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16 January 2009

Circuit City Files For Bankruptcy

Circuit City filed for Chapter 11 protection as it hire liquidators for begin selling its inventory. Officials said they will likely close most of its stores if they can salvage their online business.

There is still hope that Circuit City will come out of this if they can find a buyer in the next few days, but its more likely path is to continue operating its billion dollar online business and shut down most if not all of its stores.

Experts warn that this is a path for possibly thousands of other retail operators in 2009. After a dismal holiday season and consumers afraid to spend on anything other then needs, retailers are facing lower revenues and expenses that reach unsustainable ratios.

When retailers run short of cash, manufacturers don't want to sell goods to them on credit, because they are afraid the company will go out of business and they won't get paid. So, unless retailers can improve cash flows they could be facing bankruptcy.

How does this affect the stock market? It doesn't bode well for it, at least not the retail sector. The first analysts came out and said that if the Dow pierces the November lows it could be heading toward 6,000.

If we look at the lessons of the Great Depression, the stock market declined in waves for two years after the initial break. The sell offs made new lows and the bear market rallies were sharp and fast.

So, if the market does break to 6,000, look for a quick rally back. How high? I'd guess back to 8,000. From there it may trade sideways and work lower to a new low later in the year. If Obama's stimulus plan gets the economy back on track, then maybe 6,000 will be the low and stocks will be a very good value at that level.

Personally, I think that we are going to experience an event as bad as, if not worse than, the Great Depression. It may not be a depression, it may be hyperinflation with pockets of depressed areas, like housing. Either way, coming out of this unscathed seems unlikely.

Consider how much money the government is printing and borrowing and how it's going to get paid back. What if one or more of the giant corporations that the government loaned money to still fails. The money is gone forever. These companies are holding on by a thread. If fact, the government has loaned them more money than the company is worth if sold. In a panic, the government will likely throw even more money at it to keep it afloat and protect their investment, but will it work? As long as the confidence in the economy by the consumer and investors is gone, then the probability of success is low.

Still there are opportunities. Many people became millionaires during the Great Depression. Look for rally backs after big sell offs. Anxious investors who crave to put money to work in a rising market will pour money into stocks on the rally backs, but be careful to take profits when you have them.

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