Tag Archives: GM

Is General Motors a Good Buy?

Yes, I know I’ve been remiss on regular updates, but I’ve been working very hard on other projects.

General Motors is relevant to ETFs because already it’s been included in 5 FTSE indexes. It will be added to two MSCI indexes on Nov. 30 and may join the Russell 3000 Index. Four of those indexes are tracked by ETFs. That means GM will be affecting your ETFs, boys and girls. Of course, one of the big benefits of ETFs is that they eliminate single stock risk. Which means one stock doesn’t ruin the fund.

The following are the indexes with corresponding ETFs:

  • Vanguard Total World Stock ETF (VT) tracks the FTSE All-World Index.
  • iShares MSCI ACWI Index Fund (ACWI) tracks the MSCI All-Country World Index.
  • Vanguard Mega Cap 300 ETF (MGC) tracks the MSCI U.S. Large Cap 300 Index.
  • iShares Russell 3000 Index Fund (IWV) tracks the Russell 3000 Index.

Actually, I did comment a lot when GM went under.  I told people to get out of the stock and how it would affect ETFs as the indexes they followed refused to ditch the shares until the bitter end.

So, it only seems fitting, I should address Government Motors as it issues its post-bailout IPO.

Anyway, you didn’t really think you were going to get shares of General Motors at the offering price, did you? Well, after taking a look under the hood of GM’s initial public offering, you’ll probably be glad that you didn’t.

The biggest reason to feel lucky is that the stock’s sellers — not the buyers — grabbed most of the first-day pop for themselves. When the shares went public on November 18 at $33, the sellers sucked up the premium that investors would have enjoyed had the shares come public at $29, the high end of the original pricing range. GM shares did jump to $35.99 on their first day of trading, but they closed at $34.19, a modest 3.6% above the IPO price. The stock closed at $33.48 on November 24.

Considering that you can still get GM’s shares for less than a buck more than the offering price, the question is, should you? Probably not. Even after the Detroit auto giant reduced its headcount by tens of thousands of workers and shed billions of dollars in liabilities as part of the U.S. government’s bailout, the company still has issues.

For the full story go to Kiplinger.com.

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GM Booted From S&P 500

GM

Standard & Poor’s finally removed General Motors from the S&P 500. Starting Wednesday morning, GM is out.

DeVry gets promoted from the S&P MidCap 400 to take GM’s place in the S&P 500 after the market closes June 8. The same day, Aaron’s makes the leap to the MidCap 400 from the S&P SmallCap 600, and Cbeyond replaces Aaron’s in the small-cap index.

S&P made the announcement Monday after 5 p.m.

These ETFs track these indexes:

The SPDR Trust (SPY) and iShares S&P 500 Index (IVV) track the S&P 500.

The MidCap SPDRs (MDY) and iShares S&P MidCap 400 Index (IJH) track the S&P MidCap 400. The iShares S&P SmallCap 600 Index (IJR) tracks its eponymous index.

These indexes have a slew of style ETFs following them. Some ETFs allow you to track just the growth stocks in the index or the value stocks in the index. You can also buy inverse and leveraged ETFs for these indexes. They will all be changing their portfolios this week. I’m sure there will be a lot of trading in those stocks this week.

Was I responsible for S&P finally kicking GM out of the index? Check the progression.

Obviously, I’m j0king. I don’t think I’m that powerful. But, just in case, I will be concentrating my powers tomorrow to persuade the Obama Administration to finally put some limits on TARP.

Funds Hold GM to the Bitter End

What does a company need to do to get kicked off of an index around here?

As of Friday, General Motors was still in the S&P 500 and the Dow Jones Industrial Average. If the indexes hold the stock until the company declares bankruptcy are the index funds and ETFs that track indexes with GM as a component obligated to hold it to the bitter end? Are they are allowed to sell it ahead of time or do they have to suck up the loss, even though everyone saw this coming from a mile away?

According to AOL Money & Finance, all of GM’s shares are now owned by large block holders. Institutions hold 36%, mutual funds, which includes ETFs, hold 62% and the rest with others like the executives. State Street Global Advisors hold the most GM shares of any institution, 26.9 million, or 4.37% of all the GM shares outstanding. Surprisingly, only 5.26 million of those shares reside in the SPDR Trust (SPY). Still that’s a big loss for one fund no matter how you slice it. Vanguard Group has the second most shares, 23.99 million, or 3.93% of the shares outstanding. However, four of its funds are in the top 10 holders, the Vanguard 500 Index (VFINX) has the most shares of any fund, 5.8 million. This is followed by Vanguard Mid-Cap Index Fund (VO), Vanguard Total Stock Market Index Fund (VTI) and Vanguard Institutional Index Fund. Barclays Global Investors, owner still of the iShares ETF family, comes in third with 17.8 million shares.

