Ford/GM cut to "JUNK", be we already knew that!

Wow, what have we been telling everyone in here for years?
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Dow Falls After GM, Ford Credit Cut to 'Junk'
Thursday, May 05, 2005
     STORIES         BACKGROUND S&P Cuts GM, Ford Credit Ratings to 'Junk' NEW YORK The Dow ended lower and the Nasdaq and S&P near unchanged levels Thursday after Standard & Poor's cut the debt ratings for General Motors Corp. (GM) and Ford Motor Co. (F) to junk status.
The Dow Jones industrial average (search) lost 44.26 points, or 0.43 percent, to end at 10,340.38. The technology-laced Nasdaq Composite Index (search) was down 0.43 points, or 0.02 percent, to end at 1,961.80, while the broader Standard & Poor's 500 (search) index shed 3.02 points, or 0.26 percent, to end at 1,172.63.
Stocks in all three major indexes had been trading near unchanged levels during the first half of the session but the Dow began to fall after the S&P cut the debt ratings of the two major U.S. automakers.
"Anyone who is surprised by the debt downgrade of GM and Ford doesn't have a pulse," said Al Goldman, chief market strategist at A.G. Edwards. "As sure as Mom's apple pie is tasty, this was going to happen."
The move reduces the automakers' avenues for raising funds as they struggle with global competition and rising healthcare costs. In making the decision, the S&P said GM's management strategy may not be able to cope with its competitive disadvantage and Ford SUVs "will no longer be as profitable as they have been in recent years."
Shares of General Motors extended their losses, falling 6 percent, or $1.94, to $30.86. Ford fell 4.53 percent, or 46 cents to $9.70.
"It's always a little bit of a shock when reality strikes," Goldman said. "Obviously, it could increase the borrowing costs of GM and Ford. But it won't affect the economy."
The bond market moved sharply higher as the automakers' debt downgrades sent investors looking for safer government issues. The yield on the 10-year Treasury note fell to 4.15 percent from 4.19 percent late Wednesday. The dollar was lower against most major currencies, while gold prices rose.
Wall Street was also looking ahead to Friday's widely watched report on job creation, which is expected to show non-farm payrolls rose 170,000 in April.
Before the opening bell, drugmaker Merck & Co. Inc. (MRK), which is struggling to rebound from the withdrawal of its arthritis drug Vioxx (search), said Chief Executive Raymond Gilmartin has resigned and will be replaced by Richard T. Clark, president of its manufacturing division. Gilmartin was criticized for his handling of Vioxx, which was pulled from the market last year due to health risks. Merck shares dropped 18 cents to $34.75.
In economic news, U.S. business productivity growth accelerated unexpectedly in the first quarter but labor costs picked up, according to a government report on Thursday that suggested a slight increase in profit and price pressures.
Also, the number of Americans filing new claims for unemployment aid rose a larger-than-expected 11,000 last week but stayed in a range consistent with job growth, a government report showed on Thursday.
Retailers' sales reports showed gains at traditional department stores and wholesale clubs, but slower growth at big discount chains a sign that lower-income Americans might be spending less due to higher gasoline prices.
Traditional department stores fared well in April's retail sales reports, but big discount chains had lower-than-expected sales. Wal-Mart Stores Inc. (WMT) rose 12 cents to $48.57 and Target Corp. (TGT) gained $1 to $47.28 although their sales were below Wall Street expectations. Federated Department Stores Inc. (FD) surged $2.20 to $62.37 and J.C. Penney Co. Inc. (JCP) added 37 cents to $48.12 as both stores' April sales far surpassed analysts expectations.
Helping the Nasdaq limit its losses was Starbucks Corp. (SBUX), up 3 percent, or $1.63 at $52.24 a day after it said same-store sales in April exceeded analysts' expectations.
In other corporate news, IBM Corp. (IBM) announced a restructuring that will result in up to 30,000 lost jobs, mostly in Europe, though some U.S. layoffs are expected. The restructuring comes after a disappointing first quarter for IBM, which has been plagued by dropping revenues in Europe. IBM was down $1.58 at $75.50.
Gillette Co. (G) fell 43 cents to $52.42 after the consumer products manufacturer said earnings rose 19 percent in the first quarter and beat Wall Street forecasts by 2 cents per share. The company said earnings growth was slowed by a factory closure and costs associated with its planned merger with Procter & Gamble Co. P&G (PG) shed 36 cents to $54.78.
Crude oil futures moved sharply higher in afternoon trading after an industry consulting firm issued a report that projected higher energy prices. A barrel of light crude settled at $50.83, up 70 cents, on the New York Mercantile Exchange (search).
Exxon Mobil Corp. (XOM) rose 52 cents, or almost 1 percent, to $57.75 and ConocoPhillips (COP) gained 96 cents, or about 1 percent, to $105.01. Exxon Mobil was the Dow's biggest percentage gainer.
Trading was active, with 1.61 billion shares changing hands on the New York Stock Exchange, above the 1.46 billion daily average for last year. About 1.79 billion shares were traded on Nasdaq, just below the 1.81 billion daily average last year.
Advancers outnumbered decliners on the New York Stock Exchange by about 9 to 8 and by about 8 to 7 on Nasdaq.
The Russell 2000 index of smaller companies was up 0.42, or 0.1 percent, at 595.64.
Overseas, Japan's markets were closed for a national holiday. In Europe, Britain's FTSE 100 closed up 0.41 percent, France's CAC-40 gained 0.8 percent for the session, and Germany's DAX index rose 0.82 percent in late trading.
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Interesting. I wish I had something to report regarding my 04 Sienna other than on Monday I'm taking it in for another oil change. Anyway, that's sort of boring to talk about so I'll ask this question:
What is the increasing prime rate going to do to the bond market? I'm invested about 60/40.
--


