Get Out of GM Now

“This is the end, da, da, dum. Beautiful friend the end,” sang Jim Morrison in the Door’s classic elegy “The End.” Morrison named his band in honor of The Doors of Perception, a 1954 book by Aldous Huxley, describing Huxley’s trips on mescaline.

As the General Motors we know nears its end and the doors shut on some classic car brands, we have to reorient our perceptions about the company and its stock and its value.

Can you picture what will be
So limitless and free
Desperately in need…of some…strangers hand
In a…desperate land

All too often, investors who don’t understand the bankruptcy process buy shares of a company expected to go bankrupt in the misconception that if they buy now at a low price they can capture the upside when the company comes out of bankruptcy.

This is not the case. While General Motors may come back in some new form under the same name, the General Motors we know will soon be dead.

If a company doesn’t completely go out of business, it enters Chapter 11 bankruptcy. In this case the business is reorganized, instead of shutting down entirely. Still, in all forms of bankruptcy, the holders of common stock lose their entire investment in the company.

Everything.

Bond holders are creditors. They’ve lent capital to the company, so the company owes them money. The bankruptcy changes those obligations, but often creditors receive something for their loans, even if it’s just pennies on the dollar. Sometimes bondholders are given stock in the new company to give them a chance to make back some of their money. But current shareholders hardly ever get new stock.

Common stock holders are the company’s owners. They hold equity. Because their surrogates, the board of directors and executives, did a poor job of running their company, they lose their ownership stake completely. To make it clearer, if you hold common stock the day before the company emerges from bankruptcy you lose everything. While holding the stock to the bitter end may give you a better tax write off, if you sell now, you will at least pocket some cash.

So, please, please, don’t buy GM thinking you can hold it through the bankruptcy. All the current common shares will disappear the moment they emerge from bankruptcy. Can you make some day trades with GM and try to capture the spread? Sure, but since this is so close to the end, the risk is very high that they could call it a day on the day you are holding it and they you would lose your investment. If you haven’t already, get out of GM.

ETF Trends has an interesting piece on which ETFs will be affected by Obama’s Auto and Fuel Efficiency Plan.

United States Oil (USO) and United States Gasoline (UGS) would be the ETFs most likely hurt from new fuel efficiency in cars. The PowerShares Wilderhill Clean Energy (PBW) would be a clear way to get in on the clean energy band wagon. ETFTrends also likes Vanguard Consumer Discretionary (VCR) saying consumers could do well if fuel efficiency lowers their gas bills. Finally, the E-TRACS UBS Long Platinum ETN (PTM) seems counter-intuitive. Platinum is used on catalytic converters. There should be fewer of these if the auto business goes through a contraction. However, the launch of a platinum ETF might spur heavy buying to fill the fund’s vaults. The ETN doesn’t actually hold platinum.

ETF/ETN Assets Grew 10%, Inflows 17% of Total

Assets in U.S.-listed exchange-traded funds and exchange-traded notes (ETN) grew 10% in April over the previous month to $540.2 billion, according the National Stock Exchange in Jersey City, N.J. March assets totaled $489.2 billion.

Out of April’s $51 billion increase, 17%, or $8.5 billion was due to net cash inflows. The rest came from price apprecation . The NSX says year-to-date net cash inflows jumped 59% to $12.6 billion, over the same time period in 2008. In February, ETF/ETNs saw net cash outflows of $5.8 billion, but that turned positive in March with net cash inflows of $8.1 billion

At the end of April 2009, the number of listed products totaled 844, compared to 719 one year ago. Notional trading volume for ETF/ETN products totaled $1.6 trillion for April 2009, representing 33% of all U.S. equity trading volume. That fell from March, when notional trading volume was approximately $2 trillion, representing 38% of all U.S. equity trading volume.

I’m Speaking in Times Square on ETFs

I will be talking about ETFs and sigining copies of ETFs For The Long Run: What They Are, How They Work and Simple Strategies for Successful Long-Term Investing at the New York Financial Writers Drink Night on Tuesday, May 26.

The event will be held at Playwright’s Celtic Pub at 732 Eighth Avenue (between 45-46th Streets), third floor. It will run from 6-8 PM.

If you want to get a better understanding of ETFs and ask some questions, come on down.

I will explain the nuts and bolt differences and how the ETF can offer so many advantages over mutual funds and the purchase of individual stocks. I will also talk about how commodity and currency ETFs are different from stock ETFs and a little bit about the details of the leveraged and short ETFs.

New Firm Launches Emerging-Market ETFs

Emerging Global Advisors entered the ETF market by launching on the NYSE Arca the first family of emerging-market sector ETFs.

The EGS Emerging Markets Energy Fund (EEO) will track the Dow Jones Emerging Markets Oil & Gas Titans 30 Index. The index holds 30 of the largest emerging-markets companies in the oil & gas industry across 13 countries.

