Friday, August 17, 2012

When does that stop-loss order kick in, anyway?

Currently, the Federal Government is holding 500,000,000 (yes, that's 500 million) shares of General Motors Corporation stock. As of today, the stock is trading at a price of around $22/share, up substantially in volume--for some reason--and in price, as compared to a month ago when it was just under $20/share. For the Feds, that's a gain of over 10%, representing one billion dollars. Yes, you're also reading that correctly: the value of the GM stock held by the Feds has gone up by $1 billion in only one month. Pop the champagne, let's celebrate!

But there's a problem here. GM--you may recall--was bailed out using TARP funds (something that may have been illegal) and the Federal Government assisted the Chapter 11 process for GM by floating it additional monies, ultimately resulting in the government coming to own some 61% of the company. On  November 17, 2010 GM went public with a new IPO at a price of $33/share; the government's ownership stake was reduced to about 26%, leaving it with the 500 million shares it still holds. At that moment in time, the GM bailout was heralded as a huge success, as evidence of effective--and necessary--actions by the Federal Government to save a large company from failure.

Of course, the reality is that GM still filed for Chapter 11 and still sold off a number its brands and assets, things that would have happened without the Federal Government interjecting itself into the process with billions and billions of dollars. The UAW and other unions might not have fared quite so well in this latter scenario, but I digress. The point is that in November of 2010, there was much rejoicing over GM in the Administration, in Congress, and in the media. Witness the gushing in this piece from the New York Times:
American taxpayers’ ownership of General Motors was halved on Wednesday, and billions of dollars in bailout money was returned to the federal government, as a result one of the nation’s largest initial stock offerings ever... 
Still, now that General Motors has shown that it can be profitable, a complete exit by the government could happen even within the next two years. With the offering, G.M. is shedding its ties to the government faster than expected, cutting the Treasury Department’s ownership stake to 26 percent, from nearly 61 percent. 
The offering, President Obama said on Wednesday, continues “our disciplined commitment to exit this investment while protecting the American taxpayer”... 
There are reasons for both company and government officials to be confident. G.M., freed from much of its debt and overhead costs, became profitable this year and has earned $4.2 billion through the first three quarters. And although it jettisoned four of its eight brands in bankruptcy, the company managed to stabilize its United States market share at 19 percent and continue to invest in new vehicles.
Fast forward to the present time. From that initial offering price pegging at $33, GM stock rose to almost $40 a share in January of 2011--a nice gain for two months, and a result of all the aforementioned rejoicing, no doubt--then began to tumble, dropping to a low of under $20 a share last month.

GM's market share now sits at 18% and it's new offerings for 2013 hold little promise, as Louis Woodhill at Forbes details:
Acknowledging the importance of the D-Segment to the company’s future, GM’s CEO, Dan Akerson, ordered that the introduction of the redesigned 2013 Chevy Malibu be advanced by six months, from the fall of 2012 to the spring of 2012.

In their March 2012 issue, Car and Driver published another D-Segment comparison test, pitting the 2013 Chevy Malibu Eco against five competing vehicles. This time, the Malibu came in dead last.

Not only was the 2013 Malibu (183 points) crushed by the winning 2012 Volkswagen Passat (211 points), it was soundly beaten by the 2012 Honda Accord (198 points), a 5-model-year-old design due for replacement this fall. Worst of all, the 2013 Malibu scored (and placed) lower than the 2008 Malibu would have in the same test.

Indeed, Woodhill goes as far as to predict another bankruptcy for GM in the not-so-distant future, based on its loss of market share (make no mistake, a 1% drop in market share in a soft economy is bad news), its inability to offer competitive D-Segment cars, and its topsy-turvy upper management. Given the current stake of the Federal Government in GM, another bankruptcy likely means another bailout.

And that begs the question: why is the Federal Government still holding so many shares? Why is it holding any shares? After the IPO, Obama himself decreed that the government was committed to getting out of GM. If it had opted to sell its stake in beginning of 2011, the government could have netted close to $20 billion (when prices were close to $40/share), almost double what the shares are now worth. The problem with that, however, is it still would have meant a loss to the government--to the taxpayer--of around $6.5 billion dollars. Because to break even, the governments shares need to be sold at a price of around $53/share.

But such a price now looks like a pipe dream. Two years ago, with all of the hoopla and all of the pumping of GM stock by the Administration? Well, I'm sure it was hoping for even more. After all, if all of that stock could have been sold for an actual profit, we would never hear the end of it.

And really, no one like to take a loss on an investment. People who invest in the market hope for the best, by and large. But smart investors hedge their bets. Sometimes, things go south and taking a loss is the only smart move. That's where stop-loss orders come in to play. Given the possibility that any stock could tank at any time, investors often specify a price--a lower limit--for a given stock at which they automatically sell, the idea being to minimize the loss. This is often the wisest choice, because even if the stock has the potential to rebound, the monies invested in it now can be reinvested elsewhere for a more immediate possible return.

In the case of the goverment and GM stock, one has to wonder if any such limit was ever established. It would appear not; instead, for purely political reasons, the government simply held on so as not to admit to an actual loss. For right now, the loss is unrealized, not on the books. No one can actually say we've lost over $15 billion dollars on GM stock because it hasn't happened yet. Sounds a lot like the general methodology in DC for dealing with budgets and deficits as a whole, doesn't it? Pretend things are fine right now and push the problems down the road to the next guy.

Oddly enough, back in February of this year, Romney opined on the government's holdings of GM stock:
"The Obama administration needs to act now to divest itself of its ownership position in GM," the presidential hopeful writes in the Detroit News. "The shares need to be sold in a responsible fashion and the proceeds turned over to the nation's taxpayers."
A former member of Team Obama disagreed:
But Steven Rattner, who left the Obama administration shortly after overseeing the GM bailout and bankruptcy, told CNNMoney in November that Obama's reelection was never an issue in the government's exit strategy. 
"I think there are much bigger issues for the campaign than when the government does or doesn't sell its GM stake," he said. "The most important thing is to sell it at the right time, not too soon and not too far away." 
And Rattner said given the drop in GM's share price, this is not the time to sell shares. 
"I don't myself, at the moment, see any particular reason why the U.S. should rush to sell at a much lower price when the company is doing very well," Rattner said.
Yeah. The Obama Campaign has made a point out of Romney's income; most all of it comes from capital gains, which kinda suggests Romney knows good investments from bad. If the government had taken Romney's advice earlier this year, its losses would have been about $2 billion less than what it currently faces. It's possible things could turn around, but how much longer should we wait? The money invested in GM is stagnant capital; it's taxpayer money and it's not doing anything, just sitting there. And over time, it's shrinking in size, because aside from the absolute loss in value, there's also inflation to think about.

Given all of this, one might wonder why there has been a jump in volume and price the last couple of days. The answer is simple: big investors think Woodhill has the right of it, there will be another GM bankruptcy and the Federal Government will be forced to jump in once again, leading to another artificially high share price to inflate the value of the government's holdings so it can claim vistiry. Of course, this is all based on the assumption that Obama wins in November. Because Romney isn't willing to play this game.

Myself, I think it's time for a political stop-loss order to kick in; the current Administration has done enough damage; there's no point in allowing it another four years to do more. Let's cut our losses now.

Cheers, all.

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