Smart Money? Hardly

Since this is now front page news, further comment is called for. My explanation for the Kerkorian/GM matter is pretty simple:

Before Monday, Kerkorian’s Tracinda Corp already owned 22 million shares of GM. I don’t know when he picked them up, but if it was anytime since January 2004, he’s upside-down in the trade. And 3.9% of GM is a substantial institutional position, not a trade made last week on a "Hey-GM-is-cheap" whim.

It stands to reason that he is buried in the trade: 


Smart money? Maybe. Smart trade? Hardly.

Until yesterday’s ploy, that is. That position was looking mighty dumb, but some creative PR by KK — and Merrill Lynch upping their "Sell" to a "Hold."

But give credit to the crafty former greenmailer (recall his M.O. in the 80’s). If he wanted to, the 87 year old Kerkorian could have very easily upped his stake, quietly accumulating another 28 million shares or so — and probably done so on the down low at $27-29.

Instead, he worked the crowd like few others we’ve seen recently. The guy is old school, and I imagine that in the present highly regulated environment, very few people would have the chutzpah to do what Kerkorian did. Hey, I question the motives of anyone who shouts "I BID $31 FOR GM" — at $26 — when they are already long 22 million shares. That’s rather suspect.  But you gotta admire the sheer audacity (in another era, it was called "balls") of the manuever.

That said, its a function of how oversold the market was — and how many lemmings reside on Wall Street — that equities reacted the way it did.

Indeed, it was amusing to hear the pundits discussing how "this means value — it means that stocks are cheap," with lots of value to be unlocked.

With GM, at a market cap of $20 Billion, and over $200 Billion in long term debt, there ain’t a whole lot of value there. The value is the finance company — GMAC. Unless they spin out GMAC, leaving the auto company even more buried in debt, and probably unable to survive in its present form — there’s no "there" there.



The saying used to be, "What’s good for GM is good for America."

That needs to be edited for the 21st century.

Today, its:  "What’s ailing GM is what’s ailing America" Consider that GM has sagged under the exhorbitant costs of a broken health care system. The bill is an additional $1500 – 2000 in health care expenses added on to the cost of each auto. That’s as they compete with the Japanese — particularly Toyota and Honda — the world’s most efficient manufacturers of automobiles.

That’s like racing Jesse Owens while carrying a 50 pound pack on your back. That’s a hopeless task.

Until GM gets the health care monkee off its back, they cannot compete effectively in the domestic automobile market.


UPDATE May 5, 2005 5:47pm

Mea Culpa:  According to the Schedule TO, filed with the SEC by Tracinda Corp, they do in fact own 22 million shares at an average cost of approximately $26.33. My assumption is if its in an SEC filing, than I expect it to be accurate.

That doesn’t mean they haven’t lost money in any related GM trades before — but I gotta Mea Culpa on my statement that Kerkorian is buried in the stock . . .



Explain This: Kerkorian and GM
By Gregory Zuckerman
Wall Street Journal, May 5, 2005; Page C1,,SB111525425369425354,00.html

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What's been said:

Discussions found on the web:
  1. Anand commented on May 5

    When you say “That’s like racing Jesse Owens while carrying a $50 pack on your back.” I think you mean 50lb pack.

  2. Dave commented on May 5

    with the new shorting rules at NYSE, I wouldn’t be surprised if KK was also shorting GM all the way up yest.

  3. praktike commented on May 5

    maybe he thinks there’s gonna be a pension bailout.

  4. zgveritas commented on May 5

    KK smelled a huge short squeeze based on institutional bond holders who shorted GM shares as a hedge against their long bond positions. The bondholders were out of their league and got crushed after KK’s announcement. Before the announcement KK probably took a large leveraged positon in Index futures. When GM bondholders went to hedge their short position they caused a marketwide squeeze.

    A thing of beauty.

  5. Jon H commented on May 5

    How’s the healthcare system structured in Japan?

