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A hidden “National” treasure / Arrggggg, Gold Coins / How I determined that GM will survive



August 22, 2008 – Comments (5) | RELATED TICKERS: NCC.DL2 , GM , GLD

A hidden “National” treasure

I currently do not own stock in any bank and I really am not looking to purchase any in the near future because I think that this whole housing meltdown / credit crunch is probably going to get worse before it gets better.  Having said this, I came across a fascinating article on National City Corp. (NCC) last night.

National City, one of the most beaten up companies in this whole bank implosion (its stock is down more than 70% YTD) has a hidden treasure.  The Company has 19.7 billion Class B shares of Visa that it received during the IPO which are not counted on its balance sheet because the stock is currently restricted.  Using Visa’s current stock price, this stake is worth an estimated one billion dollars!  That’s not chump change for a company like NCC that has a total market cap of only $3.7 billion. 

Of course, National City was once one of the country’s biggest subprime lenders and many people are concerned that it might eventually have to file for bankruptcy.  In July, NCC reported that it had “Tier 1” capital of 11.1%, which is twice the amount that banks must have for regulators to consider them “well capitalized.”  If I had to make a bet, and I won’t do so in real life...but I might in CAPS...I would guess that between the $7 billion that it raised from private equity in April and the “hidden” Visa stake National City may be able to survive this nightmare without having to raise any additional capital.

National City Holds Hidden $1 Billion Stake in Visa


How I determined that GM will survive

In my “Fearless Forecast” earlier this week, I predicted that both General Motors (GM) and Ford (F)will ultimately survive without having to file for bankruptcy (Chrysler on the other hand I’m not so sure). 

The Wall street Journal published a great piece that will enable us to put a timetable on GM’s effort to survive.

When it last reported its quarterly results, General Motors had $24 billion in cash on its books.  It burned through $3.6 billion in the Q2.  At this pace, assuming that the light vehicle market in the United States doesn’t improve (and I don’t personally expect it to in the near future), GM will be able to last approximately six quarters (the end of 2009) without significantly cutting costs or raising more cash through loans or by selling assets.

On the asset side, the General has said that it hopes to sell $4 billion in assets in the near future, but so far it has been unable to find anyone who is seriously interested in purchasing its Hummer brand (yuck) and it has already sold off a 50% stake in GMAC (yuck).

On the liability side, General Motors recently had to pay GMAC $646 million to make up for the residual values that it overestimated when leasing vehicles over the past several years (Hmmmm, who saw this one coming, oh yeah I did).  Analysts estimate that GM has a total potential exposure of $2.8 billion to GMAC’s residual value losses.  Also, GM may have to lend a couple billion dollars to its former parts unit Delphi to help it emerge from bankruptcy.

Furthermore, in order to pull itself out of this mess GM is going to have to invest money in high quality new products.  This week it announced that it will spend $500 million to build a new plant to produce the Chevrolet Cruze.  Plus, it is spending tons of money to design and build the new Chevy Volt plug-in electric vehicle.

With the company burning through cash like mad and the bulk of the cost cuts that it negotiated with the UAW and its new models not arriving until 2010 it looks like it is going to be a close call for the General.  It is unlikely that the company would be able to issue bonds with its credit rating cut deep into junk status and its existing bonds yielding over 17% the last time that I checked.  It does have access to a revolving credit facility, but it recently withdrew $1 billion from it and I don’t know how much is left. 

The one wild card here is the U.S. government.  The government set a precedent by stepping in and providing Chrysler with $1.5 billion dollars in loans to help it avoid bankruptcy back in 1979.  I don’t see why they wouldn’t do the same thing for GM if it came down to that.

GM has almost enough cash to carry it until its substantial cost cuts and new models arrive in 2010.  Hopefully it will be able to sell enough assets to carry it until then or the light vehicle market will unexpectedly turn around before then.  If not, the government will likely step in with loans to bridge the gap.  The key to this whole scenario is for GM to actually do a good job with its new products.  It has no margin for error.  If they aren’t well received by consumers, the General is doomed.

