The Dow's Drastic 358 Point Dive
Thursday, June 26, 2008SUZANNE PRATT: A triple digit loss for the Dow today takes the blue chip index to its lowest close since September 2006. The Dow plunged 358 points and the NASDAQ lost nearly 80. Equities got hammered by a range of factors, including a downgrade of U.S. brokers and oil prices barreling through $140. Crude futures surged $5.09 to settle at a record $139.64 a barrel as Libya threatened to cut output and OPEC's president said prices may reach $170 this summer. General Motors also weighed heavily on stocks today as Goldman Sachs advised investors to dump shares of the troubled company. GM stock fell almost 11 percent to close at $11.43. Scott Gurvey has the outlook for the nation's largest auto maker.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: General Motors is still the world's largest maker of cars and trucks, but its market share has been steadily eroding. Today's downgrade to "sell" by Goldman Sachs is just the latest blow. Goldman says deteriorating fundamentals raise liquidity concerns. As a result some stock traders reported a near panic in the automotive sector today. But GM CEO Rick Wagoner assured investors his company has enough money on hand and many options for raising cash. Traders were also worried about privately held Chrysler which found it necessary to deny rumors of a cash crunch which could lead to bankruptcy. Auto analyst Kevin Tynan of Argus Research says his view of the road ahead does not include that prospect for the American auto makers.
KEVIN TYNAN, AUTO ANALYST, ARGUS RESEARCH: I don't think there's any possibility. I think there would be a lot of steps before that would actually happen, be it partnerships, an acquisition, a merger somewhere. I don't think that these companies would run all the way into bankruptcy. I think there would be anything from private equity money to foreign investment coming in and grabbing an immediate foothold in the U.S. market.
GURVEY: GM has been scrambling to change its product mix in response to higher gasoline prices. Ford sells a greater percentage of trucks than GM and if anything will have a bigger challenge to change its product mix. Ford shares fell in today's trading. The auto makers also face the rapidly rising cost of materials and the sluggish economy which is cutting into consumer willingness to spend. GM sales are down 16 percent so far this year. The companies will need money to convert their assembly lines and auto analyst Rebecca Lindland of Global Insights says GM will need money for marketing to remake its image.
REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: People don't think of GM as having fuel efficient cars and fuel efficient crossovers also. They aren't just about the Suburban anymore. So it's a matter of, when people think of fuel efficiency, they don't necessarily think of GM, fairly or unfairly in many cases.
GURVEY: Competitors face the same challenges as Detroit's big auto makers. But some, notably Toyota and Honda, have newer plants which are easier to convert from trucks to cars. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
SUZANNE PRATT: Joining me now with his analysis of today's market activity is Stuart Freeman, head of equity strategy at Wachovia Securities. Stuart, good to see you again.
STUART FREEMAN, EQUITY STRATEGIST, WACHOVIA SECURITIES: Thank you. Good to see you.
PRATT: So, what happened today? Walk us through some of the trading activity, if you will.
FREEMAN: Well, I mean, I think what we had today was you know, another perfect storm. We had a number of downgrades in earnings estimates in the financial area and the consumer cyclical area. The two areas that have been the toughest the last two quarters for earnings already and I think it's not really a change in the qualitative market, but it's just, you know, another sign that the quantitative nature of the downside is greater than been expected in the financial area and the lending area and in the consumer cyclical area. So, again, oil prices hitting a new high. Again, another quantitative -- not a new issue, but another quantitative high and all of it came together on the same day as we're going into the end of the quarter.
PRATT: Now, you have been through a lot of tough days on Wall Street, a lot of down days like this one. Is this more or less troubling to you?
FREEMAN: You know, (INAUDIBLE) capitulation type of behavior. It's investors not feeling the bottom yet in the fundamentals. The stocks are reeling on that. You know, I think that we probably are going to still have a couple quarters of tough numbers in the financial industry. I think we are going to have some slowing in the consumer cyclical industry, but as we move through the end of the year and into next year, I think we're going to see -- there are going to be easier comps and the low interest rates, housing affordability as a result of the house prices coming down and rates still being low, are going to slowly kind of in a U-shape pull things out. So, I wouldn't say this is a terribly unusual type of a day, but it's a capitulation day. It was a panic day and I think there is a good chance that we'll see by the end of tomorrow, some lift after today.
PRATT: So, are you a buyer of anything at these levels right now?
FREEMAN: We have been for the last couple of years very defensive. We have been buying companies that have stable growth, not highly cyclical earnings growth.
PRATT: Such as?
FREEMAN: That includes drug companies, companies like Procter & Gamble, companies like Pepsico and I think that's where we are. We are at a turning point in this market. I think as we move forward and look forward a year, year and a half, I think that it's the more cyclical stocks that have been hit that will perform the best.
PRATT: Any disclosure on those stocks?
FREEMAN: Nope. Don't own either of those stocks.
PRATT: What troubles you the most about the market right now? What is the major pressure point do you think for investors? Is it oil prices?
FREEMAN: Yeah, I think it needs - I think oil prices are certainly an issue. Consumers, investors hear about oil prices every day. It needs a couple of catalysts. One of the catalysts I think is a little bit better news in housing, you know, May housing sales were up. The prices are still dropping but because they're down, they're starting to move up from time to time. I think more days like that, more months like that is going to help and then also just a deceleration in the decline in some of the charges in the financial industry. I think once we start to see those things, investors will look beyond the -- the nadir.
PRATT: OK, some very good points. Thank you so much for joining us.
FREEMAN: Thank you so much.
PRATT: My guest this evening, Stuart Freeman of Wachovia Securities.
