The fate of GM

Magic Act: Conjuring Up a Profit at GM Like a magician who artfully controls his audience's attention, the government's General Motors investment is all about financial diversion. Here's the fancy trick: It won't be very hard for a revamped GM to succeed at making a buck. Its debts will be cut from about $73 billion to about $17 billion. Its labor costs will be reduced by as much as $2 billion a year. On Wednesday, GM got even more help. GMAC, which funds dealers and car buyers, began issuing $3.5 billion in three-year debt backed by the federal government. This should cost GMAC about 2.2% annually. Ford Motor Credit just priced a five-year bond. It's paying 8%. "New GM" will thus have a far easier road to turning a profit over the next 12 to 18 months. And you can bet that first profitable dollar will be cause for celebration in Washington and Detroit. But let's break the magician's credo and show how the trick works. Beneath the magician's table is a black box. It happens to be stuffed with about $65 billion in cash. That's taxpayer money. Some $20 billion of it was given to GM over the past few months, and another $30 billion is being used for the company's reorganization. About $15 billion of it goes to support GMAC, which the Obama administration says is essential to keeping GM alive. Like any lender, the government would be expected to demand this money be repaid. But that's not really happening here. Save for $8 billion in debt and another $2.1 billion in preferred stock, the money is being converted into an illiquid 60% stake in GM. Why didn't the government take more debt and less equity in GM? It worried that GM couldn't bear the interest expense. Explained another way: The new GM may "succeed" at getting to profitability, but only as much as taxpayers have absorbed tens of billions of losses in upfront equity. GM's Fritz HendersonIn President Obama's view, this is all part of the path to helping "this iconic company rise again and move toward profitability." Measuring it as an investment, it appears nearly impossible that taxpayers will get their $65 billion in equity back. The government's 60% stake backs into an implied GM market capitalization of about $70 billion. It will support another $26 billion in debt and preferred stock owed to the U.S. Treasury and the UAW. GM's best market cap was $60 billion in 1999, when it was cranking out high-margin SUVs. Even with huge amounts of debt and other liabilities, GM produced record annual revenue of $176 billion. Also, its pretax, preinterest profit margins were a stellar 12.6%. With the bankruptcy plan, GM will have shed four brands, its majority-ownership stake in GMAC and most of its European operations. Roughly speaking, this might put its annual revenue at about $100 billion. Assuming GM can return to Ebitda margins of 10% (they're currently negative) would mean GM's earnings power will have been cut by over half compared with a decade ago. What is that revenue stream worth? Through most of this decade, one of the world's best car companies, Toyota Motor, has been valued at about eight times its cash flow to enterprise value. Say an outside investor is willing to value GM's cash flows at six times. Roughly speaking, that makes GM's equity worth $33 billion, meaning taxpayers' stake would be worth only $20 billion, less than half their original $42 billion equity investment. And that doesn't include the uncertain fate of the $15 billion given to GMAC. Still, one day in 2010 or 2011, GM will declare itself profitable. The government's bailout plan will be hailed. But it will be an illusion created by taxpayers' black box of billions.

U.S. Treasury tells GM to prepare for bankruptcy

General Motors was instructed by the U.S. Treasury to be ready to file for bankruptcy protection no later than June 1, The New York Times reported, quoting unnamed sources who are familiar with the matter. The government wants to see GM go through the bankruptcy process as quickly as possible to minimize the likely damage to the company's sales and to its image among car buyers, according to the newspaper. The New York Times Bondholders reportedly readying to fight GM bankruptcy.
Investors who own General Motors bonds are working on legal arguments against a potential bankruptcy filing by the troubled automaker, The Wall Street Journal reported, quoting sources acquainted with the matter. The bondholders fear that having GM in bankruptcy would force them to accept huge losses on their investments, according to the newspaper. Reuters.
This is unbelievable. who would have thought that a bankruptcy would force one to accept losses?

GMAC vs GM - Big Difference‏

As the new administration makes a critical decision about the future of General Motors Corporation,. it is very important to remember that GMAC and General Motors Corporation are separate and distinct entities with different ownership. Cerberus Capital a very big hedge fund, owns half of GMAC, and General Motors owns the rest.

GMAC has been "saved". GMAC’s institutional bondholders took different bonds and gave equity to the company. This meet the government's requirements for capital levels at banks, allowing GMAC to become a bank. GMAC now has FDIC insured deposits and can issue government guaranteed bonds just like Morgan Stanley, Citicorp and Goldman. GMAC earned $1.8 billion in 2008 and has an “unqualified letter” from its accountants. This means they do not fear for it to continue to be a going concern.

General Motors Corporation, on the other hand, is in big trouble. Losing billions, with sales down over 50%, its accountants issued a letter that they believe it may not be able to continue as a "going concern".

