GM's "chairman" warned you

GM's "chairman" warned you... The pigeon and the banker... Wal-Mart's distressed real estate play... Icahn sells Lear... Fed hires Bear Stearns' risk manager...

You can't say we didn't warn you...

In his last "Letter from the Chairman," on August 6, 2008, Porter wrote:

GM is now in a death spiral. In the most recent quarter, we lost more than $15 billion. Our sales volume fell 20% from last year. We even lost $2.4 billion on leases – which indicates bigger problems to come. We're no longer offering leases on most of our cars, a move that will decrease revenues further. About 10% of our sales volume comes from leases. We are now down to $21 billion in cash. As I've told you, we must have between $10 billion and $14 billion to keep operating. Given the rapid decline of our operations and revenue, I think we'll be very lucky to survive 2008. There's no way we can last through the end of 2009 without filing for bankruptcy.

From today's Wall Street Journal:

October's declines were led by GM, whose sales fell 45% to 168,719 vehicles. The company was hurt when its financing arm, GMAC LLC, began offering loans only to customers with top credit scores. In many areas of the country only a third or so of all customers would qualify for loans, Mr. DiGiovanni said. GM padded its sales total with sales to fleet customers like rental companies. Fleet sales made up a third of its total, meaning its "retail" sales to individual consumers totaled only about 113,000 vehicles... "In my 27 years, I have never seen a month like this," said GM's sales chief Mark LaNeve. "It was like somebody turned off the lights in the month of October."

According to Michael DiGiovanni, GM's executive director of global market and industry analysis, if the carmaker's sales were adjusted for population growth, October would be the worst month of the post World War II era.

All the big automakers released monthly sales numbers yesterday, and they were all dismal. Automakers sold 838,156 vehicles in October, 32% less than the same month last year and the worst performance since January 1991. Chrysler's sales dropped 35% and Ford's slid 30%. Nissan and Honda declined 33% and 25%, respectively. Toyota's fell 23%.

The Japanese car companies can weather big sales declines. They're not overloaded with debt and other liabilities. The U.S. companies are bankruptcies that haven't filed yet. You could hand the financials of Ford and GM to any undergrad accounting or business student with the name of the company covered up to keep him unbiased, and he'd tell you they were bankrupt in less than one minute...

GM shareholders' deficit, at $56.9 billion, is larger than all of its outstanding debt, indicating some of the debtholders are in for a rude surprise when the inevitable happens.

And while we're on the subject of cars, what's the difference between a pigeon and a Wall Street banker? The pigeon can still make a deposit on a Porsche. That little joke appeared in today's Wall Street Journal, along with not-surprising news that German luxury carmakers BMW and Mercedes, after having a relatively good first nine months of the year, are finally acknowledging the damaged done by significantly worse U.S. sales this year, despite strong sales in China.

As other retailers like Mervyns and Linens 'N Things go bust, Extreme Value pick Wal-Mart (WMT) is ready to take advantages of opportunities to grab some distressed real estate. Wal-Mart CEO Lee Scott told investors and analysts "There are probably things that the government might allow you to do that they would not have allowed you to do in the past."

It's logical that any community might rather see Wal-Mart move into a vacant Mervyns location, saving jobs and real estate values, than see the building sitting dark. It also makes sense that these opportunities could put Wal-Mart in the position to negotiate lower rents.

Eduardo Castro-Wright, head of Wal-Mart's U.S. division, says the potential for Wal-Mart in 15 leading U.S. markets right now is "bigger than the entire retail market of India and Russia combined."

I've been urging investors to own Wal-Mart for more than a year, saying it was the best stock you could buy anywhere in the world. Now, I'm saying the same thing about another big, safe U.S. blue chip with lots of upside to it.

This is without a doubt the greatest opportunity of my lifetime to buy world-dominating franchises. If you want to get access to my controversial, but so far prescient, Wal-Mart reports and other world-dominator, blue-chip Extreme Value recommendations, click here.

Though he still has "great respect" for its managers, billionaire Carl Icahn dumped 8.5 million shares of auto-parts company Lear Corp at $1.90 a share, paring his position to 4.95% from almost 16%. Also, Icahn's representative on Lear's board, Vincent Intrieri, resigned. Icahn says he's selling his position to book a capital loss before the end of the year.

I would expect a lot more of this type of selling between now and December 31. U.S. investors sell to establish tax-loss carryforwards against future gains. (And Canadian investors sell to use tax-loss carrybacks to offset previous years' gains.) And, while we're being oh so very rational, some investors are anticipating heavier-than-usual tax-loss selling and are now preparing to do some buying over the next couple months.

The Federal Reserve recently hired someone to "assess the safety and soundness of domestic banking institutions." The new employee has plenty of experience with unstable banks. Former Bear Stearns chief risk officer (from 2006 to 2008) Michael Alix will be senior adviser to William Rutledge, executive vice president of the bank supervision group. Prior to serving as chief risk officer, Alix ran credit-risk management for Bear from 1996 to 2006. I am not making this up. The Fed hired the guy who let Bear go in the tank. WOW. It's just like George Carlin always said: The government is "stunningly full of bulls."

