The flight into Treasuries, as well as the fact that credit default swap spreads are widening, is causing broad weakness in the stock market.
But it is not trading in any way unusual: we are again being led down by financials and, to a lesser extent, commodity stocks. Early morning strength in commodities has dissipated as the dollar has gained strength.
As for Ford (down 23 percent) and GM (down 15 percent), the market is saying that the common equity value of the stocks are essentially zero, regardless of whether they get loans or not.
Not so with auto-related companies, or with the dozens of industries (chemicals, advertisers, steel, trucking, etc.) that depend on them. The effect of a bankruptcy on these feeder industries could be very serious.
For example, should any of the auto companies be forced to file for bankruptcy, even a pre-packaged bankruptcy, suppliers who have sold parts or services to them on credit would get only a small part of the receivables; everything else would just become part of the unsecured obligations and they would likely get only pennies on the dollar, and it may take several years to get even that.
This may be sufficient to force many auto parts suppliers that are not in bankruptcy into bankruptcy. The core problem with the stock market right now is that stocks are trading as an asset class (a class no one wants), not as individual stocks.
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I talked this morning with a seasoned hedge fund trader specializing in trading financial stocks. He is up on the year, and is 100 percent in cash. 100 percent. Why? "The issue is the volatility and the fact that you can't do fundamental work right now that matters," he told me. "Until people start looking at stocks on a company level again, it is hard to be too invested."
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