GM news: good, bad, ugly?

[armor99]

I could see an even more speculative mid term play if you assume that the 80% cut in stock value is already priced in, and that the deal with bondholders will go through AND the economy will recover such that GM starts making a profit.
Then you have the bet the stock will increase in value enough to cover your risk, quickly sell it before gas goes up north of $3/gallon or GM's internal weaknesses rear their ugly heads and the company goes to chapter 11 anyways.

Far too speculative for me, I'd rather put it all on 00 on a roulette wheel.

But I thought I might have missed something?

And this is an excellent point! What investor in their right mind would invest in GM or ANY auto manufaturer at this time? As an investor I would want to know facts and figures of the company, see trend data, consider what consumers might do, etc. But when the govt starts getting involved, it becomes a game of which company has the most push/pull with the govt. And that is something that there is no way to know, and can change daily.

In my opinion, this is preciesly why the act of the govt "touching" a private business will automatically "taint" it. I just do not see a way around that one...

 

[ziggy29]

But when the govt starts getting involved, it becomes a game of which company has the most push/pull with the govt. And that is something that there is no way to know, and can change daily.

Yep. It becomes a game of Calvinball on a very large scale.

Markets hate uncertainty, but when you have a government that can seemingly change the usual outcomes of capitalism (i.e. bad businesses fail to the benefit of their competition) and distort free enterprise almost at will, you inject massive amounts of it into investor psyche.

 

[samclem]

Yep. It becomes a game of Calvinball on a very large scale.

Markets hate uncertainty, but when you have a government that can seemingly change the usual outcomes of capitalism (i.e. bad businesses fail to the benefit of their competition) and distort free enterprise almost at will, you inject massive amounts of it into investor psyche.

The distortions extend to the retail end, too. Right now I could use a new small car, and I'm considering several. But, the Administration has suggested that there may be new incentives coming for buyers of small cars. I'd be a fool to buy a car today until I learn more about that. All those dealers spending all that money on advertisements, but there's no way I'm buying now.

Then, when the incentives are announced, the affected cars will likely be priced higher as we've seen many times--e.g. the hybrid tax credit. Prices went up to nearly match the rebate, and went down when the rebate ended. This is to be expected: In an efficient marketplace, such a car s worth XX bet dollars to a buyer, and the prices adjust to that. It was a government (taxpayer) gift car companies, very little benefit to buyers.

These two ideas are in conflict--if I'm sure the price of the car will simply go up to match the rebate, then it would make sense to buy the car right now. But, maybe the market will be soft and the rebate will end up in my pocket after all. Uncertainty== a reason for the customer to put off buying==the ultimate enemy of the salesman=no sale for now. Overall, the car dealers would be more likely to get my money this month if the government were not involved. I suspect my case is not unique.

 

[calmloki]

So doesn't it come down to: one never knows what's going to happen or what the government is going to do. Which makes for uncertainty, which makes investors wary and depresses stock prices, which makes for buying opportunities. Which is why we bought the hated GM and BofA. And we aren't looking good now, but down the road? Might pan out. Roulette odds can be calculated and aren't too good, odds on companies that can be affected by governmental action (aren't they all at risk) are unknown, but i bet on being fed misinformation or misdirection.

 

[Zathras]

In many cases, yes. But in terms of GM the equation really comes down to:
If GM goes bankrupt, common stock holders loose the most.
If GM cuts a deal with bondholders that will allow them to avoid bankruptcy the current common stock holders loose.
The only trading in GM stock now is, in my estimation, people hoping to make a quick trade in and out as the volitility is HUGE so you can make a ton of money if you want to run the risks (It has fluctuated almost 100% in just the last two weeks).

 

[Gone4Good]

I hardly see how a bankruptcy and possible corporate liquidation results in less uncertainty for potential customers than what's happening now.

 

[ERD50]

I hardly see how a bankruptcy and possible corporate liquidation results in less uncertainty for potential customers than what's happening now.

Well, I'm not a lawyer, but my impression is that bankruptcy has some history and some defined procedures. So there is *some* certainty about how things could proceed.

OTOH, my impression of what is going on with bailouts and Congress making the rules on the fly is like the Calvinball game that ziggy mentioned.

So I think a case can be made that bankruptcy *would* provide more certainty that the current Ad Hoc process.

-ERD50

 

[Gone4Good]

So I think a case can be made that bankruptcy *would* provide more certainty that the current Ad Hoc process.

-ERD50

From the customer's perspective?

