Hello and Welcome

This is the first entry for this blog -- welcome -- and going forward I will be commenting about macro and micro events, companies, market segments and other topics of interest for people playing the short side of the market. I am not a curmudgeon, or a perma-bear, I write a for fee newsletter, ChangeWave Shorts, that is itself agnostic about the market and is only concerned with making subscribers money. That being said, I have been down on the economy and the broader markets for many months and see no sustainable market recovery until there is an economic recovery; I see no economic recovery until the banking system recovers; and I see no recovery in the banking system without a $1.5-2.0 trillion dollar re-capitalization, in some form, and a recovery in the housing market, which I do not see until 2012 at the earliest. I have held these opinions since February of 2007.

My own work is predicated on three things: business and consumer surveys conducted by ChangeWave, an internal group part of Investorplace Media, the work of the few analysts I respect and who have been right the past three years; and my own analysis.

I look forward to your comments and insight -- but be mindful this is not a place to vent, or tout your positions. I review and approve all comments and contributors who are not respectful of the opportunity they are given here will be prohibited from posting commentary.

See you soon.

Citigroup Nonsense

Vikrim Pandit, the CEO of Citigroup, missed his calling -- he should have been a carnival barker, touting three legged tigers, bearded women and other anomalies, for that is what he is touting now -- a broken bank posing as a profitable one.

This morning the Citi public relations machine put out a note about their profitability in January and February -- and I can only assume this is based on the definition of operating earnings. So what. The bank is broken with not just two trillion dollars in assets that include a chunk of uncertain value but $1.2 trillion in off balance sheet assets Pandit never, ever, ever refers to. You had to be a Citi watcher -- or a short side guy like me - to find these, the first reference to them being in a smallish SEC filing in February of 2008. Then, in November of last year, Citi unveiled these assets on page 21 of their town hall meeting presentation -- you can see the whole thing on their website. My broker, a very smart Citigroup broker (he has taken his whole group and moved to Wachovia Securities, now part of Wells Fargo, wonder where he will move next year, more on that later) could to understand the chart and its acronyms. Simply put, the chart showed $1.2 trillion in off balance sheets and only used acronyms, including the one made famous by Enron -- QSPE -- Qualifying Special Purpose Entity. Mr. Pandit's carnival barking and press releases don't compensate for these off balance sheet assets including more than $800 billion Citi said not to worry about due to an accounting change. Comforting.

Will Citi continue to tally? Maybe. Will the government fudge the stress test and not include these off balance sheet assets? Possibly. Does Citi have any intrinsic value? None -- eventually I see the company being broken up and shareholders ending up with little or nothing. Stay away.

A Rally or Turnaround

I am not a market technician or rally but charts and short-termism has become a necessary ingredient to establishing short positions - fundamentals ultimately rule but technical and irrational movements in stocks can make life very unpleasant. The radical movements we saw last week have been mirrored once -- from 1929-1932. That should tell you something.

That being said, I look at fundamentals and all I see is a market moving down, over time. This view is based on a belief the market regressed then overshoots the mean -- and that mean is driven by the multiple of profits assigned to the market by investors. Fortunately, that is at the center of the current debate on the long term valuation of the market. What will corporate profits be in 2009 and 2010 and what multiple will the market assign to those earnings. Investors and traders, especially those playing the short side, need consider the following:

- The debate is underway about profits and the range of opinion is startling, from $25 a share on the S+P 500 to $55. To be conservative, let's just split the difference - let's make it $40.

- The potential multiple of profits, depending on your view of history -- are we closer to a recession than a Depression - and your view of profits in 2010 - is 9-12. Some people I would like to call some harsh names but will not and instead I will call them willfully misleading bulls that are long only see the top multiple at 15. If we include them in the discussion, the median is 12.

- Where I grew up, 12 times $40 is 480 -- that is 480 on the S+P 500 - or a 37% decline from right here, right now.

