In the wake of Delphi’s bankruptcy over the weekend, its stock plunged 71% Monday, wiping out nearly three-quarters of shareholders’ value in just one day.
And with Delta’s bankruptcy, the airline’s shares, which started the year at $7.31, are now down 91%.
But if you think Delphi’s and Delta’s bankruptcies are traumatic, wait till you see what happens when General Motors goes under.
Just in its automotive divisions, General Motors has $156.6 billion in debt. In its financial divisions, it has another $286.9 billion. Grand total: $443.5 billion in debt.
This means that GM’s total consolidated debt is sixteen times larger than Delta’s and twenty-one times greater than Delphi’s.
That’s 16 to 21 times the potential impact on banks, bonds and stock investors.
And that’s many times the impact on jobs, the economy and your entire financial future.
Why I Am No Longer
Alone in Warning About
GM’s Demise
Yesterday, a Wall Street analyst warned that General Motors has a 30% chance of filing for bankruptcy.
Also yesterday, Standard & Poor’s cut its ratings on General Motors deeper into junk status and said it may cut them again. This threatens to sabotage GM’s access to funding, which was already hampered when S&P first downgraded the company to junk in May.
Meanwhile, Moody’s action yesterday was more subtle and more alarming than S&Ps. In addition to contemplating an imminent downgrade for General Motors, Moody’s also indicated it might slash its rating on General Motors Acceptance Corporation (GMAC), which is closely tied to the fortunes of General Motors.
This means that GM’s giant $443.5 billion debt load is now in greater jeopardy, according to Wall Street’s most respected credit rating agency.
Others weren’t always this concerned. Indeed, just a few months ago, I was almost alone in warning you about GM’s demise.
In a special report in May, I warned that General Motors is “likely to collapse,†that “the consequences for investors will be enormously far-reaching†and that “millions who depend on the company’s value and retirement income will suffer shattering losses.”
Then, on August 31, I issued a second warning — right here in Money and Markets. I wrote:
“Delphi, GM’s former parts subsidiary, has already threatened to file for Chapter 11 bankruptcy by October 17 if its union does not provide relief. Don’t be surprised if one day, in the not-too-distant future, General Motors does the same.â€
Why My Warnings
Fell on Deaf Ears
Around the time I was sending out my warnings about General Motors, investment tycoon Kirk Kerkorian was upping his stake in the company. Thousands of investors and dozens of analysts were following his lead. And as a result, GM’s stock recovered neatly. Despite all its troubles, virtually no one on Wall Street believed the company could possibly go bankrupt.
After all, General Motors is the largest industrial corporation in America.
General Motors is the company that was founded by William C. Durant in 1908 … that thrived while Maxwell, Nash, Hudson and others fell into oblivion … that grew beyond anyone’s wildest dreams.
It’s the company that survived the Great Depression when automobile sales suffered their worst decline in history … that endured the gutted consumer sales during World War II … that outlived the debilitating United Automobile Workers’ strike of 1945.
With each new crisis, management moved quickly to shut down operations and slash costs. And each time, the company had more than enough cash to cover all of its debts coming due.
Not now!
Now, all I can see is a company that’s sinking rapidly into the morass of the largest bankruptcy filing in history. I see:
* Plunging sales even BEFORE the end of September when the employee-pricing-for-everyone campaigns ended … and before sticker shock returned to America’s auto showrooms.
* A massive shift in consumer buying patterns from high-profit-margin SUVs and small trucks to low-profit-margin economy cars.
* New, additional liabilities of up to $11 billion for the retirement benefits of Delphi employees that could now fall into GM’s lap in the wake of Delphi’s bankruptcy.
* Surging interest costs. Just the normal rate rise due to the Fed’s rate hikes and inflation would be bad enough. But now, with GM’s debt downgrades, the rates they pay are going to rise even more quickly.
According to Moody’s, the only way General Motors is going to keep its current, already-low, junk rating is by:
1. Maintaining its U.S. market share of approximately 25%.
My view: Very tough, given the shift to Japanese and other economy cars … and almost impossible if consumers begin to fear a future GM failure.
2. Delivering strong market acceptance and sustaining healthy price realization for new products including the T900 light truck and SUV series.
