GM Reverse Split Creates Problems for Dow Jones 14 comments
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If the General Motors (GM) 1 for 100 stock split becomes effective then the stock price would theoretically become 100 times its current value. This would not create an issue with the S&P 500 Index (SPX), which is market capitalization weighted. However the people over at Dow Jones, now owned by News Corp. (NWS) have a predicament on their hands. The Dow Jones Industrial Average (DJIA or INDU) is a price weighted index. Each constituent stock is represented by one share, regardless of the stock price or market capitalization. Thus a higher priced stock like International Business Machines (IBM) is nearly 10% of the index while a lower priced stock like Alcoa (AA) is just 1%. If the “new” GM post-reverse split shares are 100 times the current price then the “new” GM shares would jump from the lowest weighted stock in the index to the highest weighted stock.
So what is Dow Jones to do for its grand old Industrials Index? First they could leave the status quo alone and just let GM and its newly inflated price dominate the index. That would be a disaster and the index would become even more irrelevant than it currently is. Second they could seize the opportunity to transform the index to a capitalization weighted index. I doubt that would happen. It would require teaching old dogs new tricks. Lastly, they could kick GM out of the index and add a more meaningful stock like Apple (AAPL) which at a price of $130 and market cap of $117 billion is as worthy to dominate the index like IBM with its $137 billion market cap rather than GM with a dubious market cap of $1 billion. I think that the replacement strategy is most likely for the Dow Jones Industrials. Stay tuned index fans.
Disclosure: At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.
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Pavlovian reflex? Hardly. We all need a touchstone, one we can reach out and touch when the market comes crashing down around our ears; one that reassures us that the world hasn't ended, that Wall Street is still, somehow, in charge, and that tomorrow will find our hoards of convertible debentures still worth what they were this morning, economic reality notwithstanding.
The Dow is not reality. The price of, say, GM, is reality. When a hundred shares of a soon-to-be-infamous blue-chip stock are worth, say, the cost of a trip through the McDonald's drive-thru, and deteriorating toward the cost of the squeeze packet of catsup for your supersized fries, you have about as much reality as you need in this lifetime.
Two things need to be considered. First, GM represents the cars your grandfather, and his father, drove. Good cars. They served their owners well, weren't demanding to work on, and with care, could be driven several hundred thousand miles. Like I said, good cars.
Second, the assemblers decided they were responsible for this reliability. "We build such good cars that nothing can compare, and so neither should our pay, benefits, working conditions, etc."
Duh. We could also, at this point, talk about the compensation of the bosses. It's in vogue, after all. And some of the parameters that determined his compensation are as relavent as the UAW's.
The worker is worthy of his wage. Unless he builds cars. With respect to the washer-putter, putting a washer on ten million shock absorbers, and then retiring, is not worth what the UAW thinks it should be.
GM will go the way of the Dodo-Bird because they couldn't internalize that reality. Damned shame, considering they build the most reliable car on the market, the Buick Lucerne, shock absorber washers and holes notwithstanding.
What does all this mean to those who desperately need to touch the stone of the DJI?
You need to find another touchstone. My daughter, a sales rep for a brokerage, found one. She picks up her double-foamed, double-shot latte every morning at the Market-Tip, a latte stand she's been stopping at for years, within five minutes of the time she did yesterday. And she always asks, "So what looks good today, and why?"
And the Barista, bless her pointed little head, has this uncanny feel for the market, which is how she earns her obscene tips. "JimmiJon Industriez is set to release a new widget that will wow the world!Test markets suggest the kids will line up in droves, and there are five upgrade cycles in the product!"
Or some such. And so the kid, having touched her stone, goes and buys seven round lots of JimmiJon. And maybe she makes a few sheckels, and maybe not; after all, it's the market, No? And, regardless of the outcome, she'll ask the same Barista the same question tomorrow.
Viva DJA. It's how we're wired, people!
Best,
Ed
As you know, the Obama Administration has directed GM to issue 62 BILLION new shares, making common stock worth no more than a few pennies per share at best.