The chief risk faced by today's customer is that there won't be a company to replace worn out parts a couple years down the road. That's a very distinct possibility had GM been allowed to file for bankruptcy with zero government intervention. That doesn't seem to be too much of a risk now.

On the other hand, the "big" uncertainty highlighted above about whether a new tax credit will be rolled out is akin to the risk any consumer takes that they'll miss an impending promotion or sale. Kind of run-of-the-mill uncertainty.

So I still don't understand how the customer is faced with greater uncertainty.

 

[ERD50]

From the customer's perspective?

The chief risk faced by today's customer is that there won't be a company to replace worn out parts a couple years down the road. That's a very distinct possibility had GM been allowed to file for bankruptcy with zero government intervention. That doesn't seem to be too much of a risk now.

On the other hand, the "big" uncertainty highlighted above about whether a new tax credit will be rolled out is akin to the risk any consumer takes that they'll miss an impending promotion or sale. Kind of run-of-the-mill uncertainty.

So I still don't understand how the customer is faced with greater uncertainty.

?

Bankruptcy *is* government intervention, isn't it? But it is the courts, not Congress.

What I'm saying is, we have a history with court ryun bankruptcies - so some amount of certainty comes with that. We have very little history of Congress jumping in and trying to run companies, so much more uncertainty.

Neither removes uncertainty, I just think a case can be made that COngress is more uncertain than a court.

As far as warranty issues - that is still a concern, because the govt actions may fail, and GM won't be around to service the cars anyway. It is one concern I have over a GM purchase at this time.

Also, there is no reason that a BK court could not deal with the issue. They would need to have GM set aside some money to cover warranty costs that would be performed by certified shops. Probably cost much less than the $ they have thrown at them so far. How much do the bond holders still have?

-ERD50

 

[armor99]

From the customer's perspective?

The chief risk faced by today's customer is that there won't be a company to replace worn out parts a couple years down the road. That's a very distinct possibility had GM been allowed to file for bankruptcy with zero government intervention. That doesn't seem to be too much of a risk now.

On the other hand, the "big" uncertainty highlighted above about whether a new tax credit will be rolled out is akin to the risk any consumer takes that they'll miss an impending promotion or sale. Kind of run-of-the-mill uncertainty.

So I still don't understand how the customer is faced with greater uncertainty.

Actually you ask a very good question. If they go bankrupt then no more parts will be made right? Well... I am not so sure about that. Free markets (if any survive after this) follow a fairly simple set of rules. And those rules are if there is a high enough demand for a product, then chances are, a business will be created to feel that need. And not the other way around.

If there is a huge market for car parts, do you really think that no company will come forward to fill it? As of today there are thousands if not millions of aftermarket replacement parts for Ford, GM, Chrysler, etc. And not one of them is made by the OEM. If the big three were to go bankrupt, I would imagine it would be a great time to start a relpacement parts business. And I would wager you that is EXACTLY what would happen in such an eventuality.

Oh... and by the way, all of those folks that get laid off when the big three go under... well now... there is a new thriving industry just waiting to employ folks with knowlege of those car parts.

I think a lot of this "the sky is going to fall mentality" is being fabricated to some extend by the govt. Why? Because only when the populous is frightened enough, can the govt start taking more control, something they have been steadily doing for years.

 

[Gone4Good]

What I'm saying is, we have a history with court ryun bankruptcies - so some amount of certainty comes with that.

Not for the customer.

And, in this instance, not even for the investor. Not all uncertainty is bad. The certainty of seeing your investment go to zero (as for the equity and possibly the unsecured bond holders of GM in bankruptcy) is not better than the "uncertainty" of another outcome. Which is why you'll see bondholders continue to try to avert the "certainty" of bankruptcy by negotiating with the government.

 

[ziggy29]

And, in this instance, not even for the investor. Not all uncertainty is bad. The certainty of seeing your investment go to zero (as for the equity and possibly the unsecured bond holders of GM in bankruptcy) is not better than the "uncertainty" of another outcome. Which is why you'll see bondholders continue to try to avert the "certainty" of bankruptcy by negotiating with the government.

Hey, if the government can manage to get GM management, bondholders and the UAW together and lock them in a room with no climate control or plumbing, and get them to all sign off on a plan that avoids bankruptcy, rolls back some unaffordable legacy benefits and swaps at least some of the debt for equity by the bondholders, in a way that looks like it would allow enough breathing room for GM to be viable, I'd be all for it.

