Downgrades and Oil Price Surge Hammer Stocks

Posted by Patrick O'Connor on 6/26/08 12:19 pm

Multiple downgrades from Goldman Sachs in the automobile and brokerage sectors and another run-up in oil prices sank stocks today to new 2008 lows.

Goldman Sachs analysts cut earnings estimates for Citigroup and Merrill Lynch, downgraded U.S. brokerages to “neutral” from “attractive,” and cut its rating on General Motors to “sell.”

As a result, Citigroup shares traded down to 1998 levels, Merrill Lynch plumbed an area not seen since 2002, and GM cratered to prices not visited since 1955!  See chart.

General Motors ad from 1955

Meanwhile, comments from OPEC’s president and Libya’s national oil company pushed the price of crude above $140 for the first time ever.  OPEC’s president said he expects to see oil trade in the $150-$170 range this summer, and the head of Libya’s national oil company said it may cut production because oil supplies are ample.

The potent brew of downgrades and higher oil prices forced the Dow below 11,500 for the first time since September 2006.  See chart.

Unfortunately, the weakness accelerated into the close today, and the overall trading volume was not excessive.  Therefore, the market’s decline could deepen near-term.  We’ll need to see signs of capitulation (high volume on the downside, then a massive intra-day reversal) before we call a bottom.

In times like these, investors tend to sell everything, even their best performing stocks.  As such, be ready for buying opportunities.

One of our top performing products this year has been our Power Dividend portfolio.  It’s a total-return strategy that could have an advantage over typical long-only strategies, due to the opportunity created by Congress when it lowered the federal tax rate on dividends to 15%.  Ask your advisor if Power Dividend will blend well with your current portfolio.  If you don’t have an advisor, feel free to contact us.

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Posted by ReadyEver on 6/26/08 2:25 pm

Working for Honda I get to see the other side of the car swing. I started in GM and it’s been a longtime coming.. I kindah feel bad for them.  It amazes me though that they wait so long to react to market conditions.  In 2002 when gas was in the low $1.00 area GM suffered due to quality and their sales dipped due to gas going up to $1.70 or so.  When you look back at that number I bet everyone who thought that was high is shaking their head in amazement that now it’s 4.00. Any ways that was a 70% upside to price which if caught unprepared can hurt. Back then they should have reacted yet they kept procrastinating and creating nicer big vehicles while there small cars continued to be an after thought. Of course they decided to make a great move. Let’s buy Hummer and make it mass market.  I just hope they survive this and create better vehicles.  I’m a car lover and most of my favorite cars are still American muscle cars.  Ps. Great Blog Guy, Great Blog

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