Stephen’s Posterous

General Motors filed for Chapter 11 bankruptcy protection on June 1, 2009, as part of the Obama administration's plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government.

General Motors bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company. The company said it has $172.81 billion in debt and $82.29 billion in assets.

Read about the reinvention of General Motors on their new re: invention website.

General Motors Bankruptcy Filing

General Motors burned through $10.2 billion in the first quarter. And you thought start-ups in 2000 during the dot com bust burned through a lot of cash.

Revenue plunged 47%. In case you haven't noticed, the automobile business is not the business to be in, especially in a recession. GM is currently surviving on a Pay Day loan from Uncle Sam of $15.4 billion and it still needs another $11.6 billion.

If GM were your brother, would you load them more cash? The Wall Street Journal reported that Frederick Henderson, the CEO, has that while he hopes to avoid a bankruptcy filing, the scenario is increasingly likely.

If GM succeeds, it would ask the U.S. Treasury to approve a plan in which the government would swap much of the auto maker's debt in exchange for taking a 50% stake in the company.

Mr. Young said GM hasn't engaged with an ad hoc committee representing some of the company's institutional bondholders. The group proposed a counteroffer to GM's debt swap that would give bondholders, rather than the government, a majority stake in the auto maker. Mr. Young said any changes to GM's offer would have to happen in the near term for the swap to be complete by June 1. He declined to comment on the likelihood of any changes.

The Financial Times Lex column said that General Motors shares are wildy overvalued at $1.70 a share. No kidding. If GM files for bankruptcy, equity will be wiped out and GM will be trading pennies on the dollar, or more likely $0.001 a share.

The article says that hope springs enternal. The thinking must be similar to that line, "Too Big To Fail." After all, who would let a company as iconic as General Motors simply fail? The reality is that tax payers may let the company fail. After all, the Financial Times reported that US banks need $75 billion, and no one wants their local bank to go out of business.

After reporting earnings on May 7, 2009, GM can look back at two decades of selling 170 million vehicles and generating $3,300 billion in revenue with $60 billion of losses in the process, which is more than its profit of the previous 80 years as stated by the Lex article.

Buying GM shares at this point doesn't make any sense. The current proposal from the Obama administration leaves some hope that a bankruptcty can be averted if creditors can agree within the next three weeks. But this still leaves GM shareholders with very little in equity.

Jim Rogers Isn't Buying a U.S. Stock Rocovery by John Kimelman, Barron's Online

Bank executives and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.

But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.

"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."

Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.

He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.

Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.

These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.

Recently, Rogers talked to Barrons.com by phone from his Singapore home.

When you last did a lengthy interview with Barron's magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November.

It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.

In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?

If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.

Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?

Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.

That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?

I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes, the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.)

That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.

Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?

Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.

But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs.

So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.

Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Can you summarize the reasons for your bullishness about commodities?

It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years.

And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to.

And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving.

They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.

What do you think of bonds?

I am anticipating shorting bonds, the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.

I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system.

The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

Thanks for your time.

Source.

Carlos Ghosn has long been one of the stars of the car industry. Shooting to fame as "le cost killer" and the saviour of Nissan in Japan, Mr Ghosn even ended up inspiring a Japanese Manga comic book character. Later, Mr Ghosn, Lebanese although born in Brazil, took the reins, too, at France's Renault, which has an alliance with Nissan. This year he is also the head of Acea, the European car industry lobby group that elects one of its members' chief executives each year to be president.

The 54-year-old's star, however, has dimmed in recent months as a series of stumbles at Renault and Nissan has raised questions about strategy and whether Mr Ghosn can continue to do both jobs. He remains, however, one of the most charismatic and outspoken managers in the industry.

In this interview as head of Acea, Mr Ghosn discusses worries over manufacturers failing, why carmakers are asking for aid but not subsidies and the crisis in eastern Europe. 

Are we likely to see one or more carmakers fail in Europe soon?

Yes. We are seeing the market continue to dip and, unfortunately, from a very low level. So with probably 25 per cent lower production this year and at least 25 per cent down in sales, we are going to have a challenging year.

How many carmakers are likely to be left?

We already know which carmakers entered this crisis in a weak position, which obviously this crisis is not helping a lot. Now even strong car manufacturers are being weakened by what is taking place, so the longer it lasts the more it is a threat to the different actors of the car industry.

Should there be more action from governments and the European Commission?

We are advocating that governments should help eliminate the obstacles [to] the car industry as a whole, not [intervene] in one particular carmaker. There is an obvious one, which is financing. Money is scarce and, when it is available, it is very expensive . . . It is not about subsidies. We want long-term loans.