Remember when Hank Paulson proposed spending $700 billion to buy mortgages and other troubled assets from banks? Well, not only does the Treasury now want to spend bailout cash on all kinds of financial companies – from banks to bond insurers to specialty-finance firms like General Electric's GE Capital – it's becoming more and more obvious that the government didn't actually have $700 billion lying around. The Treasury has borrowed $600 billion since mid-September, and it wants to borrow a record total of $550 billion during the fourth quarter of 2008 to help stabilize the financial sector.

In July, the Treasury estimated third-quarter borrowing would be $171 billion. It actually borrowed $530 billion, $300 billion of which was for its Supplementary Financing Program, launched in September, to keep Wall Street from melting down.

I've waxed paranoid about this before. The money we use every day in the U.S. is debt. It is lent into existence. This record level of Treasury borrowing is the inflation engine itself, tank filled with gas, hood popped up, revving into the red zone right before your eyes.

By the way, I disagree with the coal short idea in yesterday's Digest, though I agree it's possible, in the short term, the voting-machine market gets it wrong. But long term, everybody knows that, without coal, this country's standard of living dries up and blows away.

The alternative energy and energy independence theses are bankrupt. But even if both ideas continue to pressure politically driven and otherwise lesser minds into taking action, coal will not go away. It can't. We are totally dependent on it. I would expect new laws to focus on cleaning up coal emissions rather than on prohibiting the use of coal... but even I have to admit that any such prognostication can only be pure guesswork. Even though Obama has mentioned clean coal initiatives, you never know what he's really going to do. Hold on to your hats.

New highs: none.

In the mailbag... we debate the supremacy of state power versus markets. Send your e-mail here: feedback@stansberryresearch.com.

"I actually bought some Lehman stocks at 26 cents a piece. Now they are all the way down at 6 cents. What will happen to these stocks now? Will they continue to be traded on the market? Has the company stopped functioning altogether? Are my shares worth anything at all now?" – Paid-up subscriber Renjit Shinto

Ferris comment: I, of course, can't give individual advice on your position. But generally, common equity gets completely wiped out in bankruptcy. That'd be my guess for Lehman.

"The way I see it, Obama tells the 'big lie,' as Hitler used to call it, better than anyone since Hitler. The 'big lie' simply stated and convincely repeated often enough will be believed by the masses because they are ignorant and just can't believe that anyone would lie that big, e.g., '95% of you under 250k will get tax cuts'. (or is it 200k, or 150k, or 120k or 97k in it's various versions) He makes Clinton look like an amateur. Obama is a true believer in his radicalism and is therefore totally congruent. Watch out for true believers because all things are acceptable to achieve their ends. It's not beyond Obama/Reid/Pelosi to confiscate wealth, e.g., in 401k's or IRA's. Roosevelt conficated gold and immediately devalued the dollar. The State power trumps all else." – Paid-up subscriber EM

Ferris comment: I agree that Obama is a fantastic liar, one of the best ever, who has millions of people drinking the Kool-Aid on terrifyingly open-ended ideas like "change." But I disagree that "State power trumps all else." I think that's the typical, whipped-dog, uninformed view of most people in the world.

Governments are just aggregations of people with guns and bad ideas. Markets are aggregations of people with more money than God and great ideas. Markets trump governments. Always have, always will.

Take one example of state power versus markets, the Berlin Wall. That was state power in a big, scary tangible form. Construction started the year I was born, and it came tumbling down just after my 28th birthday, partly because fax machines made their way behind the Iron Curtain. The scars from that regime are still present, almost 20 years after the wall came down. So yes, the government can ruin things for a long, long time. But in the end, markets trump governments, not the other way 'round.

"It would be a useful bit of knowledge to have, concerning which online brokers have the trailing stop feature available to use for your stocks. I know from personal experience that ING (which used to be Sharebuilder) doesn't. They do have limit orders, but as far as I can see, not the ability to set trailing stops. Tradeking, on the other hand, does. I know you aren't going to recommend one broker over another, but this would be a useful bit of info to have when selecting the online broker you wish to deal with." – Paid-up subscriber Craig Reed

Ferris comment: While I'm unfamiliar with the operation of the features you mention, the safety valve function of trailing stops is completely defeated if anyone but you knows your stops. Steve Sjuggerud, among other S&A editors, has repeated this over and over and over again. Do not tell anyone, especially your broker, your trailing stops. Keep them in your head or write them down on paper. Using the trailing stop feature at an online broker sounds like it could be a huge mistake.

Even better, you can sign up for TradeStops, which will automatically alert you by e-mail or cell phone when you hit a stop.

Regards,

Dan Ferris

Medford, Oregon

November 4, 2008

Stansberry & Associates Top 10 Open Recommendations

Stansberry & Associates Hall of Fame