Everyone knows something has to give in order to avoid bankruptcy, but all the stakeholders expect everyone else to sacrifice, not themselves. That's sort of a microcosm of the government spending problem we have, too. I want spending cut to avert fiscal disaster -- but cut THEIR spending, not mine...

 

[Gone4Good]

Everyone knows something has to give in order to avoid bankruptcy, but all the stakeholders expect everyone else to sacrifice, not themselves.

The really interesting story may be Chrysler. The WSJ reported today that the secured bank lenders (lead by JPM) were not willing to budge, figuring they'd get treated better in bankruptcy than under the current negotiated deal. This creates all kinds of potential conflicts between the banks and the government. It will be interesting, and telling, to see how this one plays out.

 

[ERD50]

re: uncertainty and bankruptcy versus Congressional bailouts:

Not for the customer.

And, in this instance, not even for the investor.

Sorry, I'm just not following you. I gave a reason why there is less uncertainty with BK court (history), and all you are saying is "no there isn't".

And I don't give two hoots about the investors - they took their risk and if GM goes to zero, that's it. That's how investing in individual stocks works, and I don't want the govt messing with it. The "riskiness" of GM stock has been talked about for years now.

Everyone knows something has to give in order to avoid bankruptcy, but all the stakeholders expect everyone else to sacrifice, not themselves...

And isn't that exactly how BK works, and why we should let it do it's thing? The court *tells* everyone what they will get, based on some procedures.

It sure sounds to me like Congress does not want to relinquish their control to a BK court, they want to play Car Company CEO, just like they play Automotive Engineer.

-ERD50

 

[ziggy29]

And isn't that exactly how BK works, and why we should let it do it's thing? The court *tells* everyone what they will get, based on some procedures.

It sure sounds to me like Congress does not want to relinquish their control to a BK court, they want to play Car Company CEO, just like they play Automotive Engineer.

As long as Congress and the "car czars" don't FORCE something on all the GM stakeholders, I have no problems with facilitating discussions to see if there can be some "shared sacrifice" agreement among them. Other than that, you take your chances with the bankruptcy court whether you're a stockholder, a bondholder or the unions. If you demand a loaf today, you can either all agree to accept half a loaf or risk getting a lot less than half a loaf in court.

I would agree with the administration's current position (at least as stated in public) that throwing more money at a business that's fundamentally bankrupt without significant changes to its cost structure is a bad idea. And if the AIG bonus backlash didn't do anything else (other than stupid Congressional grandstanding based on populist anger), at least it seems to be making government more gun shy about just handing over more of our money without preconditions.

 

[Gone4Good]

Sorry, I'm just not following you. I gave a reason why there is less uncertainty with BK court (history), and all you are saying is "no there isn't".

Chief risk for customer is complete liquidation of the company (chapter 7)

Chapter 7 is highly likely in bankruptcy

Chapter 7 (or similar) very unlikely with government intervention.

The same argument as above.

 

[ERD50]

Chief risk for customer is complete liquidation of the company (chapter 7)

Chapter 7 is highly likely in bankruptcy

Chapter 7 (or similar) very unlikely with government intervention.

The same argument as above.

Why does it have to be Chapter 7? I was thinking Chapter 11.

wiki (emph mine):

• Chapter 7: basic liquidation for individuals and businesses;

• Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets;

It just seems to me that Congress is trying to do Chapter 11 on their own. My point all along has been that we have a system for doing that, it is called Bankruptcy Court, and I think we ought to use it.

U.S. Courts | Bankruptcy Courts


-ERD50

 

[samclem]

As long as Congress and the "car czars" don't FORCE something on all the GM stakeholders, I have no problems with facilitating discussions to see if there can be some "shared sacrifice" agreement among them.

I wonder if there's any hope of a non-coercive environment during these discussions. The government holds all the cards, and is hoping to force a deal. Lots of levers in the hands of the exec branch and others, and everyone knows the government can make their lives miserable if they don't knuckle under. Tax treatment, tax investigations, future government funding assistance (now that they are in for a penny, they are in for a pound on this), where the Justice department will come down on various future legal actions,etc.