The EGS Emerging Markets Metals & Mining Fund (EMT) tracks the Dow Jones Emerging Markets Metals & Mining Titans 30 Index. This index is comprised of 30 of the largest emerging-market companies in the metals and mining sectors spanning nine countries.

The firm plans to introduce a total of 10 ETFs designed to provide broad-based exposure to leading emerging-market companies across many industries. Each ETF has exposure to a diversified mix of countries reducing single-country economic and political risk, says the firm, an important concern for many emerging markets investors. Index components were selected based on float-adjusted market capitalization, revenue, and net profits.

“For the first time, institutional investors will have a transparent vehicle for gaining sector-based exposure to the emerging markets,” said Robert Holderith, chief executive officer at Emerging Global Advisors. “Our family of ETFs will provide the market access and liquidity to allow institutions to execute trading and investment strategies that have not been previously possible.”

PowerShares/Van Eck Tie for Most Innovative U.S. ETF

Invesco PowerShares and Van Eck’s Market Vectors shared the 2008 award for the Most Innovative ETF the Americas at the 5th annual Global ETF Awards recently. Daiwa FTSE Sharia Japan 100 won Most Innovative ETF in Asia, while db x-trackers and Lyxor Asset Management tied in Europe.

The actual ETFs weren’t listed, as voters aren’t required to mention the fund’s name, just the firm’s. It’s probably just as well. I surmise that PowerShares won for producing the first family of active ETFs in the U.S. rather than any particular fund. PowerShares’ Active Alpha Multi Cap Fund (PQZ), Active AlphaQ Fund (PQY), Active Low Duration Fund (PLK) and the Active Mega-Cap Fund (PMA) were all launched on April 11, 2008. Does any one fund stand out as more innovative than the others? I don’t think so. I suggest they won more for bringing the active concept to the U.S. market.

PowerShares actually didn’t launch the first active ETF. It had been in a race to come out with the first active ETF, but lost to Bear Stearns by just a matter of weeks. However, when Bear Stearns died, so did its active fund, leaving PowerShares with the first viable active ETFs in the U.S.

Meanwhile, Market Vectors launched five ETFs last year. If I had to guess, I would say they won for their funds covering frontier markets, Africa Index ETF (AFK) and Gulf States Index ETF (MES).

The SPDRs brand of ETFs from State Street Global Advisors again won Most Recognized ETF Brand in the Americas. This is probably due to the fact that the SPDR (SPY) was the first ETF and is the largest and most liquid ETF on the U.S. market. But I’m sure a lot of this has to do with the ad campaign for Select Sector SPDRs.

These commercials, which run often on CNBC, show spiders building webs in the industry-signifying shapes such as an oil derrick for the Energy Select Sector SPDR (XLE), a hard hat for the Materials Select Sector SPDR (XLB) or light bulb for Utilities Select Sector SPDR (XLU). The ad makes a really good connection between the name SPDR and that fact that these are funds to invest in. SPDR also surprised many people by winning Most Informative Website, SPDRS.com. The site is a big advancement over the previous incarnation and much easier to use.

The Global ETF Awards are like the Oscars of the ETF industry. They are unique on Wall Street, because as far as I know these are the only awards in which an industry is invited to vote on itself. This makes winning extremely special because it’s your competitors who say you’ve done a good job, rather than a few individuals.

Some people who read my previous note about the awards seemed to think the conference and awards deal only with the international market. That’s not right. As I clearly stated previously, it’s the only conference that deals with BOTH U.S. AND INTERNATIONAL issues. Nearly every company in the U.S. ETF industry attended and many had representatives speaking on panels. However, unlike other ETF conference I’ve attended, which are completely focused on the U.S., this conference also addresses issues affecting ETF providers outside the U.S.

It was a great opportunity to network with not just State Street, Bank of New York Mellon, ProShares, PowerShares and Barclays, to name a few, but also representatives from the Bank of Ireland, France’s Lyxor, the London Stock Exchange and China Asset Management.

The conference and awards dinner are presented by ExchangeTradedFunds.com and were held at the Grand Hyatt Hotel in New York City.

For the complete list of winners go to ExchangeTradedFunds.com.

Einhorn Makes Gold His Largest Holding

Fresco passed along this little tidbit reported by StreetInsider.com. David Einhorn’s Greenlight Capital hedge fund issued its 13F for the quarter ended 3/31/09. Fearing inflation, Greenlight boosted its exposure to gold through two ETFs. The fund bought 514,000 shares of SPDR Gold Shares (GLD) to raise its stake to 4.2 million shares. StreetInsider says this is Greenlight’s biggest position and valued at $385 million. The fund maintains its stake of 3.2 million shares in Market Vectors Gold Miners ETF (GDX). For a full report on Greenlight’s stock holdings check out StreetInsider.com.

Inflation has to go up, no? I mean really, it can’t get much lower. Gold is considered a classic hedge against inflation, so if people anticipate inflation rising significantly, gold is a good place to be.