This is a clear example of one branch of the US Government (the Executive Branch) directing a publicly held company (GM) to use a financial artifice to assist the Government in unlawfully seizing GM shareholder assets (I.e., stock) (via dilution) in violation of GM shareholders' Constitutional rights, so that the Government might redistribute this wealth to other more favored classes (Unions, Banks, other creditors).
State-supported securities “seizure” (via dilution) in the name of “the greater good” is not something we’re used to confronting in the US since “unlawful search and seizure” was outlawed by the Bill of Rights in the 4th Amendment to the Constitution. (It was one of the many actions by then occupying British Troops - i.e., Bills of Attainder - that caused us to throw them out!!)
GM Shareholders and the NADA need to go into Federal Court to have this action stopped!
Beyond the stock dilution issue, the shareholders and the NADA need to amend their filing for an emergency hearing in Federal Court to stop GM from terminating 2000+ franchised new vehicle GM dealers in violation of GM shareholders constitutional rights as well as the obvious irreparable harm on the affected dealers planned for terminations and shareholders alike.
Regards,
Andrew Gross
Chairman & CEO
Automotive Consulting Services, LLC
503-701-6003
andy@carczarconsulting...
carczarconsulting.com
They will move their price out of the hands of the common investor and rachet the price down to sub penny stock for the current share holder. No way is this in the hole company worth $150 to $200 a share. A 10/1 split is more reasonable making it accessable to the common buyer willing to take a risk at a more affordable $15 / share price. They are not at the point yet of not being listed, I say no reverse split at all. If they go bankrupt and all the shareholders loose their money I want them to burn their factories to the ground and cut their equipment up with a torch, none of this we changed are name sorry you got screwed!
The only hope they have is to market a $ 30,000.00 volt will a heck of a good warranty and energy tax credit. It needs to be plug in, it needs to be now!
This company can be turrned around as chrysler was years ago, they need inovative young minds focused on both the short and long term. The car lots are full of same as last year thinking, time for something new they can take a lead in!
Governmemt Motors, god I hope not, so far they are being pushed in the right direction (with the exception of honoring retirement pensions and benefits) If they can't honor their agreed upon legacy benefits they need to start chopping heads at the top and yanking their benefits first. CFO needs jail time!
GM gambled and set up a corporate structure with high fixed costs requiring a high volume of sales to break even. The company did not save enough over the years to make it through rainy days and last fall burned through all the remaining value in the company when the sales volume fell. It could have collapsed completely leaving nothing before last year end. In case it's not obvious to you, common shareholders are always the first to get wiped out when a company folds.
The previous and current governments have provided a path to an orderly wind down and washing away of both the common shareholder value and the value of the debt that would have been lost in liquidation. Please point your anger in the correct direction - the free market did not provide the steady stream of revenue required by the gamble, and the Management of the company did not choose to operate with sufficient reserves to survive the drought. The most gracious handout in the history of the world has been that for the last several months someone was actually willing to pay anything at all for these shares. All that is left now is the clean up, and by June 1 as the bookkeeping is done, the value of the current common shareholders will be moved to either zero (where it would have been last fall), or 1/100th as a stunningly gracious gift to anyone not smart enough to sell now and buy back in after the reverse split if they really want to own some of this company.
As for the "too many dealers" problem, at least that has not been explained well in the media. One way or another, 20 GM dealers within a 20 mile radius has proven to be unsupportable for the sales of GM vehicles. Since this substantially improves the bargaining power of the consumer, the profits are driven out of operating a GM dealership. As many of the dealers also own other brands, the GM store becomes nothing more than a training ground for entry level talent sales people and sales management who are putting in the bare minimum to climb the ladder to the same dealer's Toyota store across the parking lot where the commissions are higher and the customers are less likely to come in with "I can get it $1k cheaper down the street". This is an unsupportable downward spiral that will either take out 2/3 of the urban dealers in a negotiated plan, or take down the entire company and every GM dealer. 100 cars/month x 5 buildings needs to get closer to 400 cars/month x 1 building, where the fixed costs are lower, the incentive is there to attract top tier talent, and the dealer has the profit to impress the customer right all through the ownership experience, from the sale to the service, and thereby winning the next sale. As it is, they are all dying on the vine.