So there you have how I came up with my prediction that GM will ultimately survive this mess without having to file for bankruptcy.  This is why I added GM's corporate bond XGM as an outperform in my CAPS portfolio.

General Motors, Hummer and the Cash Gauge 

The Chevrolet Cruze


Arrggggg, Gold Coins

When one talks about buried treasure the first thing that comes to mind isn't restricted stock hidden on a company's balance sheet, but gold coins.  According to a recent Reuters article, the U.S. mint has had to suspend minting “American Eagle” gold coins because the recent drop in price of gold from over $1,000/ounce to the $800 level has sparked huge demand for them.  The Mint has sold 311,000 ounces of gold coins this year, up 50% over 2007.

As I always say, I’m no gold bug (I prefer oil as an inflation hedge because it actually disappears when it is consumed) but it certainly sounds to me as though a solid floor might have been put under gold at the $800 level and that it will eventually rise from there.

U.S. Mint suspends red-hot Eagle gold coins

The highly sought after American Eagle gold coin


5 Comments – Post Your Own

#1) On August 22, 2008 at 3:18 PM, Tastylunch (28.56) wrote:

God  I hope so Deej, losing national City would be a huge blow to Ohio.

That being said they already lost nearly 2 billion of that warchest in their last quarter and the next two quarters don't look much better.

Of course a big problem for NCC too is that Ohio, Michigan etc is a horrible market to begin with. 4 of the top 10 fastest shrinking cities are in Ohio....... :-(

hard to believe this could happen to venerable old National City, they used to be our best and brightest bank for decades...

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#2) On August 22, 2008 at 4:54 PM, givmeabreak (29.06) wrote:

Why does the coin say 50 dollars next to 'one ounce'? Who would want that face value on an ounce of gold/

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#3) On August 22, 2008 at 6:45 PM, anchak (99.90) wrote:

I was pretty sure Tasty would leave a comment on this topic :)

Deej... My 2 cents. I am currently trying to compile an outlook hypothesis on regionals. I looked at NCC too - especially since Tasty had requested.

My simple assessment - if they survive they are worth between $9-$10 - do you see the logic of the investors , they gave themselves like a 50% cushion. Then why is NCC trading where it is and also why am I holding onto my NCC red thumb in CAPS.

Simple: THEY HAVE THE WORST ON-BOOK PORTFOLIO I HAVE SEEN. Almost at par with Downey,Corus and other POS. And they have scale going for ( or against, whichever way you want to look) them.  I did not have the courage ever to look into Wamu or CFC though.

Hence basically, the theory goes, they will continue to pull what Tasty mentioned there - deplete the warchest - at such a frightening amount that may scare the bejesus out of investors. If that happens - I might be able to close the pick in CAPS. Shameless accuracy harvesting.

But if there any indication of the leading indicators stabilizing , I inted to pick NCC as a green , at least in CAPS.

I did not know about the Class B holding - the problem is you have to monetize it somehow - meaning someone else should be  willing to invest say $750-800 MM in Visa ( assuming a 20-25% haircut) - I am not even sure that is a great idea. Pure transactional levels are going to fall also . Already I think there's a drop like 1% in total volume.

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#4) On August 22, 2008 at 7:19 PM, DemonDoug (31.51) wrote:

I've read some recent things about the gold market that make me believe that gold is very undervalued currently and is being manipulated downward.  Eventually the markets are going to win, the central banks cannot artificially keep gold low forever.  I think it has a decent chance at doubling in the next 2 years from the 800 level.

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#5) On August 22, 2008 at 10:45 PM, russiangambit (28.71) wrote:

I heard the same NCC story yesterday on Bloomberg. I am surprised NCC did't move big on it.

I decided not to buy it because I already have  a couple thousands in WM (just for a trade), and I am not willing to risk anymore on this kind of trade.

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