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The Motley Monetarist

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  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    There's nothing I can say to the last comment made. I don't indulge in ad hominems. No, I don't hate GM, and I wish they would get their act together, since I lived in Ann Arbor for six years, and loved Detroit the way it was then (not now). But you don't get to where you are by trampling on people's rights, and bypassing law for political gain.

    And, no, as a consumer, I will not buy a GM car. But that's because, having done some research, and despite what the other commenters say, I don't believe their cars provide value for the money. But that's my personal choice.
    Nov 26 01:56 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Sir,

    I thank you for your comment. Yes, I agree that the key issue is the dilutive effect. At this point, the article is too old to alert the Seeking Alpha editorial team to make the appropriate modification. In any case, I'm planning to write a follow-up.

    Too many people get caught up in the minutiae, while forgetting the main point-that GM's old bondholders were taken for a ride, and in some cases, lost their retirement income. Hence the ridiculous comment made by one individual that the bond market is a "secondary market" and thus the "old bondholders" were not affected. They were being caught up in the rhetoric of the proponents of the "shakeout" of bondholders that, was, in effect, the net result of the bailout. So what if the holder of the bond is a little old lady or some Wall Street leviathan? The result is the same-a fundamental attack on bankruptcy laws and property rights, in general...
    Nov 25 06:36 AM | 1 Like Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Agree on the issue of diluted EPS. And that is the point I was making about the warrants-that presumably everybody was happy in the original settlement-that, magically, the bonds were transformed into warrants. But it turned out to be a sleight of hand, independently of the troubling legal issues of dealing with bondholders this way. And now we're paying the price, in continued diminished EPS. The gentleman in the comment prior to mine was making the classic mistake of confusing the inherent riskiness of bonds with the necessary UNriskiness of bonds in a one-time, "black swan" event such as a bankruptcy. Two separate kinds of risk, not to be conflated. And yes, higher share prices will make the dilutive effect more pronounced, and we will continue to see this effect.

    And I'm not arguing for the sake of arguing on the issue of shares outstanding. I agree that the company did include Treasury stocks as outstanding shares-no doubt about that. Probably I did not bring this point out clearly in the article-and that was my mistake. The issue is whether, independently of whether GM does include Treasury shares or not, from an investor's point of view,(and it's clear that they do) whether these stocks SHOULD be included in shares outstanding. And that involves an analysis of how the by-laws changed around bankruptcy, and, as I said, whether these shares WERE in fact really "issued" anew. They were "created", but not "issued". There's a crucial difference, as, say, when shares "issued" are never really traded, say to corporate insiders in the form of restricted shares. These should never be included in shares outstanding.
    Oct 11 04:47 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Yes, but the question is how to define shares outstanding in a company that went through bankruptcy. So consider this, normally outstanding shares are equal to total issued shares, which are normally less than authorized shares plus par.

    Now, when companies issue new capital, that increases issued shares or outstanding shares. When there's continuity in a company, that's not a problem.

    But a bankruptcy would, I imagine change the by-laws of the company. Even assuming that authorized shares plus par would be equal to what was stated in the old by-laws, when the bankruptcy occurred, the old shares must have been liquidated, since everything starts out fresh.

    The next question is whether the shares held by the Treasury would be counted part of the issued shares post bankruptcy or just part of the authorized shares, since they may never have been "issued" in the first place. They probably were issued, but it's not clear. If the Treasury shares were part of authorized but not issued, then they wouldn't be used to deflate normal EPS.
    Oct 10 04:48 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    And from a legal point of view, it doesn't matter, in reply to the commenter above, who the holder of the bonds were. At bankruptcy, the bonds should have been redeemed at face value if the traditional hierarchy was respected. Because bondholders are supposed to bear none of the risk, traditionally. And instead, these same bondholders, whether the original holders or not, DID bear the risk of the bankruptcy by being forced to exchange their bonds for risky warrants, even with a relatively low exercise price.
    The point should not have been to save the taxpayer's money-since the government shouldn't have gotten involved in the first place. Once the government did, the traditional hierarchy of bankruptcy should have been respected and wasn't, leading to the messy situation now, where GM will have low diluted EPS for a while due to the presence of the warrants foisted on the bondholders.
    Oct 10 09:38 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    I guess the point is whether the Treasury shares were part of "authorized shares" subsequent to the bankruptcy, or were part of authorized shares prior to the bankruptcy.
    From a legal point of view, it isn't clear whether the by-laws that were part of the original incorporation have changed the number of authorized shares post and pre-bankruptcy.
    My point-outstanding shares are, legally and financially completely equivalent to "authorized shares" and "par shares", if there were any.
    I just don't know what happened to this value post and pre-bankruptcy, and if the government held shares were part of that.
    Oct 10 09:33 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Yes, sir, I do know the difference. The question is whether the shares that the Treasury holds should be considered part of "shares outstanding". I assume that in the earnings results so far, GM has, in fact, used those shares to calculates shares outstanding. I assume they have.
    I would argue that those shares should NOT be considered part of shares outstanding, and in a sense, that EPS stated so far would then be actually higher.
    These shares are neither "freely available for sale", not part of "restricted shares" which, are shares generally held by insiders in the company.
    However, once the Treasury divests, then they should/would be considered freely available for sale.
    My point, again-the government is not like any other institutional investor, given that the decision mechanism it uses is entirely different than any other investor.
    That was my point. Shares held by the Treasury are not "shares out there".
    Oct 10 09:11 AM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    Comments on the above:

    a) The fact that bonds trade just like stocks does NOT mean they are equivalent, as any student of Modigliani-Miller knows all too well. The commenter above who made such a comparison was all too facile in his analysis, as a moment's consideration will reveal. Legally, financially and in every other way, a bond in an investor's portfolio is NOT the same as a stock. To the commenter above, please go back and reconsider this. I don't have the space here to enter into the theory and analysis behind the non-equivalence of bonds and stocks, but, again, I would suggest you reexamine the issue. The fact that they trade in the open market (I am well aware of this) looks at the issue in the most simplistic of ways. So yes, GM bondholders got shafted, and the company is still paying for this in the calculation of its diluted EPS, which DOES take into account outstanding warrants, in the hands of the old GM bondholders. And, this, independently of any consideration of fairness and bad legal precedent that such a maneuver set for the future.
    b) Thanks for the commenter who picked up the factual mistake on the number of Treasury shares. This has been corrected.
    c) On the issue of whether the Treasury sales should affect outstanding shares, suffice it to say that the issue is complicated. A priori the government should be considered like any other institutional investor, in which case these shares ARE part of stocks outstanding, and Treasury sales, a priori will not change this. However, whether GM did or did not count these shares as "stocks outstanding", a more important question is whether these shares are "freely available", and thus outstanding from this definition of "shares outstanding". Consider this-when the Treasury bought these shares, could any investor buy these shares if he so desired? No, so, although GM probably already counted these shares as "shares outstanding", they shouldn't have, since the government is not like any other private institutional investor. Or at least so I would submit.
    Oct 9 08:54 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    To reply to several of the above comments:

    a) How does the Treasury sale affect EPS? Well, it might increase the amount of stocks outstanding-the denominator of EPS-it's not evident that these Treasury stocks are included in "stocks outstanding" as stated in the earnings releases. More importantly, it will increase supply while not necessarily increasing demand. Simple supply/demand perequation, most probably decreasing stock prices, absent other considerations. My last Table was a simple thought experiment to understand the impact of this.
    b) On the quality of GM cars, I realize this is a sore point. There are probably experts out there who are willing to debate the point. I do note that revenues from GM NA and GM Europe, four years after the bankruptcy reorganization, are in the doldrums. I find it hard to believe how that will realize in a 35-44% growth rate. That's pushing it, even with a complete turnaround.
    c) My main idea behind the article was to highlight the importance of these warrants, which, again will increase the denominator if "diluted EPS", has so done and probably will continue to do.
    d) Even beyond this point, I wanted to emphasize the manifest unfairness of forcing a class of bondholders, who were probably holding GM bonds as a safe investment, out into the stock market, since now all they have are the warrants issued in exchange, which may or may not be worth that much.
    e) If GM turns around in the future, which is a big IF, then they will still be faced with what the extremely unorthodox way their bankruptcy was negotiated, jettisoning the legitimate interests of a whole class of bondholders.These bondholders normally had first place in the queue, under normal bankruptcy procedures. I would not be surprised with class action suits, and if they don't occur, they certainly should occur. A warrant is in no wise equivalent to a corporate bond in an investor's portfolio. I don't think it would be too harsh to state this was the equivalent of a Madoff like scheme to hoodwink these bondholders.
    f) I am not interested in "GM bashing", unlike what some commenters have alleged. I personally have ties with Detroit, and the whole culture there. I would be infinitely saddened by the demise or even the weakening of this company. It's just that I don't see how, even after a sweet bailout, the company can turn around. I wish they would. I personally would never buy a GM car, but that's just me, I guess. And I've done my research, believe me. It's a sad day when open discussion and questioning of the way a company is run is equivalent to "bashing".
    Oct 8 01:31 PM | Likes Like |Link to Comment
  • Is GM Stock Going To Experience A Triple Whammy? [View article]
    I am absolutely not a GM hater. I do believe that the way GM bondholders got shafted was kind of shocking, and now with the unequal treatment given the creditors of the new Nova Scotia stocks, and that the whole bankruptcy was not done fairly.

    All told, I like a lot of people I imagine would never own a GM car-but that's just a personal preference.

    And yes, when the Treasury does eventually sell their outstanding stock, it will depress GM prices and dilute the EPS, as the warrants issued to the old bondholders, thrown as a bone in exchange for their bonds, have already depressed the diluted EPS over the past two earnings cycles. Please look at the earnings releases and verify.

    I guess GM still evokes a visceral reaction from some folks. As for me, I wish the company would have recovered on their own steam and would make good cars that people want to buy. No evidence of that yet, but hey, who knows what will happen.
    Oct 7 09:05 PM | Likes Like |Link to Comment
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