On May 08 10:40 AM epeon wrote:
> All that Lazaris says may be true, but why should one buy their cars?
> The marketplace does not care about the history of the company, the
> "right" ness of a company's culture, or any of that. All the market
> cares about is the value of the product. And, the market has seemed
> to say that GM products aren't worth the money. Everything else is
> just sentiment. And, sentiment (while great at funerals) has little
> business with the living. We go on.
As for you comment "Management of the company did not choose to operate with sufficient reserves to survive the drought" - who did? Banks??? the housing industry?? the newspaper industry??? insurance industry??? Seriously...the cash burn for any industry started 18 months ago and is still going strong...How many companies do you know keep that much cash on hand for a "rainy day".
On May 08 08:42 AM helper wrote:
> @Andrew Gross - What a stunningly odd rant. State-supported seizure?
> You have got to be kidding.
>
> GM gambled and set up a corporate structure with high fixed costs
> requiring a high volume of sales to break even. The company did not
> save enough over the years to make it through rainy days and last
> fall burned through all the remaining value in the company when the
> sales volume fell. It could have collapsed completely leaving nothing
> before last year end. In case it's not obvious to you, common shareholders
> are always the first to get wiped out when a company folds.
>
> The previous and current governments have provided a path to an orderly
> wind down and washing away of both the common shareholder value and
> the value of the debt that would have been lost in liquidation. Please
> point your anger in the correct direction - the free market did not
> provide the steady stream of revenue required by the gamble, and
> the Management of the company did not choose to operate with sufficient
> reserves to survive the drought. The most gracious handout in the
> history of the world has been that for the last several months someone
> was actually willing to pay anything at all for these shares. All
> that is left now is the clean up, and by June 1 as the bookkeeping
> is done, the value of the current common shareholders will be moved
> to either zero (where it would have been last fall), or 1/100th as
> a stunningly gracious gift to anyone not smart enough to sell now
> and buy back in after the reverse split if they really want to own
> some of this company.
>
> As for the "too many dealers" problem, at least that has not been
> explained well in the media. One way or another, 20 GM dealers within
> a 20 mile radius has proven to be unsupportable for the sales of
> GM vehicles. Since this substantially improves the bargaining power
> of the consumer, the profits are driven out of operating a GM dealership.
> As many of the dealers also own other brands, the GM store becomes
> nothing more than a training ground for entry level talent sales
> people and sales management who are putting in the bare minimum to
> climb the ladder to the same dealer's Toyota store across the parking
> lot where the commissions are higher and the customers are less likely
> to come in with "I can get it $1k cheaper down the street". This
> is an unsupportable downward spiral that will either take out 2/3
> of the urban dealers in a negotiated plan, or take down the entire
> company and every GM dealer. 100 cars/month x 5 buildings needs to
> get closer to 400 cars/month x 1 building, where the fixed costs
> are lower, the incentive is there to attract top tier talent, and
> the dealer has the profit to impress the customer right all through
> the ownership experience, from the sale to the service, and thereby
> winning the next sale. As it is, they are all dying on the vine.
>"The most gracious handout??? not likely...that went to the banks"
I agree if the statement is qualified as a Gov't handout. My point was that I have no idea who is buying the GM common today (and painting the open and close of the tape), but considering that in a little over three weeks both the GM plan and the Bondholder plan would wipe away 99/100 the common stock holders value, while BK would eliminate it completely, holding this stock is a hot potato. To anyone who is still holding, this looks to me like someone was willing to give you ~$1.60 for almost nothing all week. Now that's a bailout.
