Last night at 11:30pm, I went to the bank ATM and took out $200. It will cover food and gas for the next 3-4 days. Here is why:
CJ last night was doing her math homework. She asked for and received my help. The series of problems dealt with the breakeven point for a business, a bakery.
E = 824+3.25n
I = 8.20n
Find the break even point. I did in short order, first graphing the general idea of a solution, then the calculations. It took CJ about an hour to get all the points.
Let's take something a little more relevant, but no less appropriate: What is the GM break point, and what happens til then?
E = 1 trillion + 15,000n
I = 15,000n
First, you will notice in this fiction, there is no breakeven point. Worse, for any n, the result is a cash flow problem. GM gets around this issue by borrowing, a lot. If you were a bank, or any lender, how much would you lend such a business as this? If you were responsible, not a penny. Now, imagine owning GM stock. What would you think GM stock were worth.
If you are a little smart and thought about book value, you need to understand that you can only GET book value when things are sold...when the 5,000 biggest companies are in the same boat as GM...who can buy?
For the last year no one was sure how much mortgage backed securities were worth and that has lead to a credit crunch. Over the last month, more and more people are concerned there will be a recession (too late, already here), and therefore, they are wondering how much stocks are worth. GM has fallen below $5 a share. Sales are off 16% (trucks worse). Next year (probably already), GM will not have a breakeven point and their ability to borrow or sell stock has evaporated. I am not picking on GM, large chunks of the industrialized nations are in similar situations.
People have begun to wonder what companies are worth in the same way markets have wondered what MBS' were worth. The answer has been, "a lot less than they think".
Until people have an idea, there is no bottom.