Rebel Traders – Analysis Without The Hype

GDP comes in hot at a whopping 5.7% and the market was not impressed. And why should it be, a significant part of the GDP was nothing more than a huge inventory gain. It is my view that this GDP print is a ‘one hit wonder’. The stimulus money from the Government played a big role in goosing production which leads me to think of the old saying “hurry up and wait”, in this case a wait (and hope) that the gains in inventory are matched with future gains in sales which I still foresee as tepid for a considerable time to come.

Speaking of production, a report this afternoon off the wires is that General Motors is increasing production of large vehicles (SUV’s and trucks) and is reducing production of smaller fuel efficient cars. I guess General Motors has still not learned the lesson that drove them into bankruptcy in the first place.

A lot of bearish indications on the charts, which I will cover in detail in the weekend video. One particular chart that shows extensive damage is the Nasdaq.

More later…

Again I ask whatever happened to President Obama’s statement four months ago that there would be no more bailouts?

Here we go again…

[...]GMAC Financial Services is close to getting approximately $3.5 billion in additional aid from the U.S. government, on top of $12.5 billion already received since December 2008, according to people familiar with the situation.

The announcement, expected within days, will coincide with GMAC taking additional steps to absorb losses related to its mortgage operations, these people said. The cleanup is designed to return the Detroit-based finance company to profitability in the first quarter of 2010, according to one of these people.

A GMAC spokeswoman declined to comment on any potential government action but said, “GMAC has been conducting a strategic review of its business and evaluating options to address the challenges in its mortgage operation.” The spokeswoman said GMAC wants to prepare itself to repay the U.S. government.[...]

GMAC says they want to prepare itself to repay the U.S. Government. Is taking more tax payer funds a necessary step before repaying the Government? I don’t know what kind of math GMAC is using to come up with an idiotic statement like that, but if it is the same math they use to balance the books at their retail bank (Ally Bank) then I would run as fast as I could away from that one.

[...]The mortgage-related write-downs to be announced as early as this week will affect assets held by ResCap and Ally Bank, GMAC’s online bank. Ally Bank was created after the company received approval in late 2008 to convert to a bank holding company and qualify for government money under TARP. The arrangement left the Federal Reserve with regulatory authority over the parent.[...]

From the Ally Bank web site:

Who we are

We are Ally Bank, built on the foundation of GMAC Financial Services. And with that experience we’ve learned that these times demand change and a new way of doing business. So we’re taking banking in a new direction.

That means talking straight, doing right and being obviously better for our customers.

You may be asking…

Is my money safe with Ally?

Yes it is. We’re one of the best capitalized banks in the country. And all Ally accounts are covered by the FDIC up to $250,000 per depositor. (emphasis added)

They are capitalized so well that they need another infusion of tax payer funds. I’m sorry, but I have to say to GMAC and Ally Bank that you are just one more example of what is wrong with the entire system.

To the Government I say: please let GMAC die already, enough is enough.

From the ‘Move Your Money‘  campaign we have the following video – - -

Remember the nearly $85 billion of “YOUR” money that was given to General Motors and Chrysler to rescue them from themselves? Yea, that $85 billion. Tax payers awoke one morning and discovered that they owned two car companies that unfortunately has since the mid 1980’s produced poorly designed and manufactured vehicles. It did not matter if you wanted to be part owner of a car company, but you are. And you are also taking a loss on “YOUR” investment.

Washington — The Obama administration will tell Congress Wednesday that it expects to lose about $30 billion of the $82 billion government bailout of the auto industry, two administration officials familiar with the report said today.

The estimate — the first public accounting of losses connected to the rescue of General Motors and Chrysler — is in line with what the Government Accountability Office, the Troubled Asset Relief Congressional Oversight Panel and former auto czar Steve Rattner have suggested. (Source: Detroit News)

While $30 Billion is slightly less than a previous estimate, it is still a loss of 37% of your money and you didn’t even ask to be invested in it to begin with.

The former GM stock symbol became GMGMQ and was moved to the ‘pink sheets’ upon their bankruptcy filing. It amazes me that there are still people buying this shell of a stock thinking they are going to ‘make a killing’. It is a shame that there are many people out there in the world who are being misled by ’stock pumpers’ that appear all over the Internet.

Some people even think the Government will rescue the common shareholders and give them something.

