Fitch Cuts GM, GMAC To "Junk" Status
As the markets wait for the Fed minutes to be released, Fitch Ratings has lowered the bonds of GM and mortgage giant GMAC to junk status. "Fitch Ratings May 24, 2005: Fitch Ratings has downgraded the senior unsecured ratings of General Motors, GMAC and the majority of affiliated entities."
16 Comments:
Don't (at least some) Mutual Funds have a fiduciary responsibility to divest themselves of junk bonds?
Is this taking place in re Ford, GM and the like?
My ticker shows GM at 31.75 presently. How is this not affecting GMs/Fords/etc. share prices?
It's old news. GM has been junk for some time now.
S & P already downgraded them a couple months ago to junk bond status. Not much info here.
This is news. Previously there was some hope that they could stay in the investment grade indexes because only 1 of the ratings agencies had them at junk, and the new rules allowed bonds rated investment grade by 2 of the 3 to stay in the index. Now 2 of the 3 rate them junk and that hope is gone.
GM is down ~2% for the day with the biggest move happening right after the downgrade.
The big news is that with the Fitch downgrade, GM bonds will be removed from the investment grade bond indices and more funds will be forces to offload the bonds into the high yield market.
Further debt issuance will be more and more expensive.
Anon 11:25
Having to sell the bonds on the secondary market doesn't really affect the stock price - only the bond price.
**
Bond guru Brian Reynolds says today that this is indeed big news, perhaps not entirely unexpected, but surprising timing. He believes this will create a great deal of shuffling over the next month that will likely cause a lot of commotion in the stock market. Most of the bond indexers have to sell by month end. Given how late in the month this announcement came, that places a lot of sell pressure by 6/30.
If you are playing the market, don't get caught up in the current rally. June will be volatile to say the least. But it could open up a July/Aug rally after the commotion of June is over.
stock jock:
Did you mean by the end of THIS month (May - 05/31) or did you mean by end of the quarter (June - 06/30)?
Stock Jock:
Is the end of june when hedge funds can be dumped?
(Did you mean by the end of THIS month (May - 05/31) or did you mean by end of the quarter (June - 06/30)?
Is the end of june when hedge funds can be dumped?)
Given that this announcement was so close to May month end, Reynolds feels that most of the selling will be accomplished by 6/30, not 5/31---although we could see weakness over the next few days too.
Everyone in the market knows this selling is forthcoming. But when? The market loves to headfake. That's why you saw the markets actually go up today after the announcement. The big question is really how much selling we will see. Lots of the bond indexers have probably sold off a good deal in anticipation of this----that's why we saw such volatility in the stock market in April. But now we have a second round coming.
As far as hedge funds go, most of them now have a quarterly escape clause. It used to be annual. But there is too much competition. So there could be a lot of hedge fund selling in June as well as funds liquidate positions to meet the cash calls in July. It is unlikely they will wait until the last week of June to do this.
But remember, there are a lot of short funds as well as long funds---not to mention the long/short market-neutral funds. So when I say "selling", it could also mean "buying back short positions." So I am looking for a lot of volatility in June where we will see big up days followed by big down days depending on who is liquidating and when. Whether this means the month overall is down, flat or slightly up, it's hard to say.
I still believe that whatever transpires in June will be over by early July and will open up the opportunity for a rally in the summer. I'm not so bullish about the fall.
This may take some clicking to find, but if you looking at the following link, clicking on daily and then on the monthly, you can see that a lot of GMAC and GM debt disappeared from the bottom of the holdings of the iShares corporate bond fund which tracks the overall bond market. One would have to believe that the sell off for certain bond funds would be even greater.
http://www.ishares.com/fund_info/detail.jhtml;jsessionid=M1BSYT0SVH3X0RJUGQOBBGSFGRSEWD50?symbol=LQD
"Having to sell the bonds on the secondary market doesn't really affect the stock price - only the bond price."
I wish I could say that I agree with that. Anything that raises GM's cost of funding darn well better affect their stock price. Think of it as a warning shot from the bond market to the stock market on the possibility of corporate bankruptcy. At least bond holders MIGHT recover a fraction of their investment. Equity holders are screwed.
Yes and with the new employee rebates, these pieces of worthless papers will become SUPER SUPER JUNK BONDS. Way to go Motown !
FORD PROFIT SLIDES 19% on NORTH AMERICAN WOES (Globe and Mail july 20, 2005) And that is just the beginning yet. You ain't seen nothin yet baby. And that's the truth.
And GM's profit slides 16 %. And it is just the beginning folks.
Sorry no earnings for GM ! 1,2 billion loss ! Next step BANKRUPTCY and Chapter 11.
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