optfund.com Blog

I remember a time where this reader was very passionate about his GM vehicle. It was a 1969 Camaro…what a perfect car. The look, the part interchangeability, the performance. Boy what a vehicle, and man was I passionate about it.

Hear that GM! Where is the passion? The idea of connectivity to the vehicle! This comapny is in serious trouble. We are talking about the great American Icon that is close to losing its U.S market share leadersihp to a more nimble Toyota. GM shares closed at $13.19 on Tuesday, June 24. Excluding dividend and split adjustments, GM shares are trading at an all time nominal low. With adjustments, prices like this have not seen since the early 90’s recession.

Alas…the game is much different now. Eerily, the scenario is similar to issues Chrysler Corporation was facing in the late 70’s. Back then Mr. Iacocca was at the helm lobbying for guaranteed loans to rescue the beleagered company. He got them. Lesson there…no need to worry about a GM bankruptcy…you wont see it. No forced buyouts here…who will buy it? Toyota? That’ll be the day. LBO? Private Equity? HA! Unless GM reinvents the mini-van, no way will any financial model show accretion fast enough to satisfy PE…did I mention that LBO’s are nearly impossible in this environment? I recall Blockbuster’s response to Circut City’s buyout: “Sure if you can get the money…”

Yet we must give GM another look as it represents the perfect storm of fear that fantastic trading opportunities are made of. We can look at LT Debt issuance by GM, and this level had been quite high in the previous 5 years, averaging $80B since 2006. With the recent credit crisis, we have seen on a quarterly basis LT financing down to about $1B per quarter. Operating expenses are increasing more rapidly relative to revenues (naturally due to RM costs). GM is planning a huge rebate campaign, either in the from of 0% for up to 72 months or cash rebates (read: shrinking margins). The balance of Receivables relative to Payables, if called today, would leave GM with NO CASH. So lets look at the landscape: shrinking cash balance, reduced ability to leverage debt markets (due to shrinking liquidity combined with heightened costs for GM bond default insurance), no visible white knights short of the US government. Also, unlike Chrysler of the 70’s and the 80’s…no K-car or minivan on the horizon to generate sales volume. In fact, GM is shopping Hummer, slashing 170,000 light trucks and SUV’s and planning to reinstate a car that was cancelled due to a shrinking market for it: the Camaro.

Needless to say GM has been woefully slow in catching the curve, much less being ahead of it. Check out the chart below from WSJ indicating U.S. market share:

So I am thinking long here for The General. Why? This company is NOT going bankrupt…mark my words. The reasons…who can (or wants to) buy them ($13/share*566m shares+shrinking market share+ no exciting products+suffering American automakers unwilling to take on capacity…you get the picture), political implications of an American Icon either going under or being acquired by a foreign entity, and boy are the shorts having some fun right now (18% short interest).

I like my derivatives…I am looking at the Jan 2010 $15 calls, trading at $3.7 at the ask. I am speculating that any chatter of cash infusion, government bailout, or, if you can believe it, better sales, will send the shorts running. Of course, there is the fact that this stock can get cut in half way before any up move is made, so I would take a position in Jan 09 $10 puts , at $1.73 ask, at 20% of the long position as a hedge. Implied Volatility is off the charts right now…so yes premiums are a little inflated, but we are paying for movement…that is how we make money. But big moves are in store for GM, good and bad. But in the end…we will be higher. The industry has battled inflation soaring oil and emerging competitors before, and will do so successfully again.

Disclosure: Author has no position in GM

Source:

GM Slates Sweeping Rebates as Toyota Closes in on No.1

wsj.com 6/24/08