Is there a danger that you do not tackle one of the fundamental problems - overcapacity?

I don't think so. If we were establishing financing for all the car industry it doesn't mean all the manufacturers are going to be in good shape. Those who were already in bad shape will continue and will have to fix the problems of overcapacity, of lack of attractive products, of the lack of competitiveness. If you take a position that we should not aid the industry as such, you are jeopardising even the competitive part.

We have only seen action by national governments. Are you concerned about a return of protectionism?

That is one of the reasons why we are always going to the European Commission. We are saying: "If you do not take initiatives, you [will] leave governments in front of the problems and they are going to try and solve them themselves."

How quickly does it need to take action?

There are a lot of things happening, but frankly we need it faster, more decisive and not reactive but proactive.

When will the crisis end?

If you take into consideration the amount of money and incentives governments are putting in not only in Europe but in the US and Japan, logically and mechanically we should start to see a kind of recovery in 2010. You are forgetting a very important factor, which is a psychological one. It is not only about throwing money at the economy but putting the consumer in a position where he is ready to consume again. This part is frankly the most scary one.

How worrying is the growing crisis in eastern Europe?

It is worrying because the decline has been so abrupt and deep. We are really worried about it. We do not know how long it will take till we come back to some normalcy. The industry is taking the appropriate measures. Could we see something more radical? Factories being closed? I don't think we will see that in eastern Europe because usually they are the most cost-competitive factories in Europe. Because it is [accompanied by] the weakening of currencies it makes them even more competitive than before. You are going to see idling of plants, without any doubt.

How about in western Europe?

You may see factory closures if some car manufacturers go out of business. I don't believe in too many factory closures from existing car manufacturers because there are many ways they can shrink production [at] the site rather than closing it.

Is the situation among suppliers getting worse?

Yes. This is probably one of the most worrying parts for the industry. We are concerned about the supply base. This is a very important and fundamental part of the industry. We have to be careful that every time a measure is taken - whether financing or stimulating the market - we are also thinking about and including the suppliers.

Could we see the collapse of a big supplier? Is it a worry that it threatens manufacturers?

It is a big worry. That is why manufacturers are consulting each other every time there are some signs or bad news about a particular big supplier.

Are you worried about whether the euro can survive intact?

Probably theoretically it is a worry; practically I don't think so as the euro has brought so many advantages that it is going to take a much bigger crisis than the one we have been through to threaten what has already been gained.

Source.

With industries from autos to banking begging for taxpayer handouts, what would you call an industry that says thanks, but no thanks? Crazy, but like a fox. Even for venture capitalists, some ideas are just too risky.

Hundreds of the country's venture capitalists this past month blogged against or otherwise rejected proposals that the U.S. government fund early-stage investing.

They dismissed a recent column by Tom Friedman in the New York Times that urged bailout funds for venture capitalists. "You want to spend $20 billion of taxpayer money creating jobs?" Mr. Friedman wrote. "Fine. Call up the top 20 venture capital firms in America" and invest the money with them.

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google.

Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media -- here, the venture community dissecting a proposal online -- can now quickly take down bad ideas.

"The top venture firms don't want, don't need and are never going to take government money. The same is true of the top entrepreneurs," Fred Wilson of New York's Union Square Ventures wrote on his blog. "The worst firms, on the other hand, will gladly accept government money," which would go to investors who can't raise funds privately and to entrepreneurs whose ideas shouldn't be funded. "It's a problem of adverse selection."

Venture firms have had a hard time profitably investing $30 billion each year for the past several years. Even in the paralyzed markets of the last quarter of 2008, more than $5 billion was invested in more than 800 deals. Returns, however, have been low.

Some areas, such as clean tech, look especially troubled now that oil no longer costs $145 a barrel. Another $20 billion would be impossible to digest efficiently. Instead of subsidizing the biggest venture firms, Geoff Entress of Rolling Bay Ventures in Seattle posted that tax breaks are needed for seed-stage angel investors, who "are quickly becoming an endangered species."

The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good.

Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble.

Taxpayer funds would reduce hard-won investment discipline as cheap money backed riskier, less-promising ventures. Valuations assigned to companies would artificially rise, poorly selected start-ups would fail, and taxpayers would be on the hook.

Taxpayer money would bring other unwanted side effects. As Bill Gurley of Benchmark Capital in Silicon Valley put it on his blog, "If American citizens were truly appalled with John Thain's bathroom and the GM executive's private plane, then they should find plenty to abhor in the well-compensated VC community." Congress would no doubt hold hearings on the obscene profits earned by the founders of the next Google.

If policy makers want to help entrepreneurs and their investors, there's no mystery about what's needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur's sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down.

