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Equities rally on GMAC lifeline

Wed, Dec 31 2008, 13:09 GMT
by Paul Brittain

Alaron

EQUITIES FUTURES RALLY MOST IN A WEEK AS TREASURY THROWS GMAC A $6 BILLION LIFELINE TO SUPPORT LENDING.

US equities decided to let the “Times Square Ball” drop early by staging their largest rally in nearly two weeks after the US government announced a new support plan for the struggling finance arm of General Motors (GMAC). The plan will consisted of a $5 billion direct purchase of GMAC and a $1 billion loan to General Motors to assist in the restructuring of the near frozen financing & banking arm of the beleaguered company. Share of GM and Ford rallied on the announcement as beliefs regarding the supposed “end of the road” regarding government support of the industry appear overdone. While the overall equity market rejoiced in todays session, sentiment could change quickly if the details of this restructuring of GMAC are not forthcoming within what the market perceives as a reasonable time period. Questions that will need to be answer for this positive sentiment to be built on will be; What will GMAC’s business model be? How much market capitalization will it be allowed to have? What companies and/or entities will have the responsibility of developing and overseeing the restructuring of GMAC (PIMCO, perhaps)? If these questions are not answered quickly and if they do not contain some dynamic answers, then the effect of this rally catalyst should fade rather quickly.

Rohm Haas, the chemical company whose takeover by Dow Chemical appeared in jeopardy Monday recovered by nearly 12 percent yesterday after closer examination of the agreement between the chemical giants determined that it may not be so easy for Dow to walk away from the merger. Dow Chemical had initially planned to use the cash from a major chemical project with the government of Kuwait. Over this past weekend, the deal broke down, sending equities lower. Todays recovery appears to be driven by a winning out of feelings of security as the financial support of the government and the falling of the VIX (volatility index) to a three month low was enough to give the overall market a reason to shout an early “Happy New Year!-What took you so long?” The positive sentiment remained strong enough to overcome data regarding US consumer confidence, which fell to its worst level in 41 years, home prices which fell nearly 20% year over year, and a report that the health of Apple Computers chairman Steve Jobs may be taking a turn for the worst. Jobs is a cancer survivor and recent video has brought up new questions regarding his health status. With trading volume relatively low, it would appear that the market chooses to focus on certain elements and run with that sentiment for the trading session.

Technically, the market remains rangebound. Breakouts above or below the current channel of 8200 to 8600 in the Dow are unlikely to hold due to lowered trading volume. Technicals that can measure range bound markets, such as RSI, might be effective to employ in this type of market. This rangebound market will likely remain until the second week of January when initial capital that needs to be put to work enters the market place. This commitment of yield hungry resources could offer the opportunity for the Dow to breakout above the 8800 level, resetting the support ranges higher and perhaps confirming at least a near term bottom for the market. Upside potential could be determined by market seeking to end year above key resistance levels (8800 in Dow, 900 in S&P)

March Dow futures settled at 8640, up 152. S&P futures settled at 888.20, up 17.50. NASDAQ

Futures settled at 1206, up 30.50.

Published on  Wed, Dec 31 2008, 13:11 GMT