I am interested in more detail about your statement "is that it opens the door for competition...in other words the transplants will have less barriers to market". I don't see any barrier to opening additional dealers today if you have the right to sell the next hot new car out of [insert your fav low cost country here]. At best it might make it easier to take over a turnkey store faster than building and hiring one yourself. The free market approach has been slowly working for a few years, but as a customer, I am suffering for it. State franchise laws have locked in this 20 dealers in a city problem and every one of them is operating under water and holding their breath while they hope the next guy fails first. If I want to stop in and have the oil changed in my '07 while I take a look around the showroom, I will generally get a service writer who must be related to the owner because he doesn't seem to like the public, and a sales staff that wasn't there when I bought my car. The dealer has no money left to give me anything other than the minimum time and attention for the price of the oil change. I watched growing up as a friend of mine who owned a VW have every oil change done, car washed, vacuumed, and returned in less than 30 minutes and with a smile. Every time. If GM is going to survive, it needs to have a dealer network that can bid those employees into the GM store. If you decided that you would like to sell cars on commission for the next year, would you rather sell Passats or Impalas? Your GM customers are typically cross shopping 3-6 functionally equivalent GM models from 10 other GM dealers that might as well be within walking distance. If your Passat customer wants to negotiate, they have to run 30 miles to the next town. See the difference?
Really, the GM and the task force are being much kinder than I would over this whole issue. This is the time for a new stronger beginning and it would be better to rip the band aid off quickly. Cadillac gets to keep it's name and business model, all future product that was for any other division is immediately re-branded as "GM". All other dealers are told their brands are closing and there will be no future product. Then the top 33% performing dealers in each market will be offered the chance to bid for the new business model "distribution and service" centers, based around a test drive, but online sales model. The customers who are happy a year later are the ones who bought what they wanted, not what the dealer had on the lot. The market will force the separation between the mainstream model and the premium model within the next few years anyway. It high time to be the first company there and define the business model of the future to GM's advantage, rather than taking 20 years to painfully twist and turn their way there after every other company has done the heavy lifting.
That said, I think your use of the word "kinder" in the same sentence or thought with the so-called Auto Task Force, (none of whom have any automotive background), is overly generous.
This was a straight political decision, with much written about UAW "payoffs" for assistance in getting Obama elected.
The battle for GM's preservation was lost back in Nov. 2008. Elections have consequences.
That Wagoner and others may have been too blind to see it, put GM and its employees, suppliers and creditors through a very special brand of Hell reserved for those to attempt to eat of the forbidden fruit of (economic) life - Fed. Bailout $$$$ - with all of nasty strings attached, as artfully designed by Summers, Rattner, Bloom and others - to enable this Administration take control of each enterprise and recast its' Board and business plan such that it favor their political constituencies, (their protestations to not wanting to run auto companies aside).
To believe anything else is to really believe in Santa Claus.
Enjoy your weekend.
On May 08 07:22 PM helper wrote:
> @slowdown
Because GM and Ford have been in business in this country for 100 years they have a well established dealer network that along with the startup investment needed has created a barrier to market for new OEM's. That said - I absolutely cannot see any reason for artificially forcing dealer closures. I think Allan Mulally was on target when he told Congress that the dealerships were the woven into the fabric of the communities they service and he had no intention of forcing them to close and consolidate as he shouldn't. You talk of the free market....first acknowledge the lack of it globally...then explain how our Governement establishing limits on the number of brands or dealers a manufacturer is allowed supports a free market...it doesn't.
On May 08 07:22 PM helper wrote:
> @slowdown
On May 08 10:02 PM TheCarCzar wrote:
>
> This was a straight political decision, with much written about UAW
> "payoffs" for assistance in getting Obama elected.
>
> The battle for GM's preservation was lost back in Nov. 2008. Elections
> have consequences.
>
> That Wagoner and others may have been too blind to see it, put GM
> and its employees, suppliers and creditors through a very special
> brand of Hell reserved for those to attempt to eat of the forbidden
> fruit of (economic) life - Fed. Bailout $$$$ - with all of nasty
> strings attached, as artfully designed by Summers, Rattner, Bloom
> and others - to enable this Administration take control of each enterprise
> and recast its' Board and business plan such that it favor their
> political constituencies, (their protestations to not wanting to
> run auto companies aside).
>
> To believe anything else is to really believe in Santa Claus.
>
> Enjoy your weekend.
>