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sagitarius84 (< 20)

General Motors (GM) bankruptcy trade

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June 01, 2009 – Comments (4) | RELATED TICKERS: GM , TM , F

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With General Motors expected to file for bankruptcy soon, GM stock price has been in a freefall. In fact shares have hit the lowest levels since 1932, which was the year Dow Jones Industrials Average bottomed amidst the Great Depression. The stock price is also below $1, making shorting the stock almost impossible. Bankruptcy was one of the options for the major US automakers, when I analyzed the sector back in November.
According to this Bloomberg article, once the company files for bankruptcy , the US government would get $30 billion from the US federal government as well as 9.5 billion from the Canadian government. In return the US government would own 60% of the “new” General Motors once it emerges from bankruptcy, while the Canadian government would own 12%. The United Auto Workers health trust fund for retirees will end up owning 17.5 percent of the new company with warrants to purchase an additional 2.5 percent in exchange for forgiving GM the $20 billion it is owed by the Detroit automaker. Bondholders and other creditors would get a 10 percent stake in the new GM, with warrants for an additional 15 percent, in exchange for $27.1 billion unsecured debt according to Bloomberg. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network.
Shareholders would most likely get wiped out, with their shares being worthless once GM emerges from bankruptcy.
So how can you play the GM bankruptcy and potentially make money in the process? First, If you hold GM stock, I wouldn’t hope for the company rising to $10 anytime soon, so I would consider selling. Otherwise the answer is pretty simple: play it with options.
If you buy puts on GM, and the stock does become worthless you would end up making a nice gain in the process. Options are contracts which give the right but not the obligation to buy ( call) or sell (puts) a security on a given date ( expiration date) at a given price (strike price). In GM’s scenario, a bearish investor would consider purchasing puts on the stock.
I would consider GM puts with a strike price of $1 for this trade. The June 2009 $1 puts closed at $0.60;July 2009 $1 puts closed at 0.67 , while September and December $1 puts closed at $.71 and $.75 respectively.
The far out puts such as the September and December 2009 ones are much more likely to yield any significant profits, since this leaves investors ample time for the company to go bankrupt.
This is a highly speculative trade that shouldn’t be entered with more than 0.5% of your total portfolio.

Full Disclosure: None ( But I am looking to open a position in Sep or Dec 2009 $1 puts).

Relevant Articles:

- The future for US Auto Stocks


- GM Bankruptcy Filing Will Bring Taxpayer Ownership, Less Debt

- General Motors (GM) bankruptcy trade 

4 Comments – Post Your Own

#1) On June 01, 2009 at 9:04 AM, sagitarius84 (< 20) wrote:

Check my first article on the fate of the US Auto Industry from last November.

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#2) On June 02, 2009 at 2:49 AM, HugoP (< 20) wrote:

General Motors industry is a very popular and huge company but because of the current economic meltdown and recession, it is now in a pretty tight spot. GM has announced plant closures, dealership closures, and even entire brand closures (such as Pontiac), and most of the employees dedicated to those jobs are going to likely experience a layoff. Even with good budgeting or funds from the government bailout, it still isn't enough to cover the ground lost by the loss of a profession. Short term loans aren't going to assuage the hurt, and GM is in trouble. They are all but filing for bankruptcy at this point, and hopefully if they do file it will be a short one.  It looks like there will be cash advances in the near future for GM employees.

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#3) On June 19, 2009 at 5:56 PM, tmclaughlin (< 20) wrote:

The GMC truck division should not continue as a part of GM.  GM and the US government have one chance to get the reinvention of the new GM right and avoid continued government and taxpayer support.

 

Domestic and import full-size truck and SUV sales are declining with fuel economy concerns, so manufacturing two of the same brand is not a profitable long-term business model.  Chevrolet and GMC trucks and SUVs are essentially the same vehicles.  Chevrolet models cost less, have equal or better quality and fuel economy, and outsell GMC models more than three to one. Toyota and other imports don't manufacture two of the same full-size vehicles under different brand names; it does not make sense, economically, for GM to continue producing both GMC and Chevrolet. 

 

Advocates who hope to keep GMC as the auto industry changes to more fuel-efficient models want to continue a business strategy that will ultimately be as unprofitable as the now defunct brands of Hummer, Pontiac, Oldsmobile, Saturn, and Saab.

 

Follow the import business model, eliminate GMC now, and save the costs associated with the extra GMC manufacturing processes and distribution channels, which will not be part of a long-term solution. The new GM will be more profitable going forward without GMC if Chevrolet produces and sells all of GM's full-size trucks and SUVs.  

 

GM won't need government and taxpayer support again if GMC is eliminated now.

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#4) On September 10, 2009 at 10:31 PM, BrandonPaulChevy (< 20) wrote:

Well, things like these happens..Their movements to uplift the auto industry did not really made that much of an impact. They should have created auto parts which are less expensive than the usual parts...

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