The Wall Street Journal says GLD is seeing the largest money flows for buying on weakness. Today, GLD is down $1.39, or 1.5% to $90.17.

Book Review of ETFs for The Long Run

Research Magazine just came out with a supplement called the Guide to ETF Investing 2009. Some great articles in there.

On page 8 of the guide is a review of my book ETFs for the Long Run. The link goes to a PDF file. The article was written by Ron DeLegge, the editor of ETFGuide.com, a great resource for ETF information. I am reprinting it here because I can’t link directly to the article.

Long-Term Thinking

Mutual funds may have enjoyed a 65-year head start, but the interest in ETF investing by individual investors and financial professionals is blossoming. Naturally, the rise of ETFs has led to a proliferation of subject material related to this still emerging investment vehicle. ETFs for the Long Run tackles this growing investment universe in a fun, readable and easy-to-comprehend manner.

The first few chapters take readers through a brief review of how ETFs came about. Nathan Most, a product developer for the Amex was instrumental in helping to launch the U.S. ETF marketplace. Most asked his development team, “Why can’t we create a warehouse receipt which would be backed by the underlying stock in the index but trade like a share of stock itself?” His question would later be answered with product prototypes that would eventually lead to the first U.S.-listed ETF in 1993, the Standard & Poor’s Depository Receipt (SPY).

Author Lawrence Carrel writes about ETFs as being a “better mousetrap.” He argues that mutual funds are inefficient from a cost standpoint: “Funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.” On top of these costs, Carrel explains that there are additional charges that erode performance such as capital gain distributions. These often have the ugly habit of surprising mutual fund investors.

Timing Trouble

Remember the mutual fund timing scandal from 2003? Carrel suggests the 2003 scandal actually helped to fuel the popularity of ETFs. As you may recall, mutual funds were accused of breaking their own rules by allowing a select group of privileged investors to late-trade and market-time within their funds. On one hand, fund companies were telling investors to be long-term investors. On the other hand, these same companies were allowing hedge funds to make quick short-term profits at the expense of long-term investors. In contrast, ETFs avoided becoming tainted by the scandal because ETF investors are unaffected by the trading activity of their fellow shareholders.

ETFs for the Long Run explains the importance of building an ETF portfolio that accomplishes a logical financial mission. Carrel cites the classic 60/40 conservative portfolio which has substantially less exposure to stocks and more exposure to bonds. He suggests an equity mix using SPY, VO, IWM and EFA. For the bond position, he uses BSV, BLV, CFT and TIP. He also throws in a REIT fund (VNQ) for non-correlated market exposure.

Future Tense

Toward the end of the book, Carrel considers what the future of the ETF marketplace could become. While active ETFs have yet to make any significant impact in the business, the number of active mutual funds outnumbers that of index mutual funds. Could the same thing eventually happen with ETFs? Another area of future ETF asset growth is inside the lucrative 401(k) retirement market. Millions of 401(k) investors have no low-cost investment options or diversified choices like commodities, international bonds or REITs. Companies like Invest n Retire and WisdomTree are already aggressively pushing ETF/401(k) retirement plans. As complicated as ETF investing may sometimes seem, simplicity is often best. “The basic challenge for
the individual investor is to achieve a broadly diversified portfolio for the least amount of money,” states Carrel. This book should go a long
way to helping not just investors but top-notch financial professionals accomplish this noble objective.

Market Vectors Coal Called ‘Play of the Day’

StreetInsider.com recommends traders pay attention to the Market Vectors Coal ETF (KOL) in light of Alpha Natural Resources (ANR) sparking what Reuters calls a “wave of consolidation in the fragmented coal-mining industry.”

Alpha offered to buy Foundation Coal Holdings (FCL) for $1.5 billion, a 41% premium to Monday’s close. in an attempt to create the third-largest U.S. coal producer. The companies said the strategy was to benefit from an expected rebound in demand from steelmakers and power plants for coal.

StreetInsider says the ETF could be extremely volatile because it’s a stock for stock deal.

My Mother Wins Mother of the Year

This has nothing to do with ETFs, but I thought this was very cute and if you haven’t given your mother something for Mother’s Day, or even if you have, this will give her a big smile.

My mom, of course, is the real winner, LOL.

But click on the link and send one to your mom.

First Traditional Actively Managed ETF Launched

The mutual-fundification of the ETF industry now begins.

Grail Advisors launched its first ETF, the Grail American Beacon Large Cap Value ETF (GVT), Monday on the New York Stock Exchange. The San Francisco-based fund manager says this fund “represents the industry’s first ETF to use traditional active management.”

Grail says this new offering is similar to traditional actively-managed mutual funds and unlike other active-equity ETFs currently in the marketplace, because it allows portfolio managers unrestricted trading.

One needs to ask if this is a good thing for the ETF industry? And more important, is this a good thing for investors? The answer to the first question is “I’m not really sure.” The answer to the second? A definite no.

It’s late and I’ve been out of the office all day Monday. But I will update this post with a full analysis on Tuesday.