And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there's an understanding that these investments are made with income that's already been taxed once.

This no-bailout-please episode is a wider reminder about the downside of Washington picking winners and losers. Government spending almost always distorts markets. John Maynard Keynes included among his prescriptions a do-no-harm fiscal stimulus of simply paying people to dig and then fill in ditches. Venture capitalists have now reminded us that throwing taxpayer money at an industry is more likely to be a kiss of death than to transform frogs into princes.

Innovations supported by venture capital in technology, health care, education and other promising but risky industries are at the heart of our economy, too important to be dictated by nonmarket forces. Other industries now lobbying for their own bailouts should weigh more carefully the risks that come with taxpayer involvement. The lesson of accepting government involvement often is something ventured, nothing gained.

Source.

It has been 20 years since filmmaker Michael Moore tore into General Motors’ management in Roger & Me, portraying them as heartless buffoons for their ruthless downsizing.

It seems they probably should have kept cutting costs and diversifying away from autos as former chief executive Roger Smith was then doing, to Mr Moore’s chagrin.

After its dismal earnings report on Thursday, February 26, 2009, GM can now look back on two decades during which it sold some 170m vehicles, generated $3,300bn in revenue and racked up cumulative losses of $55bn in the process – more than its profits over the previous 80 years.

The US Treasury has hired some supposedly hard-nosed advisers, Steven Rattner and Ron Bloom, to evaluate GM’s restructuring plan. If they are worth their salt, they will recall this sad record of value destruction as they evaluate the carmaker’s case for another $16.6bn in government loans on top of the $13.4bn it has already received.

Even before the horrid start to 2009, GM had burned through more than $2bn a month in cash in the final quarter of 2008, leaving it with just $14bn in liquidity. Since the company estimates that it needs a minimum of $11bn–$14bn to stay afloat and that it will burn another $14bn this year, the notion that taxpayers will recover their $30bn is hard to swallow.

A recent proposal to backstop loans after a bankruptcy filing seems more prudent. Every GM annual report of the past few years has promised bold changes, green cars and a brighter future. On the same day that Washington projected a record budget deficit, GM’s inability to walk the talk counts against it.

Unless lenders and unions accept a transformative restructuring, the taskforce considering the relative merits of more aid versus Chapter 11 should firmly recommend the latter.

Source.

Never mind General Motors, Ford and Chrysler. The “big three” automotive companies worth paying attention to in this market are O’Reilly Automotive, Advance Auto Parts Inc., and AutoZone Inc. All three stocks are higher in 2009, and O’Reilly hit a 52-week high Thursday after it released earnings Thursday morning, while AAP exceeded estimates Wednesday after the close of trading.

These stocks have strengthened while most retailers have weakened in a “stretch the family dollar” trade — consumers, out of necessity, are keeping their automobiles longer, and electing to get cars fixed rather than trading them in for new vehicles. Those that are buying cars are increasingly looking to used cars — about 511,000 used cars have been sold the past three months that in normal economic times would have resulted in a new-car purchase, according to auto-information company Edmunds.com.

“People are keeping their cars longer, so that’s going to require more parts in general,” Dave Magee, chief investment officer at Magee Thomson Investment Partners in San Diego, who owns shares of O’Reilly Automotive. “We think that phenomenon is occurring because the economy is softening, so you’re getting a counter-cyclical boost.”

Shares of O’Reilly gained 16% to rise to $32.29 a share, a new 52-week high for the stock, after the company posted an 84% increase in net income and exceeded analyst estimates for earnings and revenue. Advance Auto’s net income fell 30% on inventory-related write-downs, but still surpassed expectations and it gained 12%. Autozone does not report earnings until March 3 — but the stock hit a 52-week high on Feb. 6, and gained 5.8% Thursday.

Mr. Magee says O’Reilly may have an advantage in coming months due to its recent purchase of struggling parts retailer CSK in 2008, which could help it with planned expansion in the western U.S. But Jaison Blair, analyst at Rochdale Research, says a misstep amid the integration is possible. He also says that the economic downturn may eventually impact companies such as this if it worsens. “We think the negatives of employment losses and declining mileage will eventually trump the positives of lower gas prices and older autos,” he writes.

Analysts at Morgan Stanley, meanwhile, warned that Advance Auto’s decision to write off $37 million in old inventory, along with a doubling in store closures in 2009, points to reduced demand as well. Americans also drove fewer miles in December, the 14th consecutive month of mileage declines.

Still, the vast majority of Americans still need to get to work — and need cars that operate. “The fundamentals for the parts retailers are arguably the strongest in hardline retail,” write analysts at Raymond James.

Source.