CIT files for Chapter 11

Posted by Ray on November 1, 2009 under Main | Be the First to Comment

As if the market needs anymore bad news on top of last week the CIT reorganization should have a negative impact on the market. How much of an impact is the question as most already knew the filing was coming. On the bright side, CIT thinks bondholders will receive $.70 on the dollar of their old debt, but the equity will be wiped out.

The company expects to continue operations during bankruptcy proceedings and established loan facilities before the filing. This filing goes to show that the crisis may not be front and center in the market, but it still lingers in the background. Not only is this filing proof of the difficulties facing firms, but the news that Citi may have further write downs is also a reminder that liquidity and printing money will only temporarily fix the problems that face the banking system, but longer term the real issues are still there.

Whether or not this news will impact the market is unknown tonight as the premarket futures are thinly traded, but by tomorrow we will have a firmer grasp of the situation. After that, the ISM data will be the driver of the market unless the sellers come out in force in the morning again to clear their long positions, which is what I expect. I do not think the “buy on the dip” crowd exists because all the big up days in the market lacked volume while all the down days had tremendous volume. Not only that, but on a valuation basis we are just so overpriced it is not even funny.

How overpriced? That depends on who you listen to, but I hear ultra bears who say 150 on the S&P 500 while others feel 850-900 is fair value. I am in the camp of the 850-900 area in the short-term and longer term I can see us testing the lows again, but that is my opinion and is worth whatever my opinion is worth. The reason I feel we can test the lows is simple, all the growth is government spending which we have to pay for. Government spending is a drain on society and creates nothing and this is especially true when we were already running deficits.

We also have credit contracting with banks buying treasuries, not lending money, and climbing unemployment which means higher delinquencies for outstanding bank loans. All of this points to lower spending and lower earnings for businesses, but hey, let’s not let the facts get in the way of bullish spin on the data. The question is, will CIT lead to more problems or is this it? I am not sure if any one really knows, but after 9 bank failures on Friday, 115 for the year, and now this I think we are still in for a lot more bad news.