Sunday, June 24, 2012


Now that my hand appears to be out of danger, although far from good, it is time to get back to work. I posted a chart of this fabulous "success story" a while ago and some liberal commented about what a great thing it was that we saved them. He went on to say I was dead wrong about my comments. Here are some facts to back this wonderful looking chart. Please keep in mind it is and always has been my contention, that this company is heading right back down into bankruptcy again.

When the restructuring of the company was done they basically had a huge pension obligation strangling it, which was what was causing all the problems. Sound familiar? A corporation called the US has the same problem. When they bailed them out instead of doing anything at all to reduce that obligation, they wiped out the bondholders and gave the union 40% of the company. They erased debt other than that related to union obligations. I think we all knew this at the time, so I am just restating what everyone already knows. Here are some hard numbers. At the end of 2011, they had a future pension obligation of $108 Billion, after the bankruptcy! The cumulative earnings of the company in it's entire existence is less than that. In other words, even if you put them back into their heyday, there is absolutely no chance of them coming anywhere near making enough money, just to simply pay for the retirement of workers who no longer even work there! Further complicating this is the low yields on bonds that permeate the investment world now and are not likely to change much.

Not only do they have an obligation that can't be met by any means, they also have no way of getting anywhere near the assumptions factored into how to fund these pensions because they will never be able to hit the investment return assumptions in their models. As a result, what will happen is they will come to all of us and force us to pay for the pensions of retired GM workers. Keep in mind they also still owe us about $50 Billion, so add this on top of the pension obligation. Is it so hard to see how putting more money into a situation like this makes no sense? It is also why they will inevitably go bankrupt again. Liberals can say whatever they want about how wonderful it is that we saved all these jobs. How do we know that if we had filed a real bankruptcy and wiped out these obligations, that even more jobs would have been created by now. The company has been cash flowing decently, but there is just way too much headwind for them ever to overcome. Had these obligations been wiped out this stock chart would look the opposite of what it does now, the company would be thriving. The profits they are making are decent, and with normal balance sheet stuff, this could have been a great success. I could only have been that had they allowed a real bankruptcy to occur. Say what you want about Romney, but this is one thing he clearly would understand based on his business experience. Barry has none of course, so he has no clue about things like this as is painfully obvious.

They also have a doctored debt rating due to our financing the company. If you look at the private sector and what insurance on the debt costs, it is commensurate with a debt rating of two levels below where they are. We need to let this company go bankrupt and have a legitimate restructuring just like we need Illinois and California, and other states do as well. Giving money by printing to entities that have business models that don't work, makes no sense regardless of what your politics are. It is just plain insane. Just look up the definition of insanity for clarification.

The challenge as a trader is that anyone with half a brain knew this would fall off a cliff. However, just shorting things like that is another matter. I traded emails with a reader who asked if I was going to buy Facebook, and I told him I would short it when it went public before I would buy it and there was no way I wanted to be long there. I suspected that whole thing would poof, the valuation made no sense at all. The challenge is that there are so many things like that you can easily identify, but they don't always play out the way you think they should. Shorting or buying the "story" is really a difficult way to trade. You can have the story dead on but time it wrong and get whacked. What I would suggest is accumulate a story list, then look for when your trading techniques you use are setting up trades in the direction your list tells you to look. Then take action.

I also know Bank of America is going poof, and I stated that in here a while ago when I announced my mission to clobber this stock. The problem with shorting this is that it is just like shorting the indexes, since all stocks are almost the same trade as an ES trade now. I would rather trade the more liquid stock indexes than illiquid individual stocks. If the time comes when things de-couple again some this could change. Until that time, I have put my mission against them on hold unless I see something in it's chart that tells me it can trade differently than the overall market itself. Most stocks if you look at them now have all their ups and downs on the exact same days the indexes do, so there is no reason to bother with them at the present time. If you are short even a bad stock, but we get a 100 point up day in the stock market, you will get smoked on your short.

You can see we hit the zone I mentioned to look for sells this past week, so any rallies back up into that area and I will be looking to short this market. I don't have anything really clear for Monday at this point here. I have some short term buys in a new approach I am studying, but there are not confirmed by other tools, and the raw approach with this new method sucks. In other words if you look at all the trades it calls out, it is lousy. I am studying it because it does pick some I would otherwise miss by my current approach, that are dynamite. It remains to be seen whether I will be able to figure out a way to ferret out the good ones.

As has been the case so often recently, many markets look the same again here from the Bernanke's to the currencies, etc.. They are all the same trade to me here once again. We could very well have some huge market manipulations in upcoming months due to the election, so it might be wise to keep short leases on shorts in the indexes. If you get a big quick profit, it probably should be taken. I think we will likely see a huge rally if Romney happens to pull ahead significantly in the polls. I don't know if he will or won't but if he does, long will be the side to be on. It certainly would be interesting to see if Barry has the nerve to strong arm the Fed into selling futures in that instance to try and launch a campaign about how bad things will be if Romney were to win because the market is tanking in anticipation of that. I think that it is unlikely the Fed would ever be anything but a net buyer of the ES, but all bets seem to be off with politics right now. I think we have seen now through fast and furious, why we will never see the Feds trading account summaries. It will be classified as priveleged and protected. Alas, we will never get the proof we need unless someone wants to risk their live to be a whistle blower.

We are in the critical zone for the metals here as I stated the other day. If we don't hold here, this will be something to see that none of us will ever forget. If these levels are penetrated on a closing basis you could very well have millions of people realizing at once they have been conned, and the exits are going to be incredibly crowded. I am tempted to buy into these zone just assuming the powers that be will try everything they can to hold them here. It just might be a good risk to reward trade. It stocks happen to rally, Gold will come along for the ride most likely.

Good luck this week.


John M said...

What Romney actually knows from his business experience is anyone's guess, but what he'd do as a politician is probably predictable: exactly what the last two guys have done. I don't think you really expect a politician to do anything else, but it does show you have some idealism left to imply that he would. Said with a smile, Chris....hope that hand is back to normal soon.

Michael Tredr said...

glad things have stabilized with the hand!

Vikas said...

Hi Chris, wheat seems to have gapped up on the open tonight, and I'm unsure if its wise to chase it here. Whats the play here? Do we wait for a pullback?

Chris Johnston said...

John you must be kidding me, these guys that do what Romney do are the best businessmen on the planet. They know what works and what does not, they get rid of what does not and keep what does. He certainly is far more qualified than any of the prior 10 presidents in terms of business experience. The unfortunate problem is that the President cannot act alone and Congress can really make his life miserable. However, had Obama been free to do whatever he wanted without Congress he would have already ruined this country for 100 years or more, so I guess having that check and balance is good. As do what he would really do, of course that is anyone's guess. He is somewhat of a Teflon man it appears, so maybe he would do the same thing and disappoint me.

GM speaks for itself, that whole thing is a disaster, it needs to be bankrupted, have the pensions modified. Until that happens I will walk before I buy anything from them, or any other company that is being strangled by a union. I boycott companies run by unions any time I have a choice.

Wheat, I don't have any buy signals there so I don't know what to say about that. It is the weakest grain, I would do my buys in the stronger ones. I don't like chasing gaps in general, but when I have signals I tend to try and buy a small pullback when a gap occurs and sometimes I miss the trades.

Anonymous said...

Been following your blog for a while. Great stuff, keep it up. I had a question regarding futures contract rollovers. If the current futures contract being actively traded is the December 2012 one (for example), then do you only study the prices of the December contract? Do you take into consideration the prices of the March 2013 contract? I was recently looking at Corn and have had success shorting the July 2012 contract. Looking at the July 2012 contract, it looks weak to me and if it didn't expire I'd believe that corn would be in for a big slide over the next year or so. But now that the new active contract is December 2012, I don't feel the same way. In fact December 2012 looks a lot stronger than July 2012 to the point that I don't feel that bearish about it. I would love to hear your thoughts on the issue of contract rollovers.

Thank you.

Anonymous said...

Short jpy again ?

Chris Johnston said...

I use the continous contracts which back adjust prices, with genesis that is the -067's I don't know what data feed you use but there should be a continuous contract option with all of them.

As for the Yen, possibly another short could set up there