The shocking part is that according to Standard & Poor’s, a component of the S&P 500 needs to have a market cap of at least $3 billion. With 610 million shares outstanding, GM would have to trade at $5 to make that. But GM last saw $5 on its shares on Dec. 8, 2008, more than five months ago. It’s not like S&P doesn’t remove stocks from the index. It’s deleted nine companies already this year.

Peter Cohan knows how to evaluate a company. He’s amazing at looking under the hood and breaking apart a company’s financial statements to see the rotting husk of a business. At Daily Finance, he says the failure of GM matters because it shows of success can lead to failure and how now the U.S. can’t even fail right. Companies can’t shut down without government intervention. He adds that the U.S. system of economic growth, venture-backed innovation, has been nearly snuffed out and that is not good news.

Cohan also list the five big reasons why GM didn’t have to fail and squarely lays the blame at the feat of managers who were overly impressed with themselves for no good reason. The five reasons: 1) bad financial policies, 2) Uncompetitive vehicles, 3) ignoring competition, 4) failure to innovate, 5) managing the bubble. Ignoring the competition and failure to innovate are the worst crimes and that should justify Rick Wagoner’s firing pretty easily.

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.

Pedigree, Schmedigree: Re-Evaluating Harvard

In an amazing coincidence, the negative aspects of the concept “the Best and the Brightest,” got a double dose of attention yesterday.

In “The Brightest are not Always the Best,” Frank Rich of the New York Times reminds us to not get all worked up with high expectations about the brand names being appointed to the Obama cabinet. Many of these people are academics, not business people. That means they believe theories, but have little experience with how reality can blow theories apart. Frankie reminds us that when David Halberstam wrote the book, “The Best and the Brightest” about the geniuses who filled out John Kennedy’s cabinet, it wasn’t a compliment, but sardonic. In this famous book, Halberstam describes how some of the best minds of that generation created the Vietnam fiasco, which destroyed Lyndon Johnson’s presidency and brought us the Richard Nixon era.

And for those of you who think it couldn’t happen again, or that history doesn’t repeat itself so quickly, Peter Cohan of BloggingStocks points out that “Five Harvard MBAs Wrecked the Global Economy.” The most famous and probably the most culpable is non-other than President George W. Bush. However, few can be faulted with thinking this guy was one of “the best.” Great quote on Bush’s pathological lying and ability to deny what he just said.

First runner-up goes to Treasury Secretary Henry Paulson, who I feel is as much, if not a greater economic criminal than Bush. Considering he ran one of the firms that sold the credit default swaps, his inability or refusal to see the destructive force they held, as well as how they were affecting the economy, means his actions are either those of an incompetent or a severe case of malevolence. Worse, I think Paulson, after months of saying nothing was wrong, only decided to get involved in September because his old firm, Goldman Sachs was teetering close to bankruptcy. I suspect Paulson fearing his $500 million savings, most of which is in a blind trust filled with Goldman stock, would become worthless if he let Goldman fail, decided to take action rather than face the alternative of spending his golden years living off of a government pension.

Third place goes to Rick Wagoner, the CEO of General Motors. This genius failed to take advantage of profits from huge sales of gas guzzling SUVs to reinvest in GM and turn that dying behemoth around. Instead, this Einstein lost billions of dollars, oversaw the 95% collapse of his company’s stock and is on the verge of destroying one of America’s largest industries. I could have run that company into the group for one-tenth the salary they paid that guy.

Filling out the list is Stan O’Neal, the man who destroyed Merrill Lynch, the world’s largest stock broker and one of the most respected names on Wall Street; and Jeff Skilling, the CEO of Enron, the architect of the biggest fraud in U.S. history. Skilling’s crimes of energy terrorism are well documented, including his being responsible for the near downfall of California and the real downfall of its then governor Grey Davis. Is Skilling responsible for the current mess? Well, he did help create the model and set the standard for destroying the retirement savings of many people. So, even if he isn’t directly responsible, it’s only because he’s already in jail.