Getting Out of GM While the Getting Is Good

“This is the end, da, da, dum. Beautiful friend the end,” sang Jim Morrison in the Door’s classic elegy “The End.” Morrison named his band in honor of The Doors of Perception, a 1954 book by Aldous Huxley describing Huxley’s trips on mescaline.

As the General Motors (GM) we know nears its end and the doors shut on some classic car brands, we have to reorient our perceptions about the company and its stock and its value.

Can you picture what will be
So limitless and free
Desperately in need…of some…strangers hand
In a…desperate land

All too often, investors who don’t understand the bankruptcy process buy shares of a company expected to go bankrupt in the misconception that if they buy now at a low price, they can capture the upside when the company comes out of bankruptcy.

This is not the case. While General Motors may come back in some new form under the same name, the General Motors we know will soon be dead.

If a company doesn’t completely go out of business, it enters Chapter 11 bankruptcy. In this case the business is reorganized, instead of shutting down entirely. Still, in all forms of bankruptcy, the holders of common stock lose their entire investment in the company.

Everything.

Bond holders are creditors. They’ve lent capital to the company, so the company owes them money. The bankruptcy changes those obligations, but often creditors receive something for their loans, even if it’s just pennies on the dollar. Sometimes bondholders are given stock in the new company to give them a chance to make back some of their money. But current shareholders hardly ever get new stock.

Common stock holders are the company’s owners. They hold equity. Because their surrogates, the board of directors and executives, did a poor job of running their company, they lose their ownership stake completely. To make it clearer, if you hold common stock on the day the company files for bankruptcy you lose everything. While holding the stock to the bitter end may give you a better tax write off, if you sell now, you will at least pocket some cash.

So, please, please, don’t buy GM thinking you can hold it through the bankruptcy. All the current common shares will disappear the moment they file. Can you make some day trades with GM and try to capture the spread? Sure, but since this is so close to the end, the risk is very high that they could call it a day on the day you are holding it and they you would lose your investment. If you haven’t already, get out of GM.

ETF Trends has an interesting piece on which ETFs will be affected by Obama’s Auto and Fuel Efficiency Plan.

United States Oil (USO) and United States Gasoline (UGA) would be the ETFs most likely hurt from new fuel efficiency in cars. The PowerShares Wilderhill Clean Energy (PBW) would be a clear way to get in on the clean energy bandwagon. ETF Trends also likes Vanguard Consumer Discretionary (VCR), saying consumers could do well if fuel efficiency lowers their gas bills. Finally, the E-TRACS UBS Long Platinum ETN (PTM) seems counter-intuitive. Platinum is used on catalytic converters. There should be fewer of these if the auto business goes through a contraction. However, the launch of a platinum ETF might spur heavy buying to fill the fund’s vaults. The ETN doesn’t actually hold platinum.

Disclosure: No positions.

Comments

[Rollerball:]

Right on.

I love the smell of napalm in the morning ... smells like victory ...

www.youtube.com/watch?...

May 30 07:27 AM

[PastTense:]

This is false with regards to General Motors:
"Under the debt exchange plan announced by GM last month, bondholders were to get 225 shares of GM stock for every $1,000 they had in debt, a 10 percent stake. Current stockholders would end up owning just 1 percent of the company."
news.yahoo.com/s/ap/20...

Note stockholders are getting 1% of the new company.

May 30 09:35 AM

[Prudent Man...:]

On May 30 09:35 AM PastTense wrote:

> This is false with regards to General Motors:
> "Under the debt exchange plan announced by GM last month, bondholders
> were to get 225 shares of GM stock for every $1,000 they had in debt,
> a 10 percent stake. Current stockholders would end up owning just
> 1 percent of the company."
> news.yahoo.com/s/ap/20...
>
>
> Note stockholders are getting 1% of the new company.

What is 90, 20, 1% of zero? Now with the government and the UAW in charge does anyone in their right mind think they are going to be able to compete? That would be a gigantic first!

May 30 11:14 AM

[Prudent Man...:]

Why didn't Ford take taxpayer money? Family pride. They have to deal with the same competitive forces as Chrysler and GM.

Pride of ownership is definitely lacking today. Should be interesting when your cardiologist or oncology's has GS rating.

May 30 11:17 AM

[Richard S:]

Buying GM now is a crap shot.
I agree it will go to Zero.
People are still buying it even when captians left the ship.
One may be able to make some trading at anothers peril not very ethical so I'll stay away.

May 30 12:59 PM

[The-Stock-M...:]

Very true. The only reason GM has been trading at these prices this close to the gov mandated deadline is probably the hope that someone, possibly the gov itself, will take over GM at some fair market value. There have been some bankruptcies in the past where the existing shareholders get some value when the company re-emerges from bk, but those are very rare. For GM, a bk would pretty much mean total loss for current shareholders because of the massive debt that the company is in. Hence, when it tries to emerge leaner and meaner, the easiest and best option for them is to writeoff the existing shareholders completely.

May 30 01:04 PM

[mbkelly75:]

Thank you to the author for explaining it very well and clearly. Some changes may happen from standard bankruptcy law because of gov's involvement, but a very good explaination of current law. I found the link to ETF Trends interesting also. Thank you again.

May 30 01:39 PM

[dw57:]

because if they did they would loose control. thats the main reason they didn't


On May 30 11:17 AM Prudent Man CFA wrote:

> Why didn't Ford take taxpayer money? Family pride. They have to
> deal with the same competitive forces as Chrysler and GM.
>
> Pride of ownership is definitely lacking today. Should be interesting
> when your cardiologist or oncology's has GS rating.

May 30 04:17 PM

[Fighting Yoda:]

GM couldn't compete as a private company, ho will it compete as Govt./labor union owned company. All kinds of bureaucracy and restrictions and delays, and of course green cars. GM is finished, nobody in US would be willing to buy cars from a Govt./Union owned company - there are much better alternatives out there.

May 30 06:22 PM

[eucamar:]

I have 300 shares of GM. if the company files for bankruptcy. Can I take this investment as a loss from my income Tax ?

May 31 03:09 AM

[Don Martin:]

I wouldn't bet against USO just yet because of the improved fuel efficiency of new cars. Automobile turn-over in the U.S. runs around 11 to 12 percent a year. The new fuel efficiency standards won't make a significant impact in aggregate gasoline consumption for years.

May 31 08:42 AM

[Nettligent:]

Like divorce, Laywers are the only Winners in bankruptcy process.

May 31 07:29 PM

[mac123449:]

The captains were jumping ship weeks ago and selling all there stock if this was japan they would be blowing there brains out for making suck a failure of a company but not here the captain is the first off the ship here screw the women and children first give me that life boat.

May 31 10:14 PM