GM Roundtrip

GM is now between $31-32 (it closed at $32 even)– its now over the original tender offer made by Kirk Kerkorian in May 2005 for 28 million shares at $31 (only 19m got filled).

The trade is now positive.

Before we uncork that champagne, let’s look at a few items. Tracinda, Kirk Kerkorian’s investment vehicle for the tender, owns about 10% of GM (third-largest shareholder). From November 2005 to May 2006, GM’s stock bounced around between $18-24. That means the Tracinda suffered a drawdown on the tender offer of about 41% — marked-to-market losses of as much as $355 million dollars. The initial 22 million shares bought at an average cost of $26.33 ($579.26m) were down about 25-30%, a $150m or so drawdown.

At the end of 2005, Kerkorian had some tax selling to do, dropping his GM stake
from 10% to 7.8%. He repurchased it more than 30 days later (beware the wash
rule!). 

For all this Sturm und Drang, the $1.8 billion dollar position could have sat in cash, earning CD rates of 5.3+%. That’s an uneventful $100 million dollars, with no sleepless nights.

Let me reiterate that investors need to think twice before blindly following the investment strategies of billionaires. Their risk profiles and goals are likely to be far different than your own. Take the GM buys: this looks like it was an exciting diversion for Mr. Kerkorian, who is 87 years. The transaction rehabilitated his image as a greenmailer, and also revealed him to be a canny trader. But unless you dumped the stock at the right moment, bought it back near the lows, and suffered a major drawdown, I’ll bet this was not a great trade for most individuals.

~~~

On a final note, the initial GM purchases made by Tracinda were done at 52 week lows . . .

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  1. Barry Ritholtz commented on Jul 26

    That tax sell and buy back appears to have been a breakeven

  2. David Silb commented on Jul 26

    Nice point. The old adage that they got all that money by doing something right may play most times but this is a good example that nobody bats a 1000.

    One small note, I think using the Wikipedia as a source is something, I feel, should be avoided.

    Barry you know I like your stuff and I enjoy this blog immensely. I would think you don’t want to give critiques an in.

    Remember most people hear think the fundamentals point to a wide sweeping market correction. (I really don’t need to remind you.) I just don’t want you to be fighting a battle over something as nebulous as the use of wiki as a source.

  3. Bruno commented on Jul 26

    I think that your advice of not buying 52-week lows is a good one for trading, a bad one for investing. Looking back at stocks I bought and sold in recent years, I have several very profitable ones that were bought at or near 52-week lows (PEP, AWGI, LEAP, ELY, BUD, etc.) I admit that in virtually all of them I had unrealized paper losses in the short term. You probably miss many opportunities of buying good companies that had one or two bad quarters, with the stock overreacting to the news.

  4. John Navin commented on Jul 26

    All I’m looking at is price and volume…sometimes known as technical analysis.

    Is GM trading above its 50-week moving average?
    Is is trading above its 200-day moving average?
    Has the price recently broken a previous pivot high?
    Did volume expand dramatically on the break out?

  5. Bob A commented on Jul 26

    anybody noticing the carnage in the transport sector?

  6. ArizonaChartist commented on Jul 26

    “For all this Sturm und Drang, the $1.8 billion dollar position could have sat in cash, earning CD rates of 5.3+%. That’s an uneventful $100 million dollars, with no sleepless nights.”

    Shame on you, Barry! I never took you for the MMQB type. You of all people should know that outside of an arbitrage opportunity, there is no reward without risk. One of the things I learned in grad school that has really stuck with me thru the years is this;

    There are two types of decisions; good decisions and bad decisions. There are also two types of outcomes; lucky outcomes and unlucky outcomes. Now it is entirely possible to make a bad decision and experience a lucky outcome just as it is possible to make a good decision and experience an unlucky outcome. The key to experiencing lucky outcomes is to make good decisions.

    Having said that, was the decision to invest in GM a good decision or a bad decision? That is the heart of the issue, not what KK could have could have earned had he kept his funds in cash. It’s possible KK made a bad decision but is on the cusp of experiencing a lucky outcome. But until KK lays out the thought process he followed in making his decision to invest we can only assume that he thought it a good decision at the time.

  7. Mark commented on Jul 26

    Anyone else stumped by today’s trading? First, the run off the lows then the selloff? That wasn’t what the bulls wanted and neither was the Beige Book result which sounded a lot like stagflation to me.

  8. CDizzle commented on Jul 26

    I’m short GM. I slapped my wrist 3 times today to prevent me from doubling the position.

    So I did maybe the only thing worse…bought a tech stock.

  9. wcw commented on Jul 26

    I’m short again as well, though I took a small lot; if it goes up more, I’ll take a bigger slug eventually, unless the sales data turn hard. That’s my cue to cover.

  10. ari5000 commented on Jul 26

    No. I was not stumped by today’s trading. I was incredulous that the market was strong — seemingly — all day. Volume picked up finally as if a confirmed bull rally was underway — 3rd day in a row!

    Yes, bulls finally got their volume — except the markets went the wrong way! Classic. Traders took profits and shorts finished covering.

    Now who are the permabears going to sell to next week? Two more days of window-dressing to provide at least some support… Wow. August is shaping up, in my opinion, to start out like a dog and just get worse.

    If hurricanes start forming… well… there’s going to be a vacuum for all those bulls who are looking at the DJIA chart and harping about the double bottom formation.

    We shall see. I’d like to short some retail. Sears SHLD looks pretty sorry right now.

  11. Dave commented on Jul 27

    Gotta love how all those people bought PEIX (Pacific Ethanol) when Gates was loading up at about $33 a share. That pushed the stock higher for a bit, but now its struggling just to stay in contact with its 200 day MA.

    PEIX now trades @ 18.40.

  12. bill commented on Jul 27

    Barry, did you FORGET the double digit yield on these GM shares????????

  13. GRL commented on Jul 27

    Kirk made his money in Chrysler by buying into the stock and then essentially strong-arming management into turning the company around into something salable and then having them sell … , oops, I mean, merge the company with Daimler. A lot of the same cast of characters that was involved with him then is now involved with him or with GM (I’m thinking of Lutz and York).

    At the time Kirk bought his stake, GM was extremely hated by Wall Street, which is always a good reason to buy a stock if the fundamentals are right. In GM’s case, the company was (and is) in horrible shape. However, management, though incompetent, is not as incompetent as Wall Street thought it is (now that the stock has gone back up, Wall Street is starting to think management is competent). In addition, with 10% of the company and York on the board, Kirk is in a position to have a say in management and force improvements in what would otherwise be a company totally under the sway of the UAW.

    Admittedly, Kirk’s timing was off. He bought at 31, and, if he had waited, he could have gotten it for 19-20 (though part of the decline was caused by Wall Street panicking when Kirk did his tax sale).

    Plus, there are some challenges ahead, since contract negotiations are coming up in 2007, and the union will be demanding a cut of any meaningful profits GM generates in the interim, and then there is the ongoing problem of building quality automobiles people want to buy, always a challenge for GM.

    However, evaluated from the point of view of a long term investor, rather than a trader, I think Kirk’s performance has been quite good. Furthermore, from what I can tell from the media, his conduct has been exemplary from an ethical point of view.

    Finally, as someone who was lucky enough to start buying this stock in the 19-20 range (though monthly installments with their dividend reinvestmment plan, which is free), let me say that I have not bet the farm, but Kirk’s presence on the scene gave me the confidence to follow my own gut feeling that this stock that was so hated was probably a good investment. So far, I am up about 40% overall, and my only regret is that the stock has gone up so much.

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