Only a handful of billionaires can swoop into a downtrodden stock and single-handedly rally investors to buy up shares, taking the broader stock market with them.
But sometimes, the rally tends to be short-lived.
Such was the case last week when Kirk Kerkorian announced he was doubling-up on his ownership stake in General Motors Corp. Some observers believe the move has given false hope to the struggling U.S. auto industry.
The tender offer by Kerkorian’s Beverly Hills-based Tracinda Corp. caused GM’s stock to surge 18 percent on May 4, the largest single increase for GM’s stock in 40 years. By upping his stake to 8.8 percent, Kerkorian is expected to exert more pressure on GM’s management and board, even though his company called the investment “passive.”
But one day later, a Standard & Poor’s downgrade to junk status of GM’s immense debt (along with Ford Motor Co.’s) gave the markets second thoughts on the wisdom of Kerkorian’s gambit, and the stock fell back.
In truth, high-profile investors like Kerkorian, Warren Buffett and George Soros sometimes do make mistakes.
Soros made failed bets on Russia’s ruble in 1998 and on technology stocks bought by his Quantum hedge funds in 2000 losing several billion dollars. Buffett bought one-quarter of the world’s supply of silver in 1998, before prices bottomed.
Tim Somers, senior vice president and portfolio manager, fixed income at Financial Management Advisors LLC, a Los Angeles investment advisor, said there’s no way to know Kerkorian’s motivation on GM.
“He may see something that the rest of us don’t see,” said Somers, comparing the auto industry to the steel industry a decade ago, which went through mass bankruptcy and unloaded its hefty pension obligations off on the government. “But the reality is that $1,500 of every car is going to health care and pension costs, and GM already cut production 10 percent in the second quarter.”
One local portfolio manager said the GM story bears little resemblance to Kerkorian’s attempted hostile takeover of Chrysler in the 1990’s. At that time, the U.S. was in the beginning stages of a surge in light trucks and SUV sales.
Somers said the high-yield debt market now is bracing for the massive influx of GM and Ford bonds.
General Motors owes its bondholders roughly $112 billion, while GMAC, the automaker’s lending arm, holds another $170 billion. Ford holds $97 billion in debt.
Combined, the three companies now make up nearly 40 percent of the entire $950 billion high-yield bond market disrupting the makeup of bond indices that portfolio managers use to guide their investment decisions.
Bondholders, who are the first in line to collect in the event of a bankruptcy, have been bailing out of the automaker’s bonds. GM’s were trading at roughly 74 cents on the dollar last week, and Ford’s at 90.5 cents.
