As GM goes, so goes the nation. It may seem like that is all too true right now, but it's not.
General Motors (NYSE: GM) has been a slow-motion train wreck for a generation.
Former CEO Roger Smith blew hundreds of billions in automation that forgot about workers and did not work. The company received import protection and a waiver of regulations from Uncle Sam to generate huge profits in SUVs, and it reinvested the money in excessive contractual obligations to already coddled workers currently earning in excess of $70 an hour.
And Ford (NYSE: F) and Chrysler were not too far behind.
Congress is now debating some form of bailout in addition to the $25 billion for re-tooling. The structure and future of this bailout is uncertain and, while I'm in the minority, I see nothing happening pre-Obama except a possible GM bankruptcy filing.
Many middle-of-the-road Americans, including many day-to-day Democrats and independents, want to see GM go through a prepackaged bankruptcy.
And why is that?
1. Cars that are out of sync with the marketplace.
2. A 25-year slide that management ignored or accelerated.
3. Grossly coddled workers who pay less for health care than congressional staffers and get more generous retirement benefits than veterans of Iraq and Afghanistan.
What are the odds of a bailout happening?
I'd say 100% post-Obama inauguration. But a post-Obama bailout is going to hit shareholders, and even workers, quite hard. If you listened to his interview on "60 Minutes," you know that Obama was very clear on the fact that everyone had to share the pain -- the shareholders, the debt holders, the workers and suppliers -- and there had to be a plan to make the companies viable.
He also said a prepackaged bankruptcy is a logical option in normal times, but the chaos in the credit markets may prevent this from happening, as credit might not be available. It also means that Uncle Sam could end up taking on the role of credit supplier in a prepackaged bankruptcy.
Where does that leave investors? I know many of you are tempted to trade the auto stocks based on the potential of one event -- the passing of a bailout package. The problem?
All put options are priced to a prepackaged bankruptcy or something close to that, regardless of their expiration date. The same is true for all auto parts suppliers that are a pure play on American car manufacturers.
Wait, you say, GM is trading around $3, and you could short it to bankruptcy. If GM gets a big bailout for some reason, and there is a short squeeze and someone calls their shares, you could be out double or triple your original investment. Not a good thing. Short these stocks at your own risk.
Wait, wait, you say, this is one of the larger binary events in recent history. Do I mean that you should sit it out? Not quite.
One of my rules is never short a stock -- buy put options instead.
My next rule is, do not buy a put unless there is a reasonable chance to get a double. This is not possible for GM or Ford right now, but I still think it could be a decent trade. Puts on both GM and Ford stock have premiums seeing the stocks going to a buck or worse -- and that is the play.
These are awful companies that are in the truest sense bankrupt, and they just keep burning cash they've piled up in the past. GM is going to go under in some form and will probably take Ford with it -- it's only a matter of when.
So, if you want to trade, stick to fundamentals and take the simple route: Look at puts on GM and Ford, and give yourself some time -- at least six months to expiration -- to ride out a surprise. You won't get a double, but you could do well.
But also be prepared to take a loss and move on, because you never know what could actually happen in Washington. The biggest risk is GM really does run out of cash and a hysterical Congress, trying to protect whatever is left of its legacy, signs a bill that truly is a bailout.
It's hard to see this happening given the stance of Senate Republicans -- who are returning to office in January (well, at least some of them) -- but it could. And then you would get seriously whacked.
There is another trade here. Trade in whatever you own and buy a GM or Ford SUV. They are at fire-sale prices. I just picked up a used Trailblazer with modest mileage and electronic everything for $11,000.
Now that's a great trade!
Michael Shulman is a contributor to OptionsZone.com.











Reader Comments (Page 1 of 3)
11-21-2008 @ 12:28PM
Jim said...
The assertion that GM doesn't make vehicles in sync with the market seems short-sighted to me. They have an electric vehicle coming to the market (volt), and they hit a home run (at least from a design perspective) with the new Malibu, and the Saturn that shares it's platform. Pontiac has finally woken up and is putting out cars that are relevant, like the solstice and the G8. GM also have a slew of hybrids.
