Future economists will look back on the slow death of General Motors and marvel at how the story evolved. Books will be written and perhaps even a movie made about the collapse of the greatest industry in America.

The latest chapter in this hallowed story will be completed before April 27th. That date appears to be the deadline for GM’s planned all-equity offering for bondholders.

GM currently has a total of about 27.5 billion dollars worth of debt that is held by bondholders. Unfortunately for them, they don’t have the money to pay off these debts as they mature.

The bond market is already discounting this fact in its pricing. Take for example the GM bond that matures on July 15th 2033 and pays 8.375% annually. GM issued $3 billion worth of this bond back in 2003 and it currently trades on the market for 10-cents on the dollar, or a annual yield of about 82%.  Who wouldn’t want an 82% return for nearly 30 years?

However you won’t get that yield because GM doesn’t have the money to pay you. If they can’t pay the bondholders, they go into default and then bankruptcy. So now they want to convince the holders of all their debt to swap their bonds for shares.

How many shares per bond? Nobody knows.

Is it a good idea? They really have no choice.

It will be interesting to see how this pans out. If GM goes through with this proposal and offers debt holders equity, what percentage of GM will they own? If the amount is too low, debtors will be inclined to push the company into bankruptcy in hopes that they can more of their money through liquidation of GM’s assets. Or perhaps the government will step in and declare a value for the bonds. Will it be 10-cents to the dollar? 20? 5?

Get your gambling visor on, some one’s going to make a killing/go broke.

On March 6th 2009 the Dow Industrial Average (DJIA) bottomed out at 6,469.95. As we write this commentary, the Dow has risen to 7,960, an increase of 23% in just 40 days. Of course, compared to the 52 week high of 13,136.69, the Dow is still down about 40%. So the question is: Has the Dow peaked?

Looking at the attached chart, we can see that market has been in a defined downward trend. The technical analyst in all of us would then look to see if there is any evidence that the downward trend has been broken, in this case there clearly is no break, yet. The market currently sits atop a bear rally that has been losing momentum the past few days. Then again, we here at INVESTIZMO central are not big fans of technical analysis, so don’t forget your proverbial grain of salt.

Fundamentally, things aren’t that much better. Deflation, poor earnings, and overall lack of consumer confidence doesn’t usually equate to a strong equity market.

Question: So what can be done?

Answer: Hedge!

Besides selling all your stock to crystalize the past 40 days of gains, investors can look to alternative strategies to soften the blow if the market does a quick u-turn and tanks all over again.

DXD

The ticker DXD is a leveraged 2-for-1 inverse hedge against the Dow 30.  In plain English: for every 1 percent decrease in value of the Dow, DXD will increase by 2 percent. Of course if the opposite happens, you stand to lose a lot very quickly. The theory is that if the Dow rockets up, you’ll be happy taking a big loss DXD because the rest of your portfolio will be singing. DXD trades like a stock and is very easy to purchase.

PUTS

For the more advanced investor, now might be a good time to purchase a put option on your favorite index linked product, or even the index itself. A put option can give you many times more leverage with a fixed risk profile.

It should be an interesting few weeks to watch the Dow.

I always get a lot of question asking how someone becomes a trader. The truth is that there is no simple answer, it is a combination of education, ability, personality, drive & luck. I’ll quickly go over them below:  

Education

At a minimum a University Bachelor in Commerce/Economics and preferably some industry courses. All the large institutions recruit at the major Universities in September for positions beginning after graduation in June/Aug. There are usually two types of positions, Analyst & Associate. Analyst is for Undergrads and Associates for MBAs.  Read more

According to a new Bloomberg survey, the world wide CreditCrunch™ appears to be slowly fading away.

You might be wondering what the heck is this CreditCrunch? There has been a lot written on the subject, but not too much explained at a basic level. So here goes…..

The current issues with credit is that it has become more expensive. What does that mean? Well, essentially it means that the funding of lower credit investments have become more expensive. Why? Because people were afraid of risk and wanted only the safest investments. Treasury Bills (T-Bills).  Read more

Quote of the day:

“[Citigroup] is so deep in a black hole that even renown physicist Stephen Hawking could not help the ailing company” – Banking analyst Meredith Whitney (via NY Post)

Ouch!