Folks, this is all nonsense, if you are currently holding ‘long’ positions in the bankrupt stock symbol GMGMQ.PK then you are at risk of losing every dollar without any advance notice. General Motors themselves have issued statements to people buying shares of the bankrupt stock, trying to warn them that their money is in danger:

GM management has noticed the continuing high trading volume in GM’s common stock at prices in excess of $1. GM management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios.

This is the second time that GM management has alerted the investor community that the common stock will have no value when the judge puts the gavel down and declares the process completed. Yet people continue to buy up shares thinking they will still make a fortune. And the advice they are getting from stock trading message boards is utterly ridiculous and sad.

This afternoon when GM announced its second warning to common share holders the stock dropped very quickly, but only moments later the fools were back in there buying it right back up.

One only has to look at the type of crap that is on the Internet to see why so many people lose so much of their money. How sad and pathetic that some people actually ‘beleive’ this stuff:

(disclosure: NO position whatsoever in GMGMQ, bonds, or other GM related holdings)

(click image for larger view)

A Saturday morning laugh…

GM has not been in bankruptcy for one full day yet and already the company is hitting the media with it’s ‘feel good about us’ ads.

At least they did not do what Chrysler did last year (yet). Remember the huge ‘Thank You America’ poster that ran in all major newspapers around the country thanking the American people for the ‘bailout’. See it HERE

At 6am EST the S&P 500 E-mini futures pinned the January blow off top (see chart below).

Today we have General Motors officially announcing (and court filing) bankruptcy. President Obama expected to speak to the nation at approximately 11:45am EST. To be followed by GM statements shortly thereafter.

GM is being removed from the Dow Jones Industrial Average and will be replaced by Cicco (CSCO).

Another change to the Dow index is Citigroup is being dumped from the index and will be replaced by Travelers Insurance (TRV)

S&P 500 E-Mini Futures Chart

The following is presumably a press release (draft?) by the Obama administration. This comes way of the wire services.

—–

On March 30, 2009, President Obama laid out a framework for General Motors to achieve viability that required the Company to rework its business plan, accelerate its operational restructuring and make far greater reductions in its outstanding liabilities. After two months of significant management engagement, General Motors has developed such a plan and has already begun to make progress toward its achievement. The Company has also secured commitments of meaningful sacrifice from all of its major stakeholder groups, sacrifices sufficient for this plan to proceed forward. As a result, the President has deemed GM’s plan viable and will be making available about $30 billion of additional federal assistance to support GM’s restructuring plan. To effectuate its plan, General Motors will use Section 363 of the bankruptcy code to clear away the remaining impediments to its successful re-launch.

For the better part of a century, The General Motors Corporation has been one of the most recognizable and largest businesses in the world. Today will rank as another historic day for the company—the end of an old General Motors, and the beginning of a new one.

General Motors Restructuring – Shared Sacrifice

The President made clear throughout this process that every one of the Company’s stakeholder would be expected to sacrifice, and that none would receive special treatment because of the involvement of the government. The resulting agreement is tough but fair, and has garnered broad support from GM’s major stakeholders:

• Operational restructuring: GM is undertaking a significant operational restructuring that will address past failures, dramatically improve its overall cost structure, and allow the company to move toward profitability even if the auto market recovers slowly. As a result of this restructuring, GM will lower its breakeven point to a 10 million annual car sales environment. Before the restructuring, GM’s breakeven point was in excess of 16 million annual car sales.
• The UAW has made important concessions on compensation and retiree health care that, while difficult, will help save jobs for active employees, pensions and health care for retirees, and make GM more competitive. In virtually every respect, the concessions that the UAW agreed to are more aggressive than what the Bush Administration originally demanded in its loan agreement with GM. Among other things, the UAW’s existing VEBA – to which GM has a $20bn obligation – will be replaced by a new VEBA as described below.
• The Steering Committee to a portion of GM bondholders has confirmed that bondholders representing at least 54% of GM’s unsecured bonds have agreed to exchange their portion of the Company’s $27.1 billion unsecured debt for their pro-rata share of 10% of the equity of new GM, plus warrants for an additional 15% of the new Company. The Steering Committee confirms that the number of individual and institutional bondholders that support this deal is now over 1,000. The bankruptcy court process will be used to confirm this treatment for those bondholders and other unsecured creditors that failed to accept or did not participate in the offer that was accepted by the aforementioned majority.
• Painful but necessary restructuring steps will also be implemented. In order to size GM’s footprint to its current share but also allow for volume growth when the economy and the automotive market rebound, GM has planned to reduce its plant operations. Today GM is announcing its intention to close 11 facilities and idle another 3 facilities.

Details on the Creation of New GM:

The newly organized GM will purchase substantially all of the assets of the old GM needed to implement its business plan out of a chapter 11 in exchange for the U.S. Government relinquishing the majority of its loans to GM.

• This new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.
• The GM qualified pension plans for both hourly and salaried employees will be transferred to the New GM as part of the purchase process.
• The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited chapter 11 proceeding and transition the new GM through its restructuring plan. The U.S. Treasury does not anticipate providing any additional assistance to GM beyond this commitment. In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred
  stock in the new GM and approximately 60% of the equity of the new GM. The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by the VEBA and the Canadian government.
• The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM. The Canadian and Ontario governments will receive approximately $1.7 billion in debt and preferred stock, and approximately 12% of the equity of the new GM. Based on its substantial financial contribution, the Canadian government will also have the right to select one initial director.
• Based on these steps, the new GM will have far less debt and a world class balance sheet. This will allow the company the financial stability to weather future market downturns and generate significant excess free cash flow to invest in the business.
• The new GM will also pursue a commitment to build a new small car in an idled UAW factory, which when in place will increase the share of U.S. production for U.S. sale from its current level of about 66% to over 70%.

Principles for Managing Ownership Stake

Consistent with the goal of clearly limiting the government’s role as a reluctant equity owner but careful steward of taxpayer resources, the Obama Administration has established four core principles that will guide the government’s management of ownership interests in private firms. These principles will apply to the U.S. government’s equity stake in GM:

• The government has no desire to own equity stakes in companies any longer than necessary, and will seek to dispose of its ownership interests as soon as practicable. Our goal is to promote strong and viable companies that can quickly be profitable and contribute to economic growth and jobs without government involvement.
• In exceptional cases where the U.S. government feels it is necessary to respond to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is practically feasible.
• After any up-front conditions are in place, the government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.
• As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.

Warrantees:

• GM will continue to honor consumer warranties. This past week, the U.S. Treasury made available the Warranty Support Program to GM and $361 million was funded to a special vehicle available to provide a backstop on the orderly payment of warranties for cars sold during this restructuring period.

The Bankruptcy Process

During this process, GM will continue operating in the ordinary course. From an operating perspective, the day after the filing will not be materially different from the day before the filing. The following parties will be treated as described below:

• Employees: Employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the sale moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM.
• Suppliers: GM will seek authority at its “first day” hearing to continue to pay suppliers in the ordinary course. In addition, the U.S. Treasury’s Supplier Support Program will continue to operate, and GM suppliers benefiting from the program will continue to receive that support.
• Dealers: GM will seek authority at its “first day” hearing to honor its customer warranties in the ordinary course. Moreover, GM will seek to continue to honor its dealer incentives for those dealers who are expected to continue to be part of GM’s distribution network going forward. There are some dealers that GM has identified that will not continue with GM. It is expected that the terminated dealers will be offered an agreement to orderly wind down their operations over the next 18 months
• UAW: The modified labor agreement reached between the UAW and GM will be operative and will be assumed by the New GM.

Well it was expected, but now it appears to now be a ‘done deal’. General Motors will file chapter 11 bankruptcy in New York on Monday June 1st (I will not be surprised at all to see the filing occur late this evening).

Word is spreading that General Motors board of directors have been in meeting all this weekend and have now agreed that bankruptcy is the only course to save the company.

General Motors will file for Chapter 11 bankruptcy protection in New York on Monday in a humiliating fall from grace for a symbol of America’s industrial might and the world’s biggest car maker for much of the 20th century.

Prior to the filing, which will mark the largest bankruptcy in history of an industrial business, US President Barack Obama and Fritz Henderson, GM’s chief executive, will seek to reassure workers, suppliers, dealers and car buyers that a leaner, reinvigorated GM will emerge from a court-supervised restructuring.

GM employs 230,000 people around the world, building more than 20,000 vehicles a day.

GM will say that it aims to emerge from Chapter 11 by August 1, shorn of much of its debt, four of its eight brands, and surplus plants and dealers.[...]

[...]GM secured approval over the weekend from holders of a majority of $27bn in unsecured bonds for an offer giving them a 10 per cent equity stake in the restructured GM, with warrants for another 15 per cent later.

However, while GM is hoping for a speedy transit through the court, the judge could rule that GM’s bankruptcy plan is illegal if it is deemed to be a reorganization plan disguised as a sale process.

The US and Canadian governments would initially own 72.5 per cent of the new GM, with the remaining 17.5 per cent held by a United Auto Workers union healthcare fund. Existing shareholders would be wiped out.[...] Source: FT

Tax payers of the United States will own over 70% of the failed auto maker. Combine this with what we own in AIG, Fannie and Freddie, hundreds of banks and financial institutions, auto parts suppliers, and other companies disguising themselves as ‘bank holding companies’ who even needs to participate in the stock market. The Government has done it all for us, even if we said we don’t want it.

UPDATES:

5:30pm EST – WSJ reports that the court papers will be filed at 8am on Monday. Also being reported is GM will announce that Al Koch will take the role as the chief restructuring officer. Koch is a turnaround specialist and managing director at the advisory firm AlixPartners LLP.

After months of everyone from the Government to the company CEO’s saying that bankruptcies would be the ‘wrong’ way to go because it would forever tarnish the auto industry are now one step closer to that very situation. Chrysler is of course already in bankruptcy and the final push into bankruptcy came on the heels of the President blaming the bond holders.

Now General Motors is expected to file court papers on Monday June 1st. Personally I think it will take place the night before on Sunday evening.

The executives of Chrysler and General Motors kept telling the world that bankruptcy would tarnish their name. I’m sorry, but they tarnished their names a very long time ago. Low quality, over priced, and notorious for poor customer service (just check year after year ‘consumer reports’ rankings). The bankruptcy should be viewed as a blessing by the CEO’s, not a curse.

The time to completely restructure these companies is long overdue. It is unfortunate that it will take bankruptcy to make the necessary changes but it will give Chrysler and General Motors a ’shot’ at being a better company. I said ’shot’ because unless these two companies drastically improve all aspects of their business then the bankruptcies will have been for naught.

Chrysler and General Motors MUST make changes right down to the very core of the business. If they fail to recognize the mistakes they made over the past 20 years then all of the tax payer money being pumped into these companies will be a complete waste. Tax payer money should have never been given to these companies to begin with. And what is even worse is that we will be providing upwards of another $50 Billion to General Motors to get them through the bankruptcy process. The use of tax payer money to bailout and/or rescue these firms from themselves is a disgrace in my opinion.

From WSJ:

The Obama administration plans to usher General Motors Corp. into bankruptcy court Monday and push through a restructuring that will cost taxpayers billions of dollars more than previously envisioned, turning what once was one of the most profitable companies in the world into a government ward. The possibility of a speedy bankruptcy process heightened Thursday after the government altered the terms of the restructuring and offered GM bondholders a sweetened deal if they agree to forgive $27 billion in unsecured debt and pledge not to oppose the reorganization in court.

As part of the revised plan, the U.S. would provide GM with at least $30 billion in financing to carry it through and out of bankruptcy, on top of the $20 billion in loans the government already has given the company. It also agreed to turn the loans into a 72.5% ownership stake in GM — a big bet that could cost taxpayers dearly if the car maker fails to recover.

The filing would set in train an unprecedented experiment in U.S. industrial policy in which the government, from the White House to Congress, will seek to remake an icon of American business while not appearing to bore too deeply into its day-to-day operations. It could be six to 18 months before GM becomes a publicly traded company again, administration officials said.

President Obama instead is expected to announce the government’s plans for GM in a Monday speech that will echo many of the notes he tried to strike in his last two talks on the car industry: that the government plunged into the task reluctantly, but with confidence that it can rebuild GM and Chrysler and salvage at least some of the taxpayer investments.[...]

Like I stated above, unless Chrysler and General Motors can actually build cars that people want; and can regain respect in the auto industry as building a quality and reliable product then all of this will be a waste of time, and of our money.

Over the weekend I posted an article called GM Bond Holders Prepare For War. In the article I wrote why it is that the rule of law is important with regard to bankruptcy proceedings. Bond holders of a company that enters into bankruptcy are entitled to receive first consideration under the law.

I argued what the long term implications could be if the Chrysler, and the soon to be General Motors bankruptcy game playing with secured debt holders would mean for future bond sales of other companies.

A rare event happened on CNBC today, they interviewed someone who spoke of the law and was not a ’stock pumper’. Watch Indiana state treasurer Richard Mourdock discuss his battle.