Bailout fatigue
RTGAM
Investors appear to be getting used to big bailouts, judging from the ho-hum response to the White House's plan to rescue struggling U.S. auto makers.
On Friday, about a half-hour before markets opened for trading, President George W. Bush outlined his plan to funnel a total of $17.4-billion (U.S.) towards General Motors Corp. and Chrysler LLC, in an effort to keep them out of bankruptcy in the near term and prevent a wave of auto-related layoffs. (The longer-term fix is for the next administration.)
That pretty much exhausted the first half of the $700-billion rescue fund approved by Congress earlier this year - so Henry Paulson, the U.S. Treasury Secretary, said that Congress should approve the release of the next half of the fund.
And in Canada, Prime Minister Stephen Harper said that a federal stimulus package could total as much as $30-billion (Canadian) in an effort to prevent the deteriorating economy from spinning out of control.
There was a time when three packages of this size would mean something to investors. Not on Friday.
The Dow Jones industrial average closed at 8579.11, down 25.88 points, or 0.3 per cent. The broader S&P 500 closed at 887.60, down 2.32 points, or 0.3 per cent.
To be sure, General Motors did just fine, rising 22.7 per cent. However, the price of the stock is still mired at just $4.49 (U.S.), suggesting that investors still don't have a whole lot of faith in its ability to survive. Ford Motor Co., which is not part of the bailout deal, rose 3.9 per cent.
Financials, however, did poorly, with Citigroup Inc. falling 5.5 per cent and Bank of America Corp. falling 1.6 per cent. Energy stocks were also down, with Chevron Corp. down 3 per cent and Exxon Mobil Corp. down 2.6 per cent.
In Canada, the S&P/TSX composite index closed at 8552, up 126.65, or 1.5 per cent. Research In Motion Ltd. was the big reason, with the BlackBerry maker surging 14.1 per cent after it released a fourth-quarter earnings forecast that topped analysts' expectations. As well, Royal Bank of Canada rose 0.7 per cent and Canadian Imperial Bank of Commerce rose 2 per cent in a late-day rebound.
And This:
TIP SHEET
David Berman
00:00 EST Friday, December 19, 2008
In an uncertain environment for oil and gas producers, few stocks have suffered as much as Oilexco Inc. - down more than 94 per cent from its high at the end of June, when the price of crude oil was also near its high point. Since then, oil has fallen about 74 per cent and Oilexco shares have plummeted to $1.10 from $19.46, which includes yesterday's 42-per-cent drop.
Yes, there's a connection here to the price of oil. But Oilexco is also suffering from cash issues. On Wednesday, the Royal Bank of Scotland and its banking syndicate cut a deal with Oilexco, which will provide the struggling company with a $47.5-million bridge loan. As part of that deal, the banks get 55.5 million shares of Oilexco - or almost 25 per cent - in the event that the company gets sold.
"This bridge loan makes up the company's cash shortfall that it must be experiencing as a result of current oil prices," Frederick Kozak, an analyst at Canaccord Adams, said in a note.
However, he noted that the loan is a short-term solution, and comes at the expense of diluting the holdings of existing shareholders. He has a "speculative buy" recommendation on the stock, with a 12-month price target of $5.
See David Berman's Market Blog at ReportonBusiness.com
Copyright 2001 The Globe and Mail