Some curious US economic numbers were released this morning. April’s retail sales fell 0.2%, however, when excluding auto sales the number becomes an increase of 0.5%, beating forecasts calling for a 0.2% rise.

The first curious observation is that retail sales were up, even with the recent drop in consumer confidence numbers. This can partly be explained by strong sales in defensive retailers like Wal-Mart and Costco that were reported for the same period.

The second curious observation is not that car sales dropped, as that has to be a no brainer given gas prices and the auto industry’s snail pace at responding to changing market conditions.  It is that sales at filling stations also dropped. One would think that it would be very difficult to produce lower sales when your product is in-elastic and at record prices. This has to be the most compelling evidence that people are changing their driving habits. Specifically, they are driving less. Car companies should take note, as less driving will undoubtedly lead to even lower sales.

When I first got interested in markets I thought technical analysis was a great tool. It was easy to learn, made logical sense and most importantly, appeared to work.

I was fooled by this cunning, seductive mistress. Technical analysis is the fools gold of finance. It is an illusion that is as real as Michael Jackson’s face. But to quote Levar Burton’s Reading Rainbow: “You don’t have to take my word for it”. Read more

One of the classic indicators that determine if people believe they are in a recession is retail sales. This ties into consumer confidence and jobs data that help determine the health of the economy.

Today we learn that both Wal-Mart & Costco reported sales data that increased more than analysts estimated. How does this show that we’re in a recession? (or at least acting like we are)

When consumers believe that times are tough, they will make decisions that help them build an economic cushion. Luxury goods will be cut, frivolous spending reduced, and penny pinching will begin.

Where do consumers go to penny pinch? Wal-Mart & Costco!

These companies are often coined as defensive stocks because they tend to hold their own during economic downturns. People still need to consume, just at bargain prices.

So ultimately this shows that consumers are tightening their belts and therefore behaving as if times are tough. And that’s the bottom line, isn’t it? Do you need an economist of government official proclaim that you’re in a recession to feel it? No. All that maters is how you feel and currently, Americans clearly feel like they are.

Forget techincal or fundamental analysis. Forget digging through earnings reports, crunching numbers on “trends”, or shooting darts at a list. The easiest way to make money in the market is insider trading. Unless of course, you get caught.

This probe is being carried out jointly by both the Securities and Exchange Commission in the USA and the Ontario Securities Commission in Canada. They allege that a US based law firm that advised on 11 merger transactions over the past two years had a connection to a Toronto business consultant who profited $1.1 million through purchasing shares in the target companies before the mergers were made public.

Insider trading probably happens a lot more than the regulators want us to believe. It’s just so easy. There are usually dozens if not hundreds of people who have access to information that can materially affect how a stock performs. All it takes is a quick phone call to a broker or accomplice and bingo-bango, profit!

OK, I know I made it sounds a lot simpler than it truly is. Having worked in the industry I know what compliance departments focus on and how red flags can appear on your account. I’m not about to start disclosing that for obvious reasons. What I will say is that for all the accounts that are caught, there’s a good chance many get through undetected. Those are the people who are smart enough to fool the system and keep their mouth shut.

Microsoft is turning into quite the hussy. Shortly after breaking up with Yahoo! before they even officially dated, Microsoft has been seen holding hands with Facebook…. and they might even kiss.

I never liked the proposed Yahoo merger. This one, however, might have legs.

Firstly, lets ignore the $15 billion valuation that Facebook claimed to have in October. That number is just silly. Facebook is still a new kid on the block, they’re still working on a business model that will work in the long run.

Although it is still growing like vile weed, I have noticed that fewer and fewer people on my Facebook account update their profiles in a regular basis. Facebook could just be an Internet trend. A flash in the pan. Not a $15 billion dollar company.

Microsoft could bring a lot of help to ensure that Facebook becomes a long term juggernaut on the Internet. They have the reach, the knowledge, the experience and most importantly, they are just as evil.

Facebook has built a reputation for having poor privacy controls and whoring out users to advertisers. Microsoft has a reputation for whoring out user’s rights to media lobbies. Together they can ruin your online experience and share it with the world.

Seriously though, these two firms would benefit from each other. Microsoft would gain a growing Internet database of consumer information, Facebook would get a grownup to steer it in the right direction.

I say go for it!