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Do you believe in Magic?

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"You couldn't even give GM the rest of the week to rally?!"

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Minyan Mail Bag:

Presumably in response to my whining about the S&P downgrades of General Motors (GM) and Ford (F), Minyan T ("Minty"... get it?) writes:

I think the timing of the GM downgrade made perfect sense. On Tuesday, when the car sales figures came out and GM's truck sales were down 17% year over year, I was shocked that the stock did not completely fall apart. I was expecting a downgrade that day. GM loses money on the sale of every car. Truck sales is where they make (or used to make) their money. Down 17 percent is much worse than the first quarter and they lost $1.50 in the first quarter. What is the second quarter going to look like? The S&P analyst cited truck sales as the catalyst. Yes, GM should have been downgraded a long time ago but there was a reason to downgrade now.

MinT,

It's a fair comment that the 17% decline in SUV sales was as good a catalyst as any for yesterday's downgrade. What made the strum and drang resulting from S&P's move so annoying to me, beyond that I would have given three toes to have them do it last year when I was hugely short GM, as there was really no associated effort to support that catalyst. There was no financial model that triggered with the sales decline of 17%. No specific financial projections became out of reach, due to the 17% decline for one month.

SUV sales have been eroding for some time. The incentives required to keep that erosion somewhat in check have been rising since their post 9-11 creation. In fact, the SUV sales decline was one of many factors cited by S&P and the only factor that even resembled a "catalyst". Even with that, given the non-17% specific downgrade of Ford (F) as well and the lack of any model from S&P, it becomes quickly obvious that there was some non-financial exogenous "force" that inspired the call.

Suffice it to say that Standard & Poors debt rating is important. It matters quite a bit, not just to markets but to the actual running of the companies themselves. It would be nice to think there was some sort of rigor being practiced, rigor that we could all see being practiced much in the way you could watch pizza being made at Shakey's, in the production of these credit ratings.

There isn't. From all available evidence, there's a guy with a system. His system could be influenced by a trick knee, astrology, traffic or the annoying woman in office who says "looks like someone has a case of the Monday's". Hey, I saw S&P quoted as being concerned about Detroit's loss of market share which, last I checked, would be a good thing for companies losing money on every unit sold. At least in the eyes of a credit agency anyway. Pretty much anything could have been the last straw that pushed GM and Ford to junk.

All markets are ultimately reliant on trust. The logic on the downgrade, and the timing of same, is important specifically because of Kerkorian and the related frenzy. That doesn't go away as easily as saying "Kerkorian had no effect". There were too many people who stood to win and lose big on a downgrade at the exact time that the largest stock squeeze in years is taking place in the stocks.

Claiming that the biggest ramp in GM's stock in memory was a non-factor in making an intra-day downgrade the next day makes S&P look either clueless (thus making the timing magical) or disingenuous. Those are a couple rough choices and there isn't a third.

No positions in stocks mentioned.

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