This is why GMAC bonds are currently at a much higher in price than GM bonds. We believe that investors who can bear the reasonable risk should continue to hold GMAC bonds, with the view they are likely to pay interest and principal when due unless there are many more catastrophic changes in our economy. GMAC now has $20 billion in equity, and could most likely go into a “runoff” and still pay off its debt obligations. GMAC bonds are offered as low as 24.

GM bonds should be held for a completely different reason. These bonds are now so low-priced that by holding them through a possible bankruptcy or reorganization may return a higher result than selling them under current conditions. GM bonds are being bid as low as 12.

The balance sheet and income statement for GMAC from their 2008 10K is now available along with the unqualified opinion on GMAC of Deloitte & Touche LLP. Contact info@coreportfolio for information.

Market Reflections 3/5/2009

The day arrived that General Motors is talking of bankruptcy, sending money to safety in Thursday's session. The company's shares fell 15 percent to $1.86. Another routed blue chip, Citigroup, may get booted out of the Dow Jones industrial average because its share price is too low, ending today at $1.02 for another 10 percent plunge. Bank stocks in general were hit following a warning from Moody's. The GM and Moody's news, along with disappointment over lack of follow through to Chinese stimulus plans, sent the stock market tumbling once again, with the S&P 500 down 4.3 percent at 682.55.

Nearly 12 percent of U.S. homeowners with a mortgage are behind in their payments, data from the Mortgage Bankers Association. MBA said delinquency rates are now on the rise in states outside of California, Nevada or Florida. There's talk that the administration's homeowner relief program won't be much help for homeowners who are unemployed. Weekly jobless claims eased back from peak levels but are still reflecting severe contraction in the labor market. Tomorrow's monthly employment report looks to be one of the very worst on record.

The dollar firmed nearly 1 cent against the euro to end at $1.2558, gains on safe-haven buying. Money moved deeply into the front-end of the Treasury curve where the 3-month yield fell 6 basis points to 19 basis points. Gold jumped nearly $30 to $934.70. Oil, ending at $43.70 for April WTI, continues to hold in a tight range showing less and less reaction to stock market movements.

GM says it "may" go bankrupt. Which means it "will"

Thursday, February 26, 2009

GM's auditors are pouring through its financial statements to determine if it can continue as a "going concern." GM lost $9.6 billion in the fourth-quarter, so you can't blame them for worrying about bankruptcy. The current quarter is going to be another bomb.

According to CFO Ray Young, GM needs more federal aid (just $30 billion) to stay afloat. Even so, it's expected that GM will get the "going concern" notice. Most companies that receive one go bankrupt.

Market Reflections 2/17/2009

It was concern over Japan and Europe that sank the U.S. markets on Monday. A 3.3 percent fourth-quarter contraction in Japanese GDP deepened concern over the global recession as did talk of European bank failures. Treasury International Capital data showed renewed foreign investment but not Japanese investment in Treasuries, another result of contraction in Japan. Data here showed record lows for the Empire State manufacturing report, data suggesting that the recession for the manufacturing sector continues to deepen in the first quarter.

President Obama signed the latest stimulus bill into law and, along with the Treasury Secretary, will offer tomorrow a foreclosure prevention plan for the housing sector. Other data in the session included another rock bottom reading for the housing market report from the nation's homebuilders. Bank stocks were heavily sold in the session as were shares of GM which was due after the close to report its status to the government. The Dow industrials ended at their lows, down 3.8 percent to 7,552.

Money moved further into safety including once again into gold which ended about $30 higher at $970. The dollar gained more than 2 cents against the euro to $1.2605 while yields fell sharply in the Treasury market with the 10-year down 26 basis points to 2.63 percent. Oil fell further with the March contract going off the board at $34.95. April WTI ended 8% lower at $38.55.

Market Reflections 2/3/2009

Vehicle sales were extremely weak in January in news that pushes concern over auto makers to a new level of urgency. The results will raise talk of major bankruptcies.

The news on vehicles sales surprisingly did not affect the market, at least in Tuesday's session. Shares of GM and Ford were little changed. The Dow industrials posted a strong 1.8 percent gain. Many companies warning of trouble ahead, including Dow Chemical, Cummins Engine and homebuilder DR Horton, posted gains on the session.

What did give a boost to the market was a bounce in pending home sales which, together with last week's report on existing home sales, are raising talk that low mortgage rates and falling home prices are finally giving a boost to the housing sector. The pending home sales data along with the stock market's gain pulled money out of the Treasury market where yields jumped sharply, including an 18 basis point jump to 3.66 percent for the 30-year bond.

News of a labor agreement between refiners and refinery workers hit the wires at the market close. But the news was expected and isn't likely to move oil prices which have been little changed in recent sessions at just over $40. Gold ended little changed at just over $900. The dollar fell 1-1/2 cents against the euro to $1.3036.