Wednesday, July 02, 2008

The Least Helpful Call You Will Get Today

The least helpful call you will get today is so unhelpful that, young as the day might be, we think there is no chance it will be superseded by anything even less helpful as the morning wears on.

This particularly unhelpful call comes from the alma mater of the proprietor of this blog, Merrill Lynch, and it is a downgrade of General Motors stock, from “Buy” to “Underperform.”

The analyst has also lowered his price target on the stock from, and we are not making this up, $28 to $7. Last trade: $11.75.

The reasoning behind the change is not particularly important. Like Hamlet’s recounting of Claudius’ commission for the killing of Hamlet, these things are always “larded with many several sorts of reasons” which all avoid the essential issue: the analyst has been wrong; his clients and his sales force all know he’s been wrong; he can’t take it anymore; and he’s throwing in the towel.

We know: been there, done that.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Jeff D said...

Always nice to see the Bard brought into a discussion about the markets.

And a tragedy is exactly the right call for a discussion of GM.

Makeda said...

Does anyone know if any of GM's pension obligations are tied to its stock (price)?

Just curious if the dramatic drop in share price could trigger a forced funding into the pensions, and so on--into something of a death spiral scenario.

Mark said...

Does anyone want to place a wager as to when a share of GM will be cheaper than a gallon of gas? Maybe (while we're all waiting for that new "Volt" to come out) they could build a business converting Suburbans to run on their stock certificates!

Jeff Matthews said...

Jeff D: Human nature hasn't changed much in 500 years, so we figure why not quote the original source on what we do and why we do it. Glad you appreciated it.

Makeda: We don't have time to wade through GM's 10-K, but anybody with access to the internet and a big enough bottle of Advil can presumably discover the answer to your question, which is worth understanding.

Informed responses welcome.


Dan said...

Jeff - My LA Times today ran a story that GM was considering "possibly" selling their 40mpg Chevy Beat in the U.S. Why there is any debate about this (and why it wasn't done years ago) is beyond me. I immediately thought of you!

Anonymous said...

Jeff: I thought ML's downgrade of Auto Nation was almost as "helpful"!

To intelligently answer jeff d's questions, a stock's present value is generally the sum of its discounted future cash flows. A good summary of this topic can be read about here.

Many factors cause a company's future cash flows to fluctuate, including, but not limited to, pension obligations such as GM's.

According to GM's 2007 annual report, the pension plan is overfunded "by more than 20% at year's end" (page 7).

One of many risks with GM, however, is that they are also obligated to Delphi to the tune of 1.5 billion in unfunded liabilities for their pension benefit guarantee.

I think the question GM investors have to ask themselves is whether GM's cash burn will be "slow enough" to cover their future pension obligations as they attempt to recover lost market share and, ultimately, cash flow here in the US?

I doubt it, but then, I could be wrong!