My view: Even if gasoline costs rise no further, highly unlikely.
3. Earning automotive pretax profit in excess of $500 million for 2006.
My view: It’s a joke. Even before the sales decline anticipated in the fourth quarter, GM is already losing money hand over fist.
4. Maintaining cash liquidity at or above $20 billion
My view: Not going to happen. How can it with the decline in cash revenues? How can it with the high fixed costs? Even access to new cash from banks and bond investors is going to be restricted.
5. Preserving the sizable and stable dividend stream from GMAC.
My view: Only if borrowing volume doesn’t fall with sales (impossible) and credit default rates don’t go up with rising interest rates (unlikely).
Bottom line: This is Mission Impossible; and General Motors is a financial nuke with a short fuse.
Consequences for the stock market: Ominous.
Stock Market
Break-Down
Now More Evident
In last Friday’s Money and Markets (Subject: Dow Dangers), I showed you how the S&P 500 was within a hairline of falling below critical lows, and I warned that as soon as it did, it would likely bring much lower prices.
Now, with yesterday’s 8-point-plus decline in the S&P, that landmark event has taken place.
To the casual observer, this may not seem very significant. After all, what’s a few points in the context of a long, 3-year recovery that began in October 2003?
My answer: It could be the critical threshold that marks the end of the recovery and the return of the great bear market of the early 2000s.
Indeed, for General Motors’ shares, formerly the stock market’s number #1 bellwether, the bear market already returned months ago. 
Much like the rest of the stock market, GM’s shares fell steadily in the early 2000s.
And like the rest of the market, the stock staged an impressive rally in 2003.
But unlike most other stocks in the Dow and the S&P 500, GM plunged to a brand new bear-market low early this year.
When Kirk Kerkorian came to the rescue, the stock staged another, albeit weaker, rally. But now, in the wake of the Delphi bankruptcy, even that rally has been wiped out … Kerkorian is losing a fortune on GM … and so are the tag-along investors who thought he was so brilliant.
This, my friend, is the destiny of most investors in the U.S. stock market in the weeks and months ahead. The supply and demand for GM shares — not the hope and hype of Kerkorian — is what’s leading the way.
That’s why …
My Recommendations
Have Not Changed
Step 1. Sell the losers and don’t look back. That includes not just the sectors that are directly impacted by surging energy costs and rising interest rates (airlines, autos, banks and real-estate related companies) … but also the sectors that are indirectly impacted (retail stores, restaurants, consumer electronics, computers and more).
For a list of the 23 companies most likely to fail, see my report.
Step 2. Stick with the winners. That field is more limited, but still gives you ample room for diversification — energy, gold and other natural resources.
To get specific recommendations now, see Larry’s latest report on natural resource stocks.
Step 3. Keep a big chunk of your money safe. That means stashing your cash in Treasury bills or a Treasury-bill-only money fund.
Step 4. Stay alert. Energy stocks are still strong and appear ready to move back up to 
new highs. But in times like these, you must always be on guard for the unexpected.
That’s why I sent you a full list of energy ETFs yesterday, with approximate support levels for each, and why I’m reproducing the information here again today.
Right now, these support levels are holding nicely and should continue to do so.
Moreover, Larry tells us that starting on October 24, dozens of energy companies are going to report their third quarter earnings, with huge increases due to the rise in oil and gas prices during the quarter.
Our recommendation: If these support levels hold, you should hold. If not, and you feel you’re overloaded, you should consider lightening up.
But remember: A decline in these energy ETFs— even if it does occur — does not change the fundamental outlook for higher energy and energy stocks.
Best wishes,
Martin
P.S. I made a Freudian slip in yesterday’s Money and Markets: To hedge — or profit from — a rise in interest rates, you should use the Rydex Juno mutual fund (RYJUX).
The mutual fund I mentioned yesterday, Rydex Ursa (RYURX), is not for interest rates. It’s to take advantage of a decline in the stock market, the subject of today’s issue.
I apologize for the error. However, both funds are recommended.
Just remember that neither is risk free. If markets go the other way (interest rates down and stocks up), you can lose money on these funds.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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