GM Headed to Zero, With or Without the Pelosi Bailout

Nancy Pelosi’s “too-big-fail” theory certainly succeeded in encouraging buying interest in General Motors (GM) on Wednesday. However, before analysts start issuing bullish calls on GM, they need to understand that socialist-type interventions in private businesses have never proven to create sustainable and verifiable shareholder value.

There is pressing need to recognize that an exclusive, dedicated focus on protecting jobs is completely contrary to free market principles. The best way to create, protect or improve jobs, and job quality, is to generate a viable business model in Detroit. Thus far, outside vague suggestions pertaining to the longer-term profitability of “green” cars, nobody in Congress appears ready to identify, and place on record, what post-bailout strategies the auto marker will adopt.

Given that tens of billions of dollars are at stake, the demand for precision in this regard must rate as a pre-requisite for government to spend tax dollars on companies which have essentially failed to answer the challenges of today’s domestic and global economic environment, however difficult that environment might be.

Any level above $3 clearly qualifies as a safe short proposition; there is no doubt about that. The question now is this: How aggressive should the accumulation of short positions if GM trends higher from Wednesday’s close? And, on a related note, how credible are the price targets announced by Deutsche Bank (DB) (zero) and Barclays (BCS) ($1)? Quite apparently, while nobody will argue enterprise value with either Deutsche or Barclays, there is hardly any consensus concerning the full impact, near term or longer term, of concerted government action.

More specifically, from an equity-holder perspective, the threshold issue is whether the publicly-disclosed position of the guzzler-to-green transition has any merits at all. Bond-holders, on the other hand, must determine whether a bailout, and government involvement in General Motors, will diminish default risk. For obvious reasons, few price-makers are keen to quote credit default swaps on GM at this point, though spreads are indeed widening, to junk-and-beyond status.

If CDS perceptions are superimposed on GM, zero or near-zero is correct. If the experience of socialist interventions is any guide, and Cold War-period India has an entire series of relevant examples, the value of private equity will remain zero, though periodic announcements from various podiums will, almost inevitably, continue to advocate a bullish (short-lived) agenda.

To save everyone the trouble, the bailout package itself may dilute existing shareholders so heavily that simple EPS or DCF calculations will help to chase investors out of GM altogether, probably for good, or at least until the green revolution becomes a reality.

For the present, however, we are witnessing an unprecedented socialist revolution across America’s leading business segments. Only time will tell whether this revolution actually provides what the economy requires, i.e. the inextricably-linked requirements of jobs and job quality. History, at least, provides no ground for optimism.

Disclosure: Author holds a short position in GM

Comments

[investor88:]

Agree GM is gone case. Why not let the sick and old die peacefully instead of prolonging the pain at great cost, why defy the laws of nature?

2008 Nov 13 08:18 AM

[Jason Rines...:]

I don't disagree Investor88. That said, socialism is occuring and winners and losers by government are being picked for at least the next couple of years. As a capatalist, I cannot stomach socalism but nor can I not invest where the money is going whether it is right in my philosophy book or not. Deutch and Barclays both were wrong, especially about energy in 2008. What management team is put in place to manage GM after a bailout package is what is going to influence my decisions to buy GM in 2009.

2008 Nov 13 10:38 AM

[Reverse Mer...:]

"socialist-type interventions in private businesses have never proven to create sustainable and verifiable shareholder value."

Agreed, and if that is a universal dictum, then, the socialist style bailouts being applied in the US today are money down the drain. The true rating offered by savvy CDS traders may be more realistic than others. Caveat Emptor.

2008 Nov 13 10:13 PM

[Reverse Mer...:]

Note to iThinkBig,

The idea that a responsible management team will be put in place to manage GM in a post bailout scenario is unrealistic at best. Just think AIG.

2008 Nov 13 10:15 PM