Friday, March 6, 2009

The Dow penny stock market

NY Times:

The banking giant Citigroup commanded a stock price of $55 just two years ago. But at one point Thursday, as markets hurtled to their lowest close in 12 years, the shares were worth less than an item at the Dollar Store.

After months of breathtaking declines, this is what Wall Street has come to: Blue-chip companies, once considered safe investments and cornerstones of the economy, are akin to penny stocks.

The bear market is tightening its grip, despite efforts by the government to support the economy and some of its biggest companies. Fears about the depth and breadth of the recession drove the Dow Jones industrial average down another 4 percent on Thursday, bringing its losses so far this year to 25 percent — just shy of the 33 percent decline recorded for all of 2008.


The number of companies trading at $10 or less on the Standard & Poor’s 500-stock index has increased tenfold since the market reached a peak in October 2007. And with no end in sight to the downward spiral, the New York Stock Exchange has temporarily suspended its $1 minimum share-price requirements to prevent a wave of delistings.

A share of General Motors stock, which fell below $2 on Thursday as it warned of possible bankruptcy, is now not even enough to buy a gallon of gasoline for your Chevy.

A share of General Electric, battered this week to little more than $6, would not be sufficient to buy two of the company’s compact fluorescent light bulbs. And at its current price of 73 cents, it would take several shares of Office Depot stock to buy a box of paper clips.

The Dow Jones industrial average closed at 6,594.44, down 281.40 points, or 4.09 percent — its lowest close since April 15, 1997. The broader S.& P. 500 fell 30.32 points, or 4.25 percent, to 682.55, its lowest close since September 1996. The Nasdaq composite index fell 4 percent, or 54.15 points, to 1,299.59.

The rout highlighted the apathy and pessimism that have seeped into all corners of the market as the global economic downturn deepens.

The Washington Post also looks at the fall of the giants and reports:


Analysts point to two key reasons why some of the nation's largest companies have unraveled in the current downturn. One is that they had come to rely on providing financing to their customers, lending money for sales of their own products. When the credit markets ground to a halt in mid-September, it set off chain reaction of pain, hurting consumers and manufacturers alike.

The second is their exposure to global markets. Once regarded as a way to spread risks, the diversification exacerbated a drop in sales as foreign countries grapple with more severe downturns.


The risk with the Citibank stock is that it value will be diluted with further government investments. The risk with the GM stock is that it will be wiped out in a bankruptcy. In fact it seems overvalued at this point compared to Citibank. It appears that GE's credit arm is the cause for concern with its stock, but I don't like its networks either. It does have some good core businesses which enhance its prospects if the credit arm does not take it below zero.

I think what has really spooked the market is that Obama's economic plan looks too much like that of the mortgage borrowers who bought too much house and started this mess to begin with. His prospects of paying off this borrowing with a shrinking tax base and an asset base that has shrunk by over three trillion since he was elected and shows no prospect of expanding anytime soon does not look good at this point.

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