That's more than you can say for Ford, which stakes it's entire reputation on trucks getting 13 mpg without outdated technology. Ford is the one who's in real trouble here.
By the way, I drive German cars, so I'm not biased here. I'd never drive a Ford or a GM.
11-21-2008 @ 12:59PM
Roger said...
Jim says: "By the way, I drive German cars, so I'm not biased here. I'd never drive a Ford or a GM". To me that makes you least qualified to rate the vehicles that GM and Ford sell. Also, Germany does not need your support as much as GM and Ford do. If you really care, why not invest your money in American made cars?
11-21-2008 @ 1:19PM
Sam Richard said...
I am a GM UAW worker. I have worked in several different factories for GM. Aerospace machining blades for gas turbines,assembly plant assembling vehicles,foundry diecasting transmission cases,and presently machining transmission gears for heavy truck transmissions. I work hard and have knowledge of reading gauges in english or metric measurements,know how to run and operate lathes,grinders,mills,drills,shavers,shapers,broaches,hobs,or about any other machine you can name. Have learned many types of cnc controllers and gauges. You say I am coddled. I say i have worked hard to make an honest living. You say i make $70 an hour, That includes wages,vacation time,holidays,health care,and anything else you want to add in there. What is so wrong with someone working hard for to make a good living? Add everything that you get in any form of compensation for your job and post that for us to see. You may be surprised to see what you actually earn. Have you ever worked in a factory or for that matter have you ever even stepped foot into one. If you havent then i really don't think you have a right to call me coddled. If you feel underpaid then i suggest that you do something about that instead of calling other hard working people coddled. I don't see anything wrong with someone earning a decent living for working hard. If you added all compensation to any job it would more than double the actual wage if you have any benefits at all such as holidays,vacation and health care. I would be curious to know what your job pays if all this is added to your wage.
11-21-2008 @ 1:32PM
andyg8180 said...
is it $70 an hour as advertised? or $70 an hour that comes out of the company i.e. unemployment, partial health etc...
If its $70 as advertised, thats a six figure salary for doing machine work...
I have nothing against you if you're getting 6 figures, I think its actually great... But considering whats happening to your company, you might think twice about taking 6 figures when most of the country averages under 50K a year...
11-21-2008 @ 1:33PM
John Huckleberry said...
Save the car companies and stop acting like terrorist trying to destroy the stock market. Bush and Republicans do you hear me?
11-21-2008 @ 2:03PM
Chad said...
As a proud UAW worker I could not agree with you more Sam. I have run presses, CNC machines, lathes, grinders and currently jobset in a heat treat facility. I have also spent my fair share of days on the lines as well. I would love to see these people calling us overpaid and coddled work 4 hrs on any assembly line at any of the Big 3 and then report back. I would bet my entire years overpaid wages as they say, 95% of them wouldnt last 4 hrs. I also wonder if this writter checked to see how much money GM pumps into AOL? I damn sure know I would pay $21 a month for their service if not for GM & UAW perks to join. My guess is they let the Big 3 go under, AOL is quickly behind along with DirecTV, Verizon, AT&T, Household Bank just to name a few. You goofballs better do your homework before you sing the battle cry of let the Coddled Union workers fall because your job is shortly but surely right behind...
11-21-2008 @ 2:21PM
John said...
I love these points of view being expressed.
To Sam Richard I indicate that I have worked in factories, but not coddled as in his contract. Produce or get fired, thats the Motto for the workers in the real world.
Not a word from Sam and his colleagues about how hard other workers had to push. But when Sam's coddled job is now threatned.They are suddenly very vociferious in telling the world how necessary they are to us.
If GM go under, buy a Toyota /Nissan/ Honda truck. It will still be transportation under any name tag.
Good luck to the 'Big Three"-----I haven't a shred of sympathy for any of you.
11-21-2008 @ 2:14PM
C Funge said...
I'm not an expert on the auto industry, but it seems to me that the big 3 auto makers in the US have had a very poor business model for the past few years that has lead them to the position they are in now. I think at least 1 of them should go, and the remaining 2 need to get govt help, but only on the basis of making radical changes to their businesses. They need to become more like the Japanese car manufacturers, who have been among the most successful companies in the world. They need to focus more on energy efficient cars also. Gas gusslers have to go.
From the editors desk of www.LearnAboutWallStreet.com
11-21-2008 @ 2:16PM
Chad said...
I have nothing against you if you're getting 6 figures, I think its actually great... But considering whats happening to your company, you might think twice about taking 6 figures when most of the country averages under 50K a year...
I sir understand you dont have nothing against a person earning six figures and you shouldnt! For anyone at any of the big 3 to earn a six figure year wage they have to work approximately 72 + hours per week. Now where the problem maybe is if most average $50k per year they are right on track with our wages but maybe to lazy to work a few extra hours to have more in life. I can tell you exactly what any hourly employee of the big 3 earn per year $52K working 40 hrs per week. So you see we are only $2K per year higher than your average US salary. But if the Big 3 fall and the UAW is squashed as most want to see happen, in less than 5 years the average US salary will luckily be around $30k per year. If you are union or non union is none of my business but dont think the UAW doesnt help you earn a decent living. If for no other reason they will pay you more to keep the union out but with no unions we are all screwed!
11-21-2008 @ 2:23PM
John said...
I have to add, that Chad's comments deserve a reply.
There seems to be a fixation on how tough working "the line" is, forgetting in the interim, that is what the worker gets paid for.
There are other industries out there aside from the "Big Three" where an unrelenting grind for 12 hours a day is the norm. Do we hear the workers of those industries shouting their attributes to the world?
Why are these present problems not pulling down Toyota, Nissan and Honda, to name a few?
Perhaps the public-at-large is correct in their view of the "Big Three". The private jet useage to beg for taxpayer bailouts didn't do a lot for me personally.
Good luck to all in the present economic clim.
11-21-2008 @ 3:30PM
JohnC said...
70.00 an hour to work in a factory is not near enough. They apparently work harder than anyone else because 95 percent of us just couldn't hack it. Like the guy that put on my shingles in 100 degree weather and probably made 15.00 an hour with zero benefits, He could never tough it. Or me going out to sea and risking life and limb for half that, another job for the lazies I guess. Wake up people! Your not going to have your high paying coddle jobs for much longer.
11-21-2008 @ 2:29PM
Chad said...
If GM go under, buy a Toyota /Nissan/ Honda truck. It will still be transportation under any name tag.
Good luck to the 'Big Three"-----I haven't a shred of sympathy for any of you.
You shouldnt have any sympathy for anybody but you and your family Sir. But you continue buying your Hondas,Toyotas,etc and China will own more of this country than they already own! Good luck to you Sir and your family because when your kids and grandkids are being ruled with an Iron fist by China nobody will have any sympathy for you either. By the way how do you know how coddled our contracts are if you have never worked in one of our factories? You dont know, it is just what you have heard no facts to back it up right? If you do have some we coddled UAW workers would love to hear them. Have a good day sir and when times get harder try eating one of your foreign owned autos!
11-22-2008 @ 11:31AM
Robo said...
Let's call it like it is. Labor costs are much higher at the domestic manufactures because of tenure. Yes you earned it but if theres no company around who's going to pay you and who's going to hire your kids for the future?
Until labor comes in line, the domestics are doom to fail. Labor leaders should give all manfactures in the US the same deal otherwise you will lose everything.
Just look back at the Steel industry and all the union skilled jobs lost (because labor was to proud to adjust) to the ecomonic currents at the time. Ref: Inland steel, Youngstown Sheet and Tube, American Bridge works, Bethlehem Steel just to name a few.
Labor be the Saviour, save the Auto Industry and thereby saving your future.
11-21-2008 @ 2:40PM
Chad said...
Hell I wish 100 degrees was my working conditions. That would be like having air conditioning. In our heat treating plant we have 8 furnaces running at 1750 degrees. On most days it is only 125 degrees at our plant. We also only have about total of 1200 psi of natural gas running in these furnaces. One screw up and we wipe out about 25 square miles! In other words BOOM so please dont give me your risking life and limb sob story. We all do it everyday! I also find it curious you dont even know exactly what you paid a person to put shingles on your house! Probably illegal workers not paying any taxes @ $15 hr would be around $30 hr withholding taxes. But I am sure you wouldnt do something like that as noble and loyal as you sound to your country!
11-21-2008 @ 2:54PM
Chad said...
Good point John but again your facts are wrong. Toyota and the other Jap owned industries build all of their parts overseas for around $2-3 per hour. They only build their autos in the US. I also suggest you look @ what these Jap factories pay their workers in the US before you comment. I did not say other people dont work 12 hrs or more and dont work hard for their money. But the bottom line is if you do put in that many hours you will earn far more than $50k per year. As for myself, we took a cut in pay on our coddled contract a few years back. The average wages are $14-$15 per hour but I still earn over $50k per year because of overtime. I have respect for anybody who works for a living no matter if they make $7 hr or $350k per year. I dont envy anybody for working and making good money! I say the more you can make the better no matter who you are or what you may do for a living. I just dont get your hatred for the Big 3? Do you hate athletes making milllions, Warren Buffet who started with nothing? Or is it just anybody who may make a little more money than you?
11-21-2008 @ 3:06PM
Chad said...
One other comment John. Do you happen to watch the news? Well I am sure you do being as smart as you seem on everything going on with the Big 3. I just dont know how you missed the sections about the Toyota, Honda and Nissan sales declining about 25%? They dont feel the pain like any US company because they are owned by frigging China who now owns all the largest banks in the USA. They pay no big taxes to bring their autos into the USA compared to foreign countries jacking our automobile prices up about 38% in their country. They make it so the folks in their country cant afford to purchase an american made auto! Please continue your support for the Chinese they really love you for it! Did you have the same problem with the wall street bail out?
11-21-2008 @ 3:16PM
LessThenZero said...
All I have to say is, that when a major sports team fails to deliver a significant winning season for several years in a row, guess what happens, they fire the coach and get a new one. These greedy "CEO's" got to GO!! 9.3 Million Dollar salaries, 20,000 dollar round trip private jet flights. 9.3 million dollars would allow 30,000 hard working employees to make roughly 31,000 dollars a year. Hell I lost my job nearly 2 years ago when the housing market crashed (New Home Construction) and didn't qualify for unemployment! To HELL with GREEDY CEO'S!!!!
11-21-2008 @ 3:19PM
Chad said...
Robo, I happen to agree with what you are saying. Labor does cost much more and we cant compete with slave labor nomatter what line of work you do! But what the media and others are failing to report is most of the higher tenure hourly employees are retired. I happen to be caught in the middle with 12 yrs @ GM along with only 200 more at our plant. The others are new hires making $14 hr and the rest of us took serious cuts in pay and benefits as well. I wanted to keep my job at home so I took about a 40% pay cut making around $32k a year with no OT. My only thing is when will it ever be enough for company greed? The UAW has given up alot and I just dont see any end in sight until they wipe out the middle class! I am in no way trying to be a smart ass because I do agree with your comment but you know as well as I these big CEO's will never get enough cuts to be happy!
11-21-2008 @ 3:24PM
Chad said...
All I have to say is, that when a major sports team fails to deliver a significant winning season for several years in a row, guess what happens, they fire the coach and get a new one. These greedy "CEO's" got to GO!! 9.3 Million Dollar salaries, 20,000 dollar round trip private jet flights. 9.3 million dollars would allow 30,000 hard working employees to make roughly 31,000 dollars a year. Hell I lost my job nearly 2 years ago when the housing market crashed (New Home Construction) and didn't qualify for unemployment! To HELL with GREEDY CEO'S!!!!
You hit the nail on the head and you truely have my sympathy on your job loss. I worked construction for many years as well and have many friends effected the sameway as you! I also want to say I feel you guys are way under paid
for the hardwork you do to make a living. Your point is what I am trying to stress, when will enough be enough for these CEO's? When we are all in the soup line? Hope things pick up for you soon!
11-21-2008 @ 3:27PM
greg said...
Another brain dead Obama fan, Huck, THE DEMS CONTROL THE CONGRESS, not the REPS, TRY TO SAY THAT as its a FACT, ITS all in the DEMS HANDS NOW. NO MORE POINTING FINGERS.