Brutto

GM Common Stock Is Worth More than You Think

Nice summary, which should be linked to all the other sites discussing the same dumb/greedy/ignorant question. (MarketWatch et. al.)

The sort of "investors" stumbling into GM stock and bonds at this stage are probably the same guys still trying to flip Florida condos ....


On May 30 02:02 PM SeattleGoldMiner wrote:

> 1.) GM shares will continue to trade until the company EMERGES from
> Chapter 11.
> In all likelihood they will be delisted by the NYSE sometime shortly
> after they file Chapter 11 and trade on the pink sheets.
> 2.) While in Chapter 11, whether the bondholders buy into the new
> deal or not, GM will continue to operate, almost as normal, while
> it begins to implement the changes that the government and consultants
> have suggested are necessary to perhaps be successful in the future.
>
> 3.) The Chapter 11 will take anywhere from 3 months to 18 months
> to be completely resolved and when it is resolved the company will
> EMERGE and ALL OF THE CURRENT SHARES WILL BE CANCELLED.
> 4.) There will be nothing given in return for the cancelled shares.
>
> 5.) If someone is short the stock there will be no need for them
> to "cover" their short position, only file copies of the reorganization
> plan with their broker and any margin held against the position will
> be released (this is called a terminal short.)
> 6.) There will be tax due for the profits on the short position,
> even if never formally covered by a trade. The profit will be deemed
> to have occurred on the day the company emerges and the shares are
> cancelled.
> 7.) Between now and then the stock will continue to trade and may
> spike up and down for a variety of reasons such as:
> a.) People who have held for a long time figuring, "how much more
> can I lose" and thus NOT selling. The obvious answer is, since the
> stock WILL be cancelled, that they can lose whatever their stock
> is worth when they decide to NOT sell it.
> b.) People who DO cover their short positions and are willing to
> forego the remaining drop to zero, so that they can free up their
> collateral margin, which will create some buying.
> c.) Naive people who do not understand that what is happening to
> the company has no bearing any more on the value of the stock in
> the future. So even if sales fo up 30% while the company is in Chapter
> 11, the stock is still cancelled when they emerge. The reason for
> this is that until and unless the company can make all claims against
> it 100% whole (bondholders, secured creditors, trade creditors, union
> health fund etc.) Bankruptcy law does not allow for anything to common
> shareholders. In rare instances there is either enough in the company
> to leave something over for common shareholders (usually if a company
> files to avoid litigation) or to shorten the process (as they are
> currently trying to do with the bondholders) the shareholders are
> thrown a "bone" so they do not add more legal fees or delay things.
> That "bone"....if the creditors are not made whole, may not be more
> than an "out of the money" warrant to buy stock in the "new" company
> at a price which would make the creditors whole if the stock ever
> reached it and the creditors have taken stock for all or part of
> their claims.
> d.) Hypesters and day traders who attempt to take advantage of a,
> b and c above in order to create a quick profit, or escape from an
> ill-advised position they took before the filing.
> e.) Momentum copycats who say "Gee, the stock is rising, something
> must be happening." The response to that is to not believe your neighbor
> can really fly if you see him jumping off the roof!!

Corporate Bonds: The Pace of Issuance

Sure enough - the only question is whether one should move out of the Dollar while the going is good...but into what?


On Mar 27 12:00 PM T-town Bob wrote:

> So, what is the reason for the pace of issuance? Is it because corporations
> are trying to quickly cash in on low interest rates before the market
> realizes that all Obama policies of fiscal and monetary policies
> are inherently inflationary? That would be my guess. My take away
> is to stay short on the yield curve and keep your money away from
> longer dated bond maturities. Agreed?

Cramer's Stop Trading! Dow Doomsday Scenario (3/6/09)

What a bunch of random rubbish, e.g.:

1. "Chevron has bottomed, but if oil goes to $33 it will see a rapid drop..."

2."Exxon stays at $56 because I'm a bull on oil"

Now that Cramer is talking down weaklings like Boeing, Coke, Disney, JNJ, IBM, Intel, maybe this is the contrarian indicator we've been waiting for....

Gold: The Only Remaining Bubble?

Well said. Modern Governments rely on "moderate" inflation to bail them out: even the "acceptable" inflation rate of 2 per cent virtually halves the real value of Government debt over 30 years. Long Term Treasuries, anyone?


On Feb 19 07:39 PM BrucePile wrote:

> Let's think about the bathtub thing:
>
> "The inflation argument is one in which the inflationists are premature
> if not just plain wrong. The fallacy in the argument is in just
> looking at one action without observing the bigger picture. The
> analogy I like to use is a bathtub. The water is flowing, and the
> inflationists are fearing that it will overflow. What they fail
> to realize is that the drain is running even faster."
>
> This is, in fact, a good way to think about the economy, money supply,
> and inflation. But the full picture can only be seen if you connect
> the drain back into the pump/supply circuit.
>
> The water that is always flowing into the drain is thought of as
> "wealth destruction". But the investment markets don't really destroy
> wealth; they transfer it. For every loser in the markets, there is
> an equal and opposite winner. All that investment money is still
> out there, it has just changed hands many times since stocks were
> sold years ago, money was spent to build stuff, and so on. The "deflation"
> problem is that the money VELOCITY has suddenly been slowed way down.
>
>
> That's why you have a pump, surge tank, and a complete circuit and
> an army of government analysts armed with rooms full of computers
> - to regulate this complex flow and keep the tub level (inflation)
> rising at the safe, optimal level of 2% a year lest we all get swept
> down the drain.
>
> Investors don't destroy money. Banks do. You had money destruction
> in the Depression when most banks went out of business. Today, you
> don't have massive money destruction with FDIC. On the contrary,
> as a glance at any money supply chart now plainly shows, you have
> rabid money creation.
>
> What has happened with the bathtub is this. We had a stable, smoothly
> running flow with our beloved 2% goldilocks inflation. Then along
> came the housing bust that created a violent surge down the drain.
> All the powers that be are now slamming open all the valves in the
> pump system and are even adding new pumps. Unless most of the banks
> go out of business, we will likely be facing some very tricky and
> dangerous tsunami waves of inflation. It's been pointed out that
> we are following a very similar sequence of events that Germany did
> in the 20's hyperinflation. Let's hope it all winds up being more
> stable than that.
>
> As all this relates to the price of gold, we could get slammed with
> some deflation followed by inflation and then who knows what. What
> gold seems to respond to more than anything is monetary instability.
> And I think we've got plenty of that coming for some time. Splish
> splash.

Welcome to 'Ermflation'

Excellent summary of where we stand, and of the uncertainties ahead. If we are going to be heretics, we might as well mention that other asset class that saw previous generations through crises - Real Estate. Talking of failed German Bond Auctions: Real Estate was one asset that would have protected your wealth even if you had been on the bombed out losing side of WW2.

Real Estate may get even cheaper from here, but if you don't commit the mortal sin of leverage you can hold it 'till things improve. With luck, you might even get a yield higher than Treasuries! Just stay away from commercial High Street lots: be virtuous, go for Residential and provide a shelter for all those foreclosed homeowners...

Coke or Pepsi?

Factual, concise contribution, with a clear reasoned conclusion.

Topical, as both companies are currently on similar forward P/E's of around 14 and yields of 3.0-3.5%, and we are all desperate for some stability.

Almost makes me want to go and buy KO. But 'cause I'm a cheapskate I might also stock up on second-rate Dr. Pepper Snapple (DPS) at a P/E of around 9 (but no yield), with the hope someone puts this recent spin-off out of its misery and takes it over...

Fear and Value: Together Again

Yields as a measure of value only work if they are sustainable.

The statistics are distorted by the fact that Financial stocks have been major contributors to the yield, and we all know what is happening to them.

Maybe we are just going back to the good old days: Equities = higher risk = higher yield. In a depression you can forget inflation, for a while at least

Why Buy High Yield Bond Funds?

The problem for many high yield bonds now is not just the default rate (where anyway every fund manager will argue that he has "unique insights" in picking solid businesses) but refinancing risk - the borrowers can pay interest, but the principal of many of the recent bond vintages cannot easily be repaid from company cash flows: the bonds were placed in the expectation that they could be redeemed by replacing them with abundant cheaper finance a few years down the line, or in conjunction with IPO's of the borrowers.

So crunch time is delayed until the final redemption date. Investing now is a bet that credit conditions will get back to where they were: your call if you think this is likely, but many borrowers don't really have a plan B.

Law of Supply & Demand Is Dead for Gold & Silver

Manipulating the commodities market to bulk up banking profits seems a pretty complex undertaking to me, especially given the incompetence of the banks and monetary authorities in other matters - I doubt they are up to it, and it certainly didn't work for Lehman.

Cutting interest rates is a much simpler strategy of instantly strengthening bank balance sheets and profits, and one the Fed is used to executing - so watch for a rate cut, possibly this week.

Still, gold is a better store of value than greenbacks just now, so probably worth buying: maybe worth waiting until end of September, when some hedge fund bets have been shaken out by quarterly redemptions ...

Alternative Buyers for Lehman (and Not Just the Usual Suspects)

Whenever I hear anything from "broker sources", I can usually safely assume the opposite - they gossip like fishwives, usually about matters they don't fully grasp: perfect for spreading misinformation.

BAC's Ken Lewis Mulls Another Deal as Lehman Reaches Brink

Which CEO of a leading American Bank said: "I've had all the fun I can stand in investment banking right now" when things started to implode last year?

First to answer correctly gets a LEH share. Second prize: two LEH shares.

Write to Kenneth Lewis, c/o Bank of America to claim your prizes.

Let Lehman Fail

Good article. As stated, the writing was on the wall for LEH since the demise of Bear Stearns. Fuld had plenty of time and opportunities to recapitalise LEH and passed to protect his position, always hoping that a better deal would come along later.

If LEH gets rescued now with a Fed backstop, it will be open season for buying the bonds and shorting the stock of the next victim (Merrill, say) in the expectation that the Fed will have to step in again and effectively guarantee the debt.

And again when the next domino falls,... and again...until they run out of credible buyers that can be strong-armed or bribed into fronting these bailouts.

Lehman: Nobody Knows Anything

One thing is for sure: Fuld has had it. For the last six months he has thrown away every opportunity to recapitalise LEH in the hope something better would come along later. And LEH could have possibly kept limping along if it weren't for the rating agencies now threatening a downgrade: that will be the nail in the coffin.

The Fed's problem is to find another "credible" stooge to stand in for what JP Morgan did when taking over Bear Stearns and to front a rescue with a Fed backstop. Giving a Fed guarantee to a foreign buyer just wouldn't look so good...

Goldman Sachs would have loved to do this if it weren't for the fact that they worry about being dragged down: there are enough questions about their own exposure, particularly as they have been messing about with commodities trading for the past quarter.

Time will tell...In the meantime Fuld is lucky not to be lynched by Lehman staff, who own a third of the stock.

Fannie/Freddie Bailout 'Disastrous Fiasco'

To User 125027; the unlimited checkbook you mention, would that be the US dollar printing press that has been overheating since 2001?

In the long run you may be right: The liabilities taken on by the government may be balanced by the "assets". Problem is, as John Maynard Keynes pointed out, in the long run we are all dead. In the meantime ask Bill Miller how well he's done by taking a medium term "value" view on these stocks.

The scary thing about this particular socialisation of losses is that it was deemed necessary despite everyone being reassured, not so long ago, that the Fed would effectively stand behind FNM and FRE debt if push came to shove.

It seems that even this wasn't good enough any more for investors - they needed the security of seeing the junk physically on Uncle Sam's balance sheet. Great vote of confidence....

Timber ETFs...Without the Timber?

Good write-up, George. There is a more general lesson here also, which is to look carefully at the components that make up the more esoteric flavor-of-the-month ETF's: think solar, water, renewables, etc.

More often than not the underlying stocks are only tangentially related to the actual asset you are looking for, or there are so few pure-play stocks that you can afford to research and cherry-pick among the top five names and get good sector exposure.