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wrote:

This may be a good time to short Ford and GM, since portfolio managers will have to dump the junk bonds out of their portfolios, as most charters do not allow junk bonds in there. There will be a sell off, and a quick way to make money on shorting the stock.
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You are confused, what do bonds have to do with stocks? For another, the Bond market went up not down. Bond ratings determine the interest rate the bonds earn at issue. Which means GM will have to offer higher interest if they decide to issue any new bonds. There are herds of people that made hugh amounts of money from junk bonds over the years, issued by strong corporations, including myself Junk bonds pay a higher interest rate than AAA bonds. Bond fund managers will not bump current bonds that have not matured but rather will gladly buy more bonds that pay higher interest bonds from any substantial company like GM if they issue new bonds.
mike hunt
"Dan J.S." wrote:

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about 75% of the 269 billion dollars of junk bonds will have to be put back on the street. What will that do to their price? If you believe that GM will be around 10 years from now, it could be the best investment ever.
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New bond ratings only effect new bond issues, get real.
You bring to mind the 5000 shares of Chrysler I bought many years ago, when all the soothsayers were saying sell. ;)
No sense in me continuing to try to enlighten one who does not wish to be enlightened it seems, bye
mike hunt
"Dan J.S." wrote:

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HUH?? are you serious? I do this for a living. This rating applies to ALL outstanding non-preferred bonds. About $270 billion dollars worth. Not only new issues, but all of them.
Read a book once in a while.
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To clarify, GM will pay more on future debts because of this rating, but currently, anyone selling this bond, as its rated junk, will have to sell it at a discount because of the risk that GM will never repay the bond with its current face value. So this rating change will screw GM in the future if they try to issue more bonds, and it screws the current portfolio managers who can't hold junk bonds in their portfolios.
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ALL
it
its
Which means that you and I are screwed if we have a portfolio with these junk bonds already in it. Our portfolio - presumably a 401(k) or similar - that has GM or Ford bonds in it will have to liquidate those bonds at a loss if the portfolio is not allowed to carry those bonds. (I assume a 401(k) or equivelent, because you and I as private investors could conceivably hold the junk bonds to maturity and reap a windfall on the new junk status, and the higher rates that the bonds might command. We are able to guage the extent of our exposure, but a portfolio manager will not have the latitude that we have to guage the risk, he will be bound by the prospectus to keep the risk at a certain level, and junk bond is not that level so he'll be required to dump the newly designated junk that he might be holding.
If our portfolio has these bonds, and the manager is forced to sell them off at a loss, then we take a hit on the growth of the portfolio for this particular period. Presumably, the manager can find another bond to put in to replace these junk bonds, but shouldn't we have wanted this to happen long before junk status is declared? Bonds do not go to junk status overnight or in a vacuum, if the manager is worth a crap, he should have jetisoned these flakey bonds several weeks ago.
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THere are multiple ratings and only one has labeled them junk.

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Bingo!
Dan
"Dan J.S." wrote:

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I'm glad I didn't buy any of my bonds from you.
Dan
"Dan J.S." wrote:

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managers will

charters do not

to make

Wow, now here's something we agree on.
I think the fact that Ford/GM have been downgraded just yells volumes to us that the old United States, as we knew it, no longer exists. This makes American Unions that much less powerful. Hope they wake up and smell the exhaust fumes before WalMart starts making cars.
Richard ------- www.xdnc.com Democrats -- Working Hard For America's Families. E Pluribus Unum -- http://www.googlezon.org / If you replied to this, you're in there! Find yourself.
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Why not? Sears sold Fords and Henry Js at one time ;)
mike hunt
learningrichard wrote:

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The only way the US labor unions can regain leadership is if they could go international just like the big corporations. Unlikely unless they could get laws changed in other countries but in reality that is the only way long term labor will have a force in the economy.
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