  6. anon commented on May 5

    these comments are potraying Mr. Kerkorian as a short-term player, looking to toy with short-sellers mentality, and their pocketbooks. Reality is, Mr. K is an empire builder. Although he has bought and sold MGM a number of times, he is a long term holder. IMPORTANT POINT — He held Chrysler 8 years before exiting with a multi-billion $ gain. It is easy to smell an intriguing story, but seaprate the reality of a large investment in a troubled stock and sector from the short-term daily volatility forced on the market by day traders and hedge funds. There is no doubt this is a tough stock to turnaround and may indeed turn out to be troublesome for Mr. K. With debt downgrades today, we can see the risk in ownership of common stock. This reactive change in union/management relationships is as political as it business. Forcing change on the auto industry is akin to forcing Social Security change on our populus. Tough, but with the right leadership, doable. To simply assume that the man has manipulative desires to save a failing position is cheap at best. At 88, Mr. K could outwit any of you readers any day. I am ashamed to have to read these uninformed comments.

  7. Jon H commented on May 5

    “At 88, Mr. K could outwit any of you readers any day.”

    But not outlive us.

    Hence, the idea that he must have short-term goals.

    I don’t think he’s going to be planning an 8 year strategy, even if he did so with Chrysler.

  8. Jennifer commented on May 5

    “I am ashamed to have to read these uninformed comments.”

    Try being polite, and you may learn something though I rather think you are a plant. Hope you bought lots of GM yesterday :)

  9. Jennifer commented on May 5

    Why do you have to read these comments anyway? Me, foolish me, I find them excellent.

  10. TFD commented on May 5

    I don’t know if most folks get this, but the GM issue is huge. This sucker going down is a MAJOR story that has hardly even pierced the MSM.

    Look out below…….

    And, btw, anyone logging those calls to the White House from Big Corporate Brother as he looks into the abyss?

  11. foo commented on May 5

    I suspect he understands that GM’s future, like IBM’s, Boeing’s, and Lockheeds is in the service market.

    Very soon, GM will not be making cars, they will be offering value added consulting services to the transportation industry.

  12. Ken Houghton commented on May 5

    The pension play is Kerkorian’s bread&butter, but the idea that GM has an overfunded pension liability in any reality is befuddling.

    The GMAC question is a fair one–but a lot of that value is dependent on the no-cramdown provision in the bankruptcy bill surviving the soon-to-be-inevitable class-action lawsuit. Otherwise, you’re basically talking about wanting to own CCE without KO (or, more accurately, PEP without YUM’s fountain service).

  13. praktike commented on May 5

    I blame the LA Times for their biased reporting!

  14. diddy commented on May 5

    Phoenix Woman is onto something with the reintroduction of the 30. It’s awfully hard to benchmark corporate debt, especially corporate debt that includes pension and retiree health liabilities, without a comparable risk-free rate. We’ve been imputing 30-year rates for the last 4 years. That 30-year rate was used to calculate current liabilities. The corporations that most need protection from their pension and health care liabilities, along with their actuaries, succeeded in lobbying Congress to change the benchmark rate for current liabilities to an average of the AA corporate 30-year bond. Since that was based on a spread to a phony imputed Treasury rate, it was basically too low, and the corporations got free money from the absence of a stated 30-year rate. Now that the 30 is coming back, the AA spread is going to widen, and these companies are all going to get downgraded. Which means that not only is their own debt going to cost more, but the cost of their actuarial liabilities is going to skyrocket. They’re going to have to make hard decisions now. I’m not sure what the financial markets implications are, but I do expect the actuaries to run back into the arms of the 30-year bond as fast as they can, to get their clients’ death sentences stayed.

  15. TubbyAZ commented on May 5

    Health care may be a 50 lb. weight, but their product is a 200 lb. ball and chain. GM makes crappy automobiles. I spent last weekend in one rented from Alamo. A Shitbox with a capital “S”.

  16. Barry Ritholtz commented on May 5

    Mea Culpa: According to the Schedule TO, filed with the SEC by Tracinda Corp, they do in fact own 22 million shares at an average cost of approximately $26.33. My assumption is if its in an SEC filing, than I expect it to be accurate.

    That doesn’t mean they haven’t lost money in any related GM trades before — but I gotta Mea Culpa on my statement that Kerkorian is buried in the stock . . .

  17. chrisg commented on May 5

    A poster asks about the japanese health care system.
    This link seems to cover it:

    The big picture is that everyone is covered through a combination of insurance, capped copayments, government-paid insurance for the unemployed (including retirees, which is pretty relevant to GM),and heavily regulated pricing. They spend about 60% of what we spend as a fraction of GDP despite an aging population and an economy suffering from long term duldrums, while covering everyone.

    GM lobbied heavily against the Clinton health care plan, which would have saved them many billions.

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