Extreme? Consider the fundamentals:

- The next mortgage meltdown is beginning and will last up to three years and end up larger than the last one, this one built around option ARMs, ALT-A mortgages and prime mortgages improperly rated or with folks either unemployed or so upside down on their homes they just walk away. Either look for Ivy Zelman's comments somewhere on the Web or watch an outstanding piece on CBS News' Sixty Minutes http://www.youtube.com/watch?v=XR0asxyRGX4.

- The current and future mortgage meltdown will be joined by a commercial real estate and private equity meltdown and that in turn makes current bank "marks" and other measures of capital adequacy problematic. I disagree with Dr. Bernanke -- the big banks are or will be insolvent. Even if they fudge the "stress tests" -- and fudge "mark to market" -- and it looks like they are going to do both in tandem - assets will decline in real world value. And, private investors will do their own valuations of bank equity and bonds. Do you think they are not going to ignore Citigroup's (C) $1.2 trillion dollars in off-balance sheet assets? My belief, using simple math, is the banking and credit crisis will not be fixed until the banks are re-capitalized.In the US alone that could take up to $2 trillion dollars.

- The US consumer has pulled back do to necessity -- and will continue to do so as credit is pulled back, credit standards are tightened, people refuse to borrow. This is driven by the recession and the incredible decline in wealth -- 18% of the nation's accumulated wealth evaporated last year. This in turn is already leading to a permanent reduction in consumer spending. This in turn will lead to business failures here and the failure of entire economies overseas. Read an interview with Stephanie Pomboy in Barrons (mid December of 2008) to get a great view of this contraction.

The bottom line: the economy is going to be in full retreat throughout 2009, will not bottom until mid to late 2010 and corporate profits and the market will catch up with this reality. You cannot ignore rallies but view this as just that -- a bear market rally.

The Big Banks: A Sucker's Rally

Are the big banks really coming back? Are the bank stocks coming back? Can the Geithner and Bernanke plans and actions save the shareholders of the large banks.
No. No. No. Meredith Whitney, great diva of banking, said so this morning. I agree - and my agreement began in October of 2007 when I met Ms. Whitney on a TV set and she blew me away. My take is almost as dour as hers so read this and then check her appearance on CNBC this morning (Squawk Box).

There are probably less than 20 banks that are insolvency or getting close - unfortunately, they hold the vast majority, 85% plus, of deposits in the US. Their lending is shrinking, which means their ability to generate margins and profits is shrinking and they cannot, anywhere in the short term, "earn" their way out of the current situation. For example, they continue to cut back credit card lines and these will be half their former size by year's end, down more than $2 trillion dollars.

Two years ago many of these banks - new entrants into certain markets after the repeal of Glass Steagall in 1999 - were leveraged more than thirty to one - in Europe, up to 50 to one - and they are now retreating to a 10 to one or 12 to one ratio. Then you have write downs - massive write downs in the past 18 months, massive write downs to come. These write downs are moving from mortgages to credit cards - check out American Express' numbers - to commercial real estate and loans - and then they will move again to the next wave of mortgages.

The solution, so far, is public capital. Geithner wants private capital to flow into the banks. He is not going to get it until toxic assets are wiped off their books or their real value is made perfectly transparent. Very loud pundits with political axes to grind but no integrity about numbers or the truth scream this is only a temporary situation, the assets are perfectly fine. Sure, right. Mortgages continue to default more than banks anticipate; ditto for credit cards; ditto for commercial loans; ditto for private equity loans. Don't be surprised if more than 60% of option ARMS default or if credit card default rates top 10%. That is a lot of bad debt still to come.
If this happens the banks that are in reality insolvent will now be seen as insolvent - so they will delay this as long a possible. Eventually toxic assets will be written down and sold in some form and transparency provided to investors. Then assets will be sold to re-capitalize the banks. And when all this happens current shareholders will get creamed.

Whoa. What about the Fed and Treasury actions? It all starts with housing - prices will fall throughout the year, putting more and more homeowners under water and more and more homes into foreclosure, putting more pressure on prices. And you cannot fix housing - we don't have enough money or political support and the new program is a palliative for constituents.

Whoa? What about the new TALF? Everyone always forgets that by statute the Fed can only buy triple AