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July 10, 2009:
This day is one for the
history books as General Motors, for many
years the world's largest industrial company,
emerged from its Detroit ashes as America’s
new Phoenix bird for the purpose of once
again becoming a power in the automobile
industry. The largest stockholder of this now
private company is the US Government,
which owns 61% of the company’s stock
along with other major stockholders --- the
UAW (the United Auto Workers Union) and
Canada. It has been renamed Motors
Liquidation Company.
In April 2000 the original GM, the
world's largest automaker and one of the
world's largest corporations – a company
without which we probably could not have
won World War II - traded at an all-time
high of $94 per share. Today its stock is
worthless, shedding light on the validity of the
"Buy and Hold" strategy of investing. At
least we have learned one more axiom about
investing that we should put away for another
day.
On
www.motorsliquidation.com there
is an Important Notice stating "Management
continues to remind investors of its strong
belief that there will be no value for the
common stockholders in the bankruptcy
liquidation process, even under the most
optimistic of scenarios."
The former GM shares, renamed as
mentioned above, Motors Liquidation
Company, are unlisted and have been
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declared worthless.
Today, July 10th, old
GM's shares (GMGMQ) are trading up
almost 40% at $1.15 a share in the over-thecounter
market, on volume of 74,814,700
shares. We admit that we just don't get it.
(Very shortly after writing the above, trading
in the worthless Old GM stock was halted.
There is no trading in the securities of the
reborn/Phoenix company as it is entirely
privately held. GM stock is now gone
forever.)
We are curious to see if the
government will be able to show its prowess
in managing the new GM powerhouse back to
its former Michael Jackson-like stardom.
This will be necessary in order for the
company to repay $50 billion of debt to the
US government – us - which the company
said it will do by 2015. This exercise
undertaken by Washington will show how
accurate those are who say big government
cannot run big business. Actually, it is
beginning to look like Washington will have
many opportunities to show us how numerous
businesses should be properly run.
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On July 9, Bloomberg reported:
"American International Group Inc. [AIG],
the insurer bailed out four times by the
government, will likely have no value left for
private shareholders after repaying the US….
Our valuation includes a 70% chance that the
equity at AIG is zero," said Joshua Shanker,
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an analyst at
Citigroup. "Shareholders may
have no value left if AIG is forced to sell its
assets and can’t command prices that exceed
the insurer’s liabilities, a scenario that has a
60% chance of occurring, according to
Shanker. He said there is also a 10% chance
of insolvency, which may also wipe out
investors."
Bloomberg goes on to report: "the
government’s rescue includes a $60 billion
credit line, $52.5 billion to buy mortgage-linked
assets owned or insured by the
company, and an investment of as much as
$70 billion. You may recall that several years
ago AIG was the largest insurance company
in the world. Now it is in large part owned by
the US government, and analyst Shanker has
declared that its shares may well be
worthless. It is of interest that several days
ago AIG declared millions of dollars of
bonuses for executives for 2008. New bonus
proposals will be forthcoming in a few more
months. This is another opportunity for big
government to show the world how to run a
big company.
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Oh by the way, one of many other
companies where the US government now
owns a substantial percentage of the stock is
Citigroup. The US will own 34% of
Citigroup's shares, and while we do not have
exact figures as to how much money
Citigroup has borrowed from the
government, we believe it's liabilities to the
US taxpayer exceed $300 billion. In the last
few days Citigroup has undergone its third
major executive shakeup in 2009 which leads
to some confusion as to when Citigroup's
debts will be repaid, if ever.
It is also noteworthy that Citigroup
raised its interest rates on its credit cards
before the new federal rules become effective.
The Financial Times (July 1st) reported
"Citigroup has sharply increased interest
rates on up to 15,000,000 US credit card
accounts. Just months before curbs on such
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rises come into effect, in a move
that could
fuel political anger at the treatment of
consumers by bailed-out banks." The article
continued. "People close to the situation said
that City, which is about to cede a 34% stake
to the US government as part of its latest
rescue, had upped rates on between
13,000,000 and 15,000,000 credit cards. It cobrands
with retailers such as Sears and
Macy's. Citi’s rate increases emerged on the
day the government proposed legislation to
create a new regulator with sweeping powers
on consumer protection."
The rate increases were retroactive,
and Carolyn Maloney, Democratic
representative for New York, told the
Financial Times . "It's hard to tell if rate
hikes on existing balances being put in place
now are the result of prior bad business
decisions or getting in under the wire of the
new law. Regardless, retroactive rate hikes
are ’unfair’ and deceptive - and that's the
Federal Reserve talking, not just Congress.”
We add "Nice going City. At least you don't
deviate from your former business standards
and ethics. How much do you owe now, and
when will it be paid back to the US
taxpayer?" If you hear Citigroup's answer
before we do, please let us know. We have a
continuing interest!
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Finally, don't overlook
California:
The state that would be the world's eighth
largest economy if it stood alone. California
began its fiscal year last week without a
budget. California is now paying its
employees with IOUs since it has run out of
money. On July 10th it was reported that,
among others, Bank of America, Wells Fargo
and JP Morgan were not accepting the state’s
IOUs printed because of its $26.3 billion
deficit. The California economy continues to
suffer an economic slump due to a collapse in
housing, unemployment exceeding 11% and
welfare and social service spending well in
excess of its income. Why wouldn't a bank,
accept a California IOU? When we last |
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checked, we noticed that most banks still
aren't accepting Confederate money either.
Our friends in California are far from
alone as they continue to spend more money
than they are taking in. Apparently another
30 or more states are getting ready to follow
California's example. A few that have been
mentioned include Massachusetts, New
Jersey, Pennsylvania, Ohio, Michigan,
Nevada, Arizona and on and on. These
disasters have snowballing effects with regard
to their citizens and businesses that
immediately affect the stock and bond
markets in the country as a whole.
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All of the above and volumes more
are true. We could not make it up. The
relevance to the financial markets is the fact
that the Credit Crisis is nowhere near being
solved, and as a result, the economy continues
to flounder. In our opinion, the economy
continues to deteriorate with no end in sight.
The Administration seems to be on the edge
of announcing a second Stimulus Package as
the first has obviously not worked. One of the
many small problems with such a proposal is
the fact that the US government, like
California and her sister states, simply does
not have the money. Other proposed major
programs with which we are all familiar will
require untold sums of money for
implementation. There is a great deal of
agreement that some of the goals could
significantly benefit our society, but the
problem continues to be their funding. What
will they ultimately cost and how will they
ultimately be paid for? Again, if you hear the
answers to those questions before we do,
please let us know
The average citizen is aware that
economic and financial conditions are
worsening. He is sitting back watching the
parade go by. He realizes that his borrowing
power is extremely limited and has long been
aware that he can no longer use his home as
an ATM machine. Could he be one of those to |
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push the unemployment rate to 10%, 11% or
higher? Perhaps worse, he has begun to realize
that not even the inspirational politicians he
formerly believed in have the solutions. He has
simply stopped spending "Until things get
better."
When the markets can figure out
when things will get better, they will get
better.
John W. Hamilton
July 13th, 2009
John W. Hamilton
jwh@hamiltonadvisors.com
Deborah J. Hamilton
djh@hamiltonadvisors.com
J. Brock Hamilton
jbh@hamiltonadvisors.com
WEB SITE
www.hamiltonadvisors.com |
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2009 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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