On Tuesday, the stock market rallied sharply during the first hour of trading after Alan Greenspan said that the recent decline in long-term interest rates was not necessarily a sign of looming economic trouble. In the afternoon however, the Dow gave back its triple digit gains to close up only 16 points. So what gives. How about General Motors announcement that they plan to close plants and cut at least 25,000 jobs over the next three years. Wall Street obviously disagrees with Greenspan's accessment of the economy since GM is one of the nations largest employers. The trickle down effect from GM's cutbacks will have a ripple effect on suppliers and other companies who rely on business from GM, not to mention the economy.
On Thursday, Greenspan will testify before the Joint Economic Committee of Congress. He will probably try to sooth the markets by reiterating what he said to a group of bankers in Beijing on tuesday. In his comments to the bankers, Greenspan practically admitted that he did not know what was going on, and more importantly, that he did not know what to do about the drop in long term interest rates. Admitting that ("We've never run into anything like this before". "The economic and financial world is changing in ways that we still do not fully comprehend ") he doesn't understand what is going on does not provide much comfort to investors as to what going to happen in the future. In fact, one could take his comments as saying that our economic future is no longer being controlled by us. Well hello ! That's what happens when you sell your economic souls to China.
One of our stocks, Sears Holdings (SHLD) fell 13.27 to 141.50 after reporting sluggish sales and a first quarter loss of $9 million on an accounting change. Please do not make the mistake of thinking SHLD as a retailer. CEO and pricipal owner Eddie Lampert has a much bigger vision than being a retailer. I mentioned this before, but Lampert's goal is to create another Berkshire Hathaway. Lampert is using the valuable real estate holdings of Kmart and Sears to buy other business. My buy limit on SHLD is $139.00, so if you were not able to get your foot in the door when I first recommended the stock, now's your chance.
As far as today's trading goes, a rise in oil prices put a lid on the markets early advance. A report from the Energy Department showed U.S. crude inventories fell more than expected. General Motors gained 1.54 to 32.27 as investor Kirk Kerkorian bought an additional 18.9 million shares in his tender offer which expired yesterday. I still favor the GMAC preferreds and debt over the common stock. Kerkorian's influence will turn GM around, but it may take a year or two for things to get better. If you are a patient investor, owning GM is fine. Be prepared however for a dividend cut down the road.
