No Life Support for GM
No bailout - but a bridge loan could help with transition.
Everyone knows that there are large amounts of hedge-fund redemptions being processed. Some blame the current vicious sell-off on forced hedge-fund sales as they have to meet these redemptions at the end of the quarter.
This brings up an interesting possibility: My guess is that the large bulk of that money is going back to institutions that will need to put the money to work. Where will they deploy it? If they're projecting 7-8% total portfolio returns, they cannot put that money in bonds. My guess is that it will go back to other hedge funds or into long-only managers. This money will start to go to work in mid- to late January.
We could see a very large rally the first quarter of next year. For traders, this will be a chance to make some money. I think it will be a bear market rally, as the recession will still be in full swing, and we could see a pullback when that money gets fully deployed. But it will be fun while it lasts.
As traders begin to sense that possibility, we could see a serious year-end rally as well. Would I bet the farm? No, but I offer up the idea as a possibility. And I know a lot of people have large short positions that have made them a lot of money this year. Maybe it is time to think about taking profits.
Is GM Too Big to Fail?
I wrote in 2004 that General Motors (GM) was essentially bankrupt. They owed more in pension obligations than it seemed likely they would be able to pay without major restructuring of the union contracts. I was not alone in such an assessment, although there were not many of us. Now that assessment is common wisdom.
Bloomberg today cites sources that claim a collapse of GM would cost taxpayers $200 billion if the company were forced to liquidate. The projections also called for the loss of "millions" of auto-related jobs. Combined, GM, Ford (F) and Chrysler employ 240,000. They provide healthcare to 2 million and pension benefits to 775,000. Another 5 million jobs are directly related to the 3 auto companies.
GM has 6,000 dealerships which employ 344,000 people. According to a recent study by the Center for Automotive Research (CAR), if the domestic automakers cut output and employment by 50%, nearly 2.5 million jobs would be lost and governments would lose $108 billion in revenue over three years. (Edd Snyder at Roadtrip blog)
How did we get to a place where the market cap of GM is a mere $1.8 billion and its stock price has dropped from $87 in early 1999 to $3.10 today? Where Rod Lache of Deutsche Bank has a "price target" of zero for GM? "Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," Lache wrote.
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