Monday, June 1, 2009

GM Bankruptcy End of an Era; Oil Rally Continues

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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GM will declare bankruptcy this morning, striking a major blow to the prestige of American manufacturing. This is one more step, and a major one at that, in the end of the economic dominance of the U.S. In the future, historians will look back and cite this as a key event that represented a turning point and a significant failure in U.S. policy. GM is the largest industrial bankruptcy in American history. The new 'improved' GM that emerges from bankruptcy will be a socialized company with the federal government owning 60%. The government will be paying for its stake with $30 billion of newly printed money under the TARP program.

GM's bankruptcy is not an isolated event, but will be taking down a host of associated companies and this will have ripple effects throughout the economy. Two parts suppliers already filed for bankruptcy on Friday. The first major dealership, Chevrolet-Saturn, of Harlem, declared bankruptcy this morning, expect many more to follow. The problems are not limited to the U.S. either. There are apparently over 100 Japanese companies that have significant exposure to GM. There could be quite a few in other countries as well (I am sure they will all be delighted to do business with U.S. manufacturing firms in the future). The company will cut 21,000 employees or 34% of its work force during a time of rapidly rising unemployment, reduce dealerships by 2600 and close 11 manufacturing facilities.

Markets in Asia last night and Europe this morning were rallying. U.S. stock futures are up a the moment in the pre-market. Oil broke over $68 a barrel last night, breaking through resistance at 67. It was recently trading at 67.69 in mid-morning European trading. Once oil can hold above 67, the next stop is chart resistance at 70, which was the top during hurricane Katrina. Gold was as high as 988 and silver was in the 15.80s pre-market, both close to major breakout points. Silver is overextended on the technicals however, so it should have trouble getting to and staying above 16 at the moment. The trade-weighted U.S. dollar was priced at 78.79 this morning and is in danger of a major breakdown. There should be at attempt on the part of the authorities to try to save it, which might work for awhile and cause a temporary pause in the rise of gold and silver. It will be interesting to see how this plays out.

Markets which are bullish tend to go up the first few trading days of the month (and down when they are they are bearish). While oil, gold and silver look like they are in good shape, so do stocks for the moment. Nasdaq traded convincingly above its 200-day moving average four days last week (as this blog predicted it would). The Dow and S&P are both about to hit this line though and this will lead to stickiness at the very least. A failure of the stock rally is possible at this point, but that is by no means definite. The next week or two will be a key period for all markets which should tell us a lot.

NEXT: So Far This Doesn't Look Like a Top

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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