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[TTHQ Staff]

Being Street Smart
Sy Harding

THE SUSPICIOUS KERKORIAN RALLY. May 6, 2005.

Just four weeks ago the market suffered its worst weekly decline in two years, which had it down to a five month low. The decline had the market short-term oversold, and due for at least a technical bounce off that oversold condition. But, it struggled for two more weeks, unable to get a bounce going, with the Dow gaining just 0.7% three weeks ago, and just 0.3% two weeks ago. This week it did somewhat better, the Dow closing up 1.5%.

The main spark was billionaire Kirk Kerkorian’s announcement on Wednesday of his bid to buy 28 million shares of General Motors stock from the company, at a premium of 15% above its market price. That drove GM shares up 18% for the day, and enticed investors into other stocks on the belief that if Kerkorian thinks GM is a bargain, maybe other stocks are also bargains. The result was a triple-digit gain in the Dow of 127 points on Wednesday.

Kerkorian’s announcement was puzzling. General Motors stock has been plunging for more than a year, losing 51% of its value in the process. It had just reported another sizable decline in auto sales the previous day. Why would Kerkorian announce a bid to buy stock at a 15% higher price than he could get it for by quietly accumulating shares in the open market? And the resulting pop-up in the stock price made the premium he was offering disappear, so why would he expect GM to accept the offer?

The announcement is perhaps less puzzling when you realize Kerkorian already owns more than 20 million GM shares, which have been plunging in value. The spike up in the stock price created by his announcement increased the value of those shares by 18%. It’s interesting to also recall Kerkorian’s bid for Chrysler stock in the early 1990s. Kerkorian already owned 9% of Chrysler’s outstanding stock when he teamed up with Lee Iacocca to announce they were making a bid for the remaining shares, offering a premium above the market price. Chrysler’s stock soared 24% that day. No deal was ever finalized. After much ongoing publicity regarding the bid, Chrysler’s directors rejected the idea.

Whether this bid to double his stake in troubled General Motors is serious, or will be accepted by GM’s board, cannot be known at this point. But the announcement turned out to have amazing timing, purely by coincidence I’m sure. The very next day, Thursday, Standard & Poor’s announced more bad news for GM, that it was cutting its credit rating on General Motors’ (and Ford’s) corporate bonds to ‘junk’ status. GM’s stock plunged almost 6% on that news, but thanks to the 18% spike-up created by the Kerkorian announcement the previous day, the stock was still up handsomely for the week. Wouldn’t it be great if we could all boost the price of our holdings without spending a dime. Just make an announcement and let investors do the buying that drives the price up.

Kerkorian was not the only one lucky enough to be very timely with a few words that kept investors confident about a stock at a critical time. Last week IBM announced that its board of directors had authorized its management to buy back up to $5 billion of its stock from time to time over the next year. Not that is must, but that it can. That gave a nice bounce to the stock, which cushioned it against the disappointment of the company’s announcement this week that it is going to lay off between 10,000 and 13,000 of its employees.

After the spike-up on Wednesday on the puzzling Kerkorian GM announcement, there was no follow through on Thursday, when Standard & Poor’s downgrade of General Motors’ (and Ford’s) debt to ‘junk status’ brought the market back down fractionally.

Then the final potential market influence of the week arrived Friday morning with the monthly jobs numbers for April. They came in much stronger than forecasts, with 274,000 new jobs created in the month. With the dismal employment picture being of great concern over the last few years, the monthly jobs numbers have been big market movers. When the numbers are strong the market has tended to take off immediately to the upside. When the numbers are weak, the market has tended to nosedive.

This time however, the market was not impressed with the strong numbers, and even moved to the downside for much of the day, before finally closing just about unchanged for the day.

The reason is probably that the market’s main worry is no longer the employment picture, but rising inflation and rising interest rates. And investors have been hoping the weaker economic numbers so far this year would cool off inflation and convince the Federal Reserve that it could stop raising interest rates. However, strong and inflationary economic numbers at this point could convince the Fed that it needs to be even more aggressive in raising rates.

So the market did not look on the strength in this jobs report as a positive, moving primarily sideways for the day on extremely light volume.

But it did end up with a gain for the week, of 1.5% for the Dow and 1.3% for the S&P 500, primarily due to the spike-up on the Kerkorian bid announcement on Wednesday.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.