The banks and TARP funding provide a good example. I heard a very interesting interview on NPR yesterday with an official of a NY regional bank. They are planning to repay the TARP funds as soon as possible. They never needed the money but (paraphrasing) "when your regulator calls and says it would be good if you participate in this program, it's pretty clear what you should do." In the beginning, this guy said the TARP was portrayed as a program for the strong banks, one that would alolw them to make loans and also acquire the weaker banks, thus making the whole system more sound. As time has passed, the recipients of TARP funds are being vilified and portrayed as weak banks at the government trough squandering money. He no longer wants his bank to be painted with this brush, and wants the flexibility to make deals, do business, advertise, and pay people what they are worth. So, they are giving the money back as soon as possible. They never needed it, but felt compelled due to government pressure. How much more pressure/coercion will there be when the GM management, GM bondholders, GM stock holders, and the UAW meet?

George Will had a column full of good observations on the GM situation today. In part (individual names redacted to avoid the appearance of a partisan political post. This is about government policy):

" [A high US government official] displayed reality-denying virtuosity last week when, announcing the cashiering of General Motors' CEO, and naming his replacement, and as the government was prompting selection of a new majority of GM's board of directors, and as the government announced the next deadline for GM to submit a more satisfactory viability plan than it submitted at the last faux deadline, and as the government kept the billions flowing to tide GM over until, well, whenever, the [high US government official] said: "The United States government has no interest in running GM."

and
"The two best-selling vehicles in America this year are large pickup trucks (Ford F-Series and Chevy Silverado). In February, Toyota sold 13,600 Tundra and Tacoma pickups and 7,232 Priuses. It sells the Prius at a loss, which it can afford to do because it makes pots of money selling pickups. Has the Car Designer in Chief, aka the president, considered the possibility that what he calls "the cars of tomorrow" will forever be that?"

And a good closing:

The government's wallow in the automobile industry, under this and the previous administration, merits a hockey coach's evaluation of his team: "Everyday you guys look worse and worse. And today you played like tomorrow."

 

[jug]

GM will soon be in bankruptcy court, the writing is on the wall after the new CEO gave his speech. More than likely, many people will be taking haircuts and if it does emerge intact, it will be a leaner meaner company with a completely different business model set to compete.

Right now, people are scared sh-t. 401K's are down, and home prices down. Both represent the accumulated lifetime hopes and dreams of most working people. So don't expect people to go run out and buy cars like before. It will take a long time to build any solid confidence. No auto company will do well for the next few years at least.

Times are achanging, and the wishes and hopes of bringing this economy back to what it was are unrealistic, we cannot go back to the credit fueled spending, at least not for a few years. We are broke, and most workers are afraid for their jobs.

jug

 

[armor99]

At least now the american people will really see what the goal of the people in their govt is at the present time. "Do what we tell you to, or else!" And any word of dissent from anyone at anytime, will be shouted down with, "It is for the common good.... Think of the economy, Do it for the children!!!", or any number of 100's of meaningless catchphrases designed to demean others, but in reality have almost no meaning at all.

I am truly at a loss right now. When words loose their meaning entirely, and emotion rather than logcal thinking are what people will act on, then I am completely dissarmed. A knight without armor or sword on a strange foreign battlefield.

I have spent a lifetime untill now using the power of my own mind, and my own personal judgement. Those qualities have made me live within my means, buy a house, a car, and brought me back from a net worth of 3k to a net worth of well over 200k.

I went to my favorite Gelato place last week. The owners machine was down but being a good customer, he gave it to me for free and said I could pay him back next time I was in. So I did just that, and gave him two extra dollars as a tip. The man was shocked, apparently no one had ever done that before! I told him that superior service deserved superior compensation.... and to be honest... doing that made my whole day! Why? Because in a very small way, I helped make the world work a bit more like my ideal vision of how it should be...

 

[jug]

I went to my favorite Gelato place last week. The owners machine was down but being a good customer, he gave it to me for free and said I could pay him back next time I was in. So I did just that, and gave him two extra dollars as a tip. The man was shocked, apparently no one had ever done that before! I told him that superior service deserved superior compensation.... and to be honest... doing that made my whole day! Why? Because in a very small way, I helped make the world work a bit more like my ideal vision of how it should be...

Now I want gelato!!!!

They built this italian themed casino down the road from me, great gelato joint in there, bunch of great flavors, had pistachio last time.

When in doubt, ice cream, gelato can't hurt a bit.

jug

 

[FinanceDude]

If Gm doesn't watch out, Hyundai will catch them............

 

[unclemick]

I really don't want to trade in my Chevy for a Ford - BUT

heh heh heh - hurry up and wait I guess.

 

[FinanceDude]

I really don't want to trade in my Chevy for a Ford - BUT

Ford might be the only domestic left in 3 years.......