Welcome to CrushTheStreet.com’s Weekly Market Wrap Up!
We’ll begin in the U.S. equities sector, which registered a mixed performance on Thursday following three consecutive sessions in the green amongst large-cap indices. The S&P 500 closed up at 1,864 points, a 0.14 percent increase in valuation culminating a wave of momentum buying after the benchmark index dropped below its 50 day moving average for the first time since late January.
In stark contrast, the precious metals complex took a worrisome dive mid-week, with gold barely recovering the 1,300-dollar threshold as the flow of money abruptly shifted into risk-on assets following earlier enthusiasm into equities. Despite the setback, geo-political tensions are back in the limelight with Russian president Vladimir Putin hinting towards another invasion into Ukrainian territory under the pretext of ethnic protectionism. This suggests that safe-haven assets could be game on again, especially given palladium’s rise to 800-dollars, a level not seen since the commodities peak of 2011.
RadioShack Making Headlines
In the domestic sector, the much discussed recovery of RadioShack is making headlines, but for all the wrong reasons. Thursday’s close at $1.41 per share represented a single day drop of 16-and-a-half percent, and capped off six consecutive sessions in the red, an astonishing 33% loss of valuation since April 10th. To put this into greater historical perspective, RadioShack once used to trade for 75-dollars a share, commanding a market capitalization north of 15-billion. Taking into account the recent volatility, the electronics retailer can now be bought for 141 million and change, an insurmountable decline of 99%.
Perhaps “the Shack” is a microcosm of the underlying U.S. economy : like the retailer’s market cap, the currency of America the Great, the symbol of its honor, strength, and stability, has experienced a decline of valuation that is similar in scope. Just since the turn of the century, the greenback has lost more than a quarter of purchasing power, yet we convince ourselves that professional rhetoric combined with monetary dilution is enough to turn a sinking ship around.
In RadioShack’s case, a revamped endeavor to generate excitement into their brand kicked off with a well-received Superbowl commercial, but their efforts were merely exposed for applying lipstick on a pig. The reported catalyst for the sudden reversal in fortune is cited as a conflict within a credit agreement that limits store closures to 200 locations as opposed to the 1,100 stores that upper management originally planned for.
However, this issue is merely a symptom of the greater issue : debt leverage. As it stands, Radioshack has a debt-equity ratio of nearly 3, whereas embattled retailer JC Penney is about half that, at 1.58. What this means is that Radioshack executives have very little say in the trajectory of the company : as the old saying goes, he who holds the gold makes the rules.
Debt leverage of course is a huge, though somewhat underappreciated problem with the American economy. The constant barrage of policy statements and statistical manipulation is the federal government’s Superbowl ads, enticing the public and buying themselves time. The only problem is, all economies are subject to the free market. At some point, creditors could lose faith in the dollar, much like they lost faith with Radioshack’s feeble attempt at regaining an ever-eroding market share.
If and when that day occurs, the penalty for unrequited faith could be harsh and swift.