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by Eric Englund
Two hedge
funds, managed by Bear Stearns, are on the verge
of liquidation due to making highly leveraged bets on
securities backed by subprime mortgages. Bear Stearns’ woes
have investors worried that any negative developments in the
credit markets will also drag down the stock market – which
has become quite volatile since the bad news, from Bear Stearns,
surfaced. To be sure, the ripple effects of the subprime-mortgage
implosion will continue to roil the credit and stock markets.
But is the subprime-mortgage bust truly large enough to drag
down Wall Street, and its precious Dow Jones Industrial Average,
with it? If the recent performance of General Motors’ stock
is an indicator, the Working
Group on Financial Markets (aka: the Plunge Protection
Team) is answering this question with a resounding "yes."
As Karen
De Coster and I asserted in our essay General
Motors, Market Engineering, and "Confidence" Protection,
the Working Group manipulates General Motors’ stock in order
to prop up the Dow Jones Industrial Average so as to maintain
investor confidence in the stock market, Wall Street, and
the economy in general. Indeed, based upon our assertion,
General Motors’ stock definitely has big shoes to fill. In
light of GM’s stunning performance, during the exact period
of Bear Stearns’ hedge fund catastrophes, the "General"
is strutting up and down Wall Street as if he is Sasquatch…with
members of the Plunge Protection Team peering from behind
the curtain in delight.
This
past quarter – April 1, 2007 to June 30, 2007 – has been a
barnburner for GM’s stock. Through this period, the Dow Jones
Industrial Average was up
by 8.5% while GM was up by nearly 23%; talk about market
leadership. During the trading week of June 25th,
when Wall Street was really feeling the heat of Bear Stearns’
meltdown, General Motors’ stock closed the week
up by 6.6%. This isn’t just leadership; no, the General
is fearlessly spearheading the stock market’s charge upward.
And it gets even better; for during this hard-charging week,
GM’s stock hit a 52-week high which tallies up to nearly a
43% gain from its 52-week low. General Motors’ stock, most
certainly, closed this last quarter with a magnificent performance
that served to steady a jittery stock market.
Interestingly
enough, this magical week began with an upgrade from a Wall
Street brokerage powerhouse. On June 25th, Goldman
Sachs analyst Robert Barry put out a "buy"
recommendation on General Motors citing his rather dull
insight that "GM can make a compelling case to UAW members
that material wage and benefit cuts are needed…And we suspect
members and retirees are increasingly amenable to such cuts."
Although this won’t go down as an awe-inspiring recommendation,
the reasoning is much less important than putting the prestige
of Goldman Sachs’ name behind General Motors’ stock. And this
is where, in my opinion, the heavy hand of the Plunge Protection
Team has been exposed yet again.
So let’s
connect a few important dots here. For openers, the four key
members of the Plunge Protection Team (which reports directly
to the President of the United States) are the Secretary of
the Treasury, the Chairman of the Federal Reserve, the Chairman
of the Securities and Exchange Commission, and the Chairman
of the Commodity Futures Trading Commission. Henry
M. Paulson is the current Secretary of the Treasury. Before
being sworn in as the Secretary of the Treasury last year,
Mr. Paulson was the Chairman and Chief Executive Officer of
– you guessed it – Goldman Sachs. Thus, Henry Paulson was
once the aforementioned Robert Barry’s boss. In light of this,
it is highly plausible that Goldman Sachs’ buy recommendation
– regarding GM stock – was a political favor to help the Plunge
Protection Team do damage control on Wall Street.
Now,
let’s look a little deeper into the company whose common stock
Robert Barry so uninspiringly recommended to American investors.
Upon reviewing GM’s December 31, 2006 fiscal year-end audited
financial statement, I certainly can see why Mr. Barry was
so bland. To analyze General Motors’ 12/31/06 FYE financial
statement is to understand that this once great company is
likely heading towards bankruptcy. Here are the gruesome details:
- GM’s
"as stated" net worth is negative $5.4
billion
- By
fully discounting intangible assets, which includes deferred
tax assets, GM’s net worth is arguably negative $48.5
billion (refer to Note 13 of GM’s 12/31/06 financial statement)
- GM’s
as stated working capital is negative $3.7 billion
- By
fully discounting current deferred tax assets, GM’s working
capital drops to negative $14 billion
- General
Motors’ total liabilities amount to a staggering $190.4
billion
- GM’s
net loss, in 2006, was nearly $2 billion
In spite
of the "General’s" ill financial health, Robert
Barry proclaimed a 52-week target price of $42 per share.
This target price was simply pulled out of thin air. Without
earnings and without a tangible net worth, it is impossible
to apply basic analytical tools – such as a price-to-earnings
ratio and a price-to-book-value ratio – in order to derive
a rational target price-per-share for General Motors’ common
stock. Since most "investors" are financially illiterate,
it is easy for Wall Street analysts to get away with making
such absurd proclamations.
This
is not to say that Robert Barry didn’t comprehend the gravity
of GM’s financial condition. When Barry stated that "GM
can make a compelling case to UAW members that material wage
and benefit cuts are needed" he clearly understood the
grim reality of General Motors’ financial situation. In essence,
Barry’s "buy" recommendation is based upon the bizarre
logic that although GM’s acute financial weakness may be a
"strength" when bargaining for concessions from
the UAW, that investors should ignore this extreme financial
fragility – but the UAW should not – so go out and purchase
GM stock today. After all, this company just may survive if
its negotiations, with the UAW, go exceedingly well. And what
if the UAW doesn’t give an inch? Heck, let’s not spoil the
convincing case (wink, wink, nod, nod) made by Goldman Sachs’
star auto-industry analyst.
There
is little doubt that Robert Barry "took one for the team"…the
Plunge Protection Team that is. Typically, a "buy"
recommendation is accompanied by exciting and positive developments
regarding the company being analyzed. All Barry could muster
was tortured logic intertwined into an insipid endorsement
of a company teetering on failure. But the deed was done.
Goldman Sachs’ endorsement, of GM, gave the Plunge Protection
Team the cover it desired to continue pushing GM’s share price
higher; thereby providing market leadership investors yearn
for when instability is afoot.
As
I see it, the intense manipulation of GM’s stock indicates
that the Plunge Protection Team is frightfully worried about
the damage subprime mortgages will inflict upon Wall Street.
In the end, it is quite ironic that General Motors’ financial
condition really isn’t substantially different relative to
the financially-strapped individuals who are defaulting on
the very mortgages that toppled Bear Stearns’ hedge funds.
July
9, 2007
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