Archive for April, 2009
General Motors and the Swine Flu
Posted by Jody Eisenman | Filed under Uncategorized
No, one has nothing to do with the other. However, these are two primary news stories shaping the markets today. As the Swine Flu spreads across Mexico and into this country, investors got skittish, sending the Dow about 50 points. Also, any drug or biotechnology stock that had anything to do with a treatment or potential treatment for the disease shot up in value. Although I have no idea how severe this might get, (lets hope it doesn’t), my hunch is that the panic will quickly subside, along with previous outbreaks like SARS, Legionnaires Disease and the Avian Flu. I think it’s a good sign that the CDC seems to have a handle on the situation.
Meanwhile, GM continues its’ negotiations with both the unions and the bondholders in order to structure an “orderly” bankruptcy. Basically, along with the layoffs and product restructuring (say goodbye to Pontiac), GM is looking to trade its’ heavy debt load for increased equity in the new entity. The company is close to reaching a deal with the unions. The bondholders, however, are another story. After sticking to a hardline offer of fifteen cents on the dollar, GM (read: the government) has now “upped” the offer to 225 shares of GM common for each $1000 owed. At current prices, this would appear to be worth about forty five cents on the dollar. However, this is really a mirage.
Here’s why: GM is proposing to issue an additional 60 billion shares to the unions, the government and the bondholders. At current prices, this would give GM a market capitalization of close to $130 billion. The bondholders’ stake ($27 billion face value) would be worth around $12.5 billion. The problem is twofold. First, the stock price. A $130 billion valuation for GM is incredibly rich. The current valuation is 1.25 billion! Ford is a little over $5 billion. Even a slimmed down GM can’t possibly be worth anywhere near this valuation in my humble opinion. Even if you gave the company a valuation of $40 billion (which is still ridiculously high), the bondholders’ stake would shrink to about $4 billion, or roughly fifteen cents on the dollar. This brings us to the second problem. Forgetting the fact that the bondholders feel that they shouldn’t be treated any worse than the unions (who are getting 40% vs the bondholders 10%), they also need to know that they would be getting more than they would in bankruptcy. Remember, in a bankruptcy, debt holders claims are senior to shareholders. Therefore, if bondholders feel that they will they will receive more by simply allowing the company to go under, why on Earth would they take less in a restructuring?. The answer is, they wouldn’t, which is why I feel this plan will probably not pass in its’ present form. In the meantime, the negotiations continue.
Another Example of Why “Buy and Hold” is Dead
Posted by Jody Eisenman | Filed under Uncategorized, fraud
As I wrote yesterday,“since there is very little correlation from day to day on Wall Street nowadays, tomorrow could be radically different”. Remember Vornado and Simon Properties that were down about $6 each yesterday? Well both were UP about $6 today. Bank of America (BAC), which got crushed yesterday, opened today at $7.23, and closed at $8.75. C opened at $2.70 and closed at $3.24. When I started as a broker in 1984, a 15% gain for a stock over the course of a year was considered to be an acceptable return on your money. Many of these stocks now make these moves in a day. The funny part is, there really wasn’t much news to account for these swings. It seems that almost every day, some prominent analyst or some government official will make a comment that will move stocks dramatically. Today, Geithner reassured everyone that banks have several avenues available to them in order to raise capital if needed. I don’t consider this to be very significant. Why not? Because banks are only going to raise money from investors when the investors feel that the potential return more than justifies the risk. Geithner has no control over this, other than his “private/public partnership” which is still in the planning stage. If a bank “fails” the stress test (which is due to be made public in two weeks), they will be forced to either get more government money, or go under. You can structure the government assistance any way you like, it’s still a handout. This situation has not changed in the last several months.
Meanwhile, the short term traders continue to rule the equity markets. It is an exciting time to be on Wall Street, as stocks and bonds continue to make wide swings on a daily basis. As a bonus to all my blog readers, I will be offering a free report in the coming days. Stay tuned for more details.
Seems Like Old Times…
Posted by Jody Eisenman | Filed under Uncategorized
Just when you thought it was safe to go outdoors again, the market reverted back to its’ old pre-March 9 tricks. As I suspected over the weekend, the market rally ended at least temporarily today with about a 4% drop. The financials, which had risen dramatically in the last 6 weeks, got absolutely clobbered. C, which hit a high of $4.48 last week closed today at $2.94. BAC released earnings that did not exactly enamor the street, and the stock dropped over two and half points to close at the days’ low of $8.02. American Express (AXP), which had closed at $21.81 Friday, closed at $18.98 today. Remember the REITS that were so strong? Vornado (VNO) and Simon Properties (SPG) each lost almost six dollars each. It was not a great day to be long. As I continue to preach, this is traders’ market. If you don’t have the stomach for these big swings, you probably shouldn’t be in it at this point.
I found it quite humorous to read and listen to all the bears who came roaring out of the caves today screaming “I told you nothing has changed!” However, since there is very little correlation from day to day on Wall Street nowadays, tomorrow could be radically different. Its’ certainly a great traders’ market if you can spot the short term trends in advance.
According to several sources, the Government will release the results of the banks’ stress tests in the first week of May. It will be interesting see both the results and the ensuing market response. In the meantime, I expect the markets to continue to gyrate wildly in reaction to any or all news. The short term traders continue to dictate market direction on a daily basis.
