and the auto workers union. The union has provided a powerful and traditional source of money and election workers for the Democratic Party for decades. The GOP sees the crisis of the Big Three as a means to break the back of labor hopefully for good. If there is no bail-out, so the thinking goes, then the automakers would be forced into bankruptcy. Under that legal process, the courts could mandate vast changes in union wages, contracts and other areas without interference as a condition for eventually re-emerging from bankruptcy.

Both sides have a point. I can’t see how the American car makers can compete, regardless of any bail-out with such a huge differential in labor costs, not to mention the onus of unworkable union rules and regulations on what company management can and can’t do on the assembly line (see my column “The Big Three should become the Big One”). At the same time, if Gettlefinger agreed to such a deal the union body would lynch him. Like all Americans, the auto workers are struggling with recession, higher prices, and higher unemployment as it is. I suspect a 57% cut in their wages would have hundreds of thousands of workers on strike and in the streets. How would that help GM or Chrysler?

General Motors, who did not take kindly to the rebuff of its loan request, upped the ante on Friday by announcing the closing of 20 North American plants by the first quarter of next year. That would not only reduce production by 250,000 vehicles but would throw hundreds of thousands of workers into the unemployment lines at least temporarily. Given that, I expect President Bush will relent in his opposition to using any of the $750 billion bank bail-out money for the automakers. So by Monday I can predict with some surety that a deal will be struck to provide enough money to GM and Chrysler (Ford says it doesn’t need any immediate cash right now) to at least tide them over until the whole mess becomes Obama’s problem.

As for the alleged swindle perpetrated over several years by the ex- chairman of the NASDAQ Stock Market, Bernie Madoff, what can I say? His own sons turned him in. If true, his actions seem to exemplify the greed and dishonesty of Wall Street and will just drive another nail into the coffin of the financial sector. Still, none of this bad news seems to have swayed investors in their determination to have what they want most, a Christmas rally.

By the end of the week the markets managed to overcome everything from crappy earnings, the highest unemployment increase in 34 years, scandals, bankruptcies and even one or two kitchen sinks only to end slightly higher from a week ago Friday. You have to admire the bulls, if nothing else, they have determination.

Posted in At the Market, The Retired Advisor