General Motors Shareholders Wiped Out!!!

Well, its official, General Motors shareholders have been almost totally wiped out. Makes them wish that the company could have gone into bankruptcy instead. As bad as the news is, unfortunately for the stock markets this is very good news. Markets like to see total restructuring, markets like to see inefficient companies being completely broken down and sold down the river. Markets like to see lots of employees losing their jobs and benefits. Markets have no conscience, no soul, its like the devil's game. I have one bank stock and one auto stock in my Marketocracy portfolio, and am still very happy with them, Bank of America and Ford.

Freund Investing :

It’s official; General Motors common shares are in their final death throes.

Yesterday, General Motors indicated its intention to seek a 1-for-100 reverse split on its common stock. If you’re wondering what a reverse split is, Investopedia has a fairly accurate definition and example:

A reduction in the number of a corporation’s shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.

For example, a 1-for-2 reverse split means you get half as many shares, but at twice the price. It’s usually a bad sign if a company is forced to reverse split - firms do it to make their stock look more valuable when, in fact, nothing has changed. A company may also do a reverse split to avoid being delisted.

So what does this mean for GM shareholders? Well, if you own 100 shares at today’s closing price of $1.85, and if the reverse split were to happen tomorrow, your 100 shares would now be shrunken down to 1 share worth $185. Far more often than not, especially for companies facing serious trouble (as GM is), the $185 share price post-reverse split will drop fast and hard.

As far as I’m concerned, if you’re invested in GM, get out now. At $1.85 per share, the price is insanely overvalued. If you want American car manufacturing exposure, choose Ford. They aren’t treating their shareholders like dirt, and they actually have a viable business model without the support of the government.

Karl Denninger:

You didn't / don't hold General Motors stock, do you? If so, I hope you sell today, assuming it opens over 2 cents/share.

Seriously. No really, I'm not kidding.

It was disclosed that the GM "restructuring" would:

• Increase the number of authorized shares to 62 billion (!)
• Reduce the par value to one cent.
• Effect a 100:1 reverse split for the existing shareholders.

The effect of this as disclosed would be that the existing common shareholders would have their holdings reduced in value to one percent of their current market value.

So as of 4:00 Eastern Tuesday, your $1.85 stock price would be.... drum roll please..... $0.0185 per share.

There is a lot of other material in this filing related to the restructuring of the debt. The exchange offers appear to have gone from 2/3rds reduction in the outstanding debt to a ninety percent reduction, effectively paying debtholders no more than a dime on the dollar.

Oh, and it gets better. If the "negotiation" is as was done with Chrysler, saying "no" won't do you a damn bit of good - the government will, I would assume, threaten you and then file an involuntary Chapter 11 and attempt to cram this down your throat.

The UAW does not get hit for 90%. The VEBA will get 50% in cash and the other half in stock - newly issued stock - which, of course, is part of the 99% you won't own when this "restructuring" is completed if you are a common stock holder as of last night. Their effective hit? Zero, assuming the share price does not collapse (again) when this is all said and done.

Oh, and if all this is not completed by agreement before June 1st? The filing makes clear: They're going to see the judge.

For those of you who were trapped in this position since GM was in the $30s and foolishly thought your stock had value, you were wrong. You're done; God (in the form of The Administration) has spoken and for you, the game is over.

Expect the price of the stock to collapse this morning. You did sell yesterday, didn't you?

PS: You think there's a thing called "senior debt" in this country any more? Uh, no. There is not. The Capital Structure no longer has ANY legal meaning. Guess what this does to the banks in particular (anyone with government "rescues") along with the potential for ANY firm in the U.S.? Yep.

p/s photos: Nozomi Sasaki

What Should Happen & What Is Likely To Happen

General Motors

What Should Happen - Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.

What Is Likely To Happen - Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy. The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.

Citigroup

What Should Happen - JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.

What Is Likely To Happen - The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days
a) GMAC running into deep trouble.
b) GE Capital running into deep trouble.
c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.
d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.
e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.


p/s photos: Li Bing Bing

The Next Crisis Unfolding - Auto

On 15th October 2008, I posted on the upcoming demise of the US auto sector:


Watch for the auto sector - this is where the pain will shift to. Big companies will fail or be merged and job losses will be massive - the auto sector consolidation has been brought forward by the events over the last couple of weeks. The auto sector combustion will cause the media to focus away from the carnage on Wall Street to carnage on Main Street. Expect markets to be wobbled by this. Keep cash at least 50%, trade out on weak signs - the worst may be over, but the general conditions still shifty. Jobs is where we should really look at. We can expect more job losses in the coming weeks and even months. I forsee some industries will see MASSIVE failure - the first to go will be the US auto makers.... pension problems, no credit or loans for people to buy cars, consumers delaying changing of cars now, problems with unions... very difficult to refinance their lines of credit moving forward... watch for at least two of them being merged or absorbed by a foreign competitor at cut throat prices. The auto industry are big employers, and that will hurt employment, and drag property prices weakness in those states where auto industry is strong.
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General Motors Corp. stock fell to its lowest level since 1946 as concern intensified that the auto maker could run out of cash and be forced to file for bankruptcy protection. The stock's decline came as several analysts issued dire reports about GM and the company acknowledged in a government filing it could be at risk of violating the terms of some of its debt if it doesn't steady its deteriorating finances by year's end.

Should governments bail out GM? If GM is allowed to fail, what are the repercussions? How far does it spread in terms of employment and loss of business activity? How far do GM bonds reach, and what are implications of default? The size of bonds outstanding for the entire US auto industry comes to about $250 billion. The good news is that most of these bonds are already at very junk status, most trading at less than 25 cents to the dollar. The loss to bondholders have already been triggered way way before today. Hence if any of them were to go bankrupt, it would not have strong repercussions on the actual bond holders. The bad news is that over the past few years, there is the invention of Credit Default Swaps, which has been the bane of AIG's demise. When actual companies do fail, these CDS clicks into action. How many holders of CDS are actually able to pony up the funds to pay back these bond holders? Thats why they trade at just a fraction of their face value. The market does not think that the CDS will actually be able to come up with the cash to pay back the face value of the bond (which is what CDS is designed to do). The worse news is that if say one-third of these bonds crumbles due to bankruptcy, the actual $100 billion losses is manageable, but many of these holders (think AIG) will also be holding many other CDS - a payout to a GM bankruptcy will have cascading effects on the "validity" and "viability" of the other CDS these people are holding.

This might make CDS totally unworkable and will collapse. Hence many more insurance firms will have to file for bankruptcy as well to avoid paying many of these CDS. Thats also why AIG keeps needing more and more capital infusion. Thats also partly why the government needed to bailout AIG, and the likes, in order for a properly functioning credit market to continue. Is the $125 billion into AIG sufficient?

Hence in all likelihood, the government is UNLIKELY to risk having GM go into bankruptcy. You DO NOT WANT TO STRESS TEST the CDS market to see if it would hold up. It might also unravel all the hard work done so far to keep AIG afloat. If the government pump money into GM, how much money is required and what is the direct purpose? By purpose, what will the money be used for? Will the initial injection be enough? Can any amount of money make the company a strong, viable competitor again? Will other national governments pump money into their car companies too, further increasing competition? If you look at how the Big 3 auto companies are operating, they are not financially viable over the long term.

I suspect Obama will not allow GM to fail so early in his Presidency as its not just the car maker, its the supporting sub industries and flow on job losses effect which is not what he would want at such a critical time.

The chart above shows average hourly compensation for the Big Three ($73.20) and Toyota ($48.00), compared to average hourly compensation for Management and Professional Workers ($47.57), Manufacturing/Goods Producing ($31.59) and all workers ($28.48). The auto industry in the US has long been crippled by the unions. We can argue till the cows come home but unions can kill an entire industry. They now have pensions that the company cannot fund, which in turn put unbearable claims on the company's balance sheet. At the end of the day, unless you make a much much better car, you cannot justify operating at cost per hour that is 70% higher than your competitors. The $73 and hour includes legacy costs. Union member don't make anywhere near that much money in reality. That number is at least $15-$20 high and includes benefits like health care. Well, you know what, no matter how you cut it, its still $73 and counting.

I think Obama will inject money into GM in exchange for control, and then institute a merger with maybe a foreign car maker - its pointless to merge an American car maker with another, it just compounds the problem. A foreign car maker will come in but with huge concessions and with a union that is willing to make huge sacrifices. Unions will have to be controlled and ask to forsake a lot in order to keep the company afloat. Job losses will be severe but it will be a lot less than allowing GM to fail. Allowing GM to fail is not an option owing to the flow on effects on the CDS and hence the entire bond market and credit viability.

The danger for financial markets is IF GM is allowed to fail, then you could get another freeze up in credit and sent all markets much lower. You could see the 7,000 being tested. If GM is being bailout, its still not blue skies. Things are still fluid and I see huge volatility in the coming weeks til end of the year at least.

p/s photos: Iwa Moto