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Mark's Market Blog

4-10-09: Bold Prediction: The End is Nigh

By Mark Lawrence

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On the short week, the market went up a bit as promised. Wells Fargo announced they made $3B in the first quarter, it's party time!

S&P 500, Jan 9 '09 to April 9 '09

My position is that this market is topped out right now. I sold more of my stocks in preparation for apocalypse. More later.

Obama has had a busy week in London. The G20, the 20 countries with the largest economies, got together to pretend to agree on things. They agreed that things were bad, and someone should do something. The IMF gets another $1T, but I never heard from where. The US and much of Europe agreed that tax havens must go, 'cause they want to be able to see and tax this money. "We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over," the leaders of 19 countries and the European Union said. About $7 trillion of assets are held offshore and, according to pressure group Tax Justice Network, developed countries lose $180 billion a year in evaded taxes. China agrees completely, except that the Hong Kong and Macao banks should still be able to keep secrets.

A list of offending countries that are ripe for sanctions was made. The first list counted the Philippines, Malaysia, Costa Rica and Uruguay on it while the second had 38 names, including European Union members Austria, Belgium, Luxembourg as well as Switzerland and Liechtenstein. Luxembourg and Liechtenstein told the G20 to take a leap, they don't care about no stinkin' sanctions.

Ok, enough of that stuff, time for my bold prediction. This, by the way, is not an economic prediction; I think we all know I'm not very good at those. This is a political prediction with economic side effects. First, a recapitulation of recent events. GM had been negotiating with their bond holders, who are primarily large investment banks and hedge funds. GM offered about $0.15 on the dollar in cash, another $0.15 in new bonds, and to issue a new batch of stock which would result in the bond holders owning about 90% of GM. The bond holders rejected it. Interestingly, so did Obama. It's now the expressed opinion of Obama that GM needs to have no debt. Anyway, Obama fired Rich Wagoner for being too nice in the negotiations, and promoted Fritz Henderson to kick some butt. He then gave Chrysler 30 days to do a deal with their bondholders and Fiat, and GM 60 days to do a deal with their bondholders. Why 30 and 60?

Chrysler has been pronounced unable to survive on their own by Obama's task force. Personally, I agree with this: the company has been looted by Mercedes and now their new owners Cerberus; they have no new models in design / engineering; their current models were originally designed sometime between Iraq I and Iraq II. They have some things worth some money: the Jeep name, Dodge Ram Trucks, the Viper, but these things are clearly worth less than $1B total in today's environment, far less than the $7B or so Chrysler has in bonds. A couple months ago Chrysler announced they had a deal in principle with Fiat. A month ago when Obama's task force said Chrysler had too much debt to survive, they answered, "That's ok, Fiat agreed to take on 35% of our debt." Fiat immediately responded, "What!?!?!"

A couple days ago it leaked that GM's latest offer to the bond holders is a bit of cash and a bit of stock, no new bonds. The stock amounts to about 20% of the company, not the previous 90%. GM seems to be daring the bond holders to put them into bankruptcy, where GM indicates they have a plan to split GM into two parts, a "bad" GM that gets Saturn, Hummer, Saab and the bonds and lingers in bankruptcy indefinitely; and a "good" GM that consists of Chevy, Cadillac, GMC, Buick, and exits bankruptcy in a month to six weeks with little UAW retirement obligation and no bond holders. To put this in perspective, Obama's group says interest on the bonds is $3,000 per car; and GM is currently supporting about 75,000 UAW workers and providing pensions and health care for 775,000 UAW retirees.

I don't believe it. No bankruptcy judge is going to go for splitting a $200B / year corporation into two parts and have it all done in a month. Furthermore, the bold holders are going to descend on this courtroom with more lawyers than Lucifer has, telling the judge that there are major issues and he needs to take his time to get the right result with all prudence. Judges love hearing this. It's been estimated that a GM bankruptcy would generate over a billion dollars in legal fees for each side. A GM bankruptcy could be a train wreck for probably 2M workers, and I hold the popular view that they would be unlikely to ever recover.

I think Obama is playing chicken with the bankers. I think there's no way on earth Obama wants to go into history as the president who shut down the US auto industry. Furthermore, Obama is a lawyer, he understands the legal arguments quite well, if perhaps he's a bit more fuzzy on the financial arguments. I think Obama has a plan, and here it is: he's going to put Chrysler into bankruptcy to force the bond holders to tip their hands on their defensive strategy, hence the 30 day / 60 day thing. I think he put the recent $6B supplier bailout in place as a safety net to make sure the suppliers don't go under. I think he means to put the fear of God, or at least the fear of Obama, into the bankers.

The bankers have their own perspective: they believe that instead of accepting Obama's 15 cents on the dollar offer, in bankruptcy they can get perhaps 70 cents on the dollar. The banks involved in GM and Chrysler are J.P.Morgan, Citigroup, Goldman Sachs. and Morgan Stanley, all bailed out by tarp. There are also several hedge funds that bought in big recently with the plan of forcing a bankruptcy and getting liquidation value on the bonds. The senator from GM Michigan says that these guys already got their bailout, they should let the auto debt go for nothing.

When (not if) Chrysler declares bankruptcy on roughly May 10th, the markets are going to drop like lemmings into the Grand Canyon. A Chrysler bankruptcy calls GM into serious question: GM shares will be at half a buck in the first 15 minutes. A Chrysler bankruptcy could lead to a projected 2,600,000 new unemployed. And, a Chrysler bankruptcy means that Obama has drawn a line in the sand for Citi, JPMorgan, etc.

That's it, that's my bold prediction: Chrysler is in bankruptcy court by May 10th. A few days earlier, when it becomes clear to everyone what's happening, the S&P drops by 25% in a couple days, lead down by autos, steel, banks. Then we're all going to stand on the sidelines for the next three weeks and see who swerves in this game of chicken: Obama, the banks, or nobody. Personally, I dunno about the banks, but my money is on Obama not swerving.

I've sold my Apple, Google, and half my S&P. I intend to sell the other half by Wednesday. I'm keeping my GM, 'cause at this point GM dropping to zero doesn't cost me much more. If Chrysler announces a big deal with the UAW, the bond holders and Fiat in the next two weeks, I'm going to look pretty stupid. But I'm not that worried, I think I'm going to get to buy all my stocks back for about 70 cents on the dollar. Maybe I'll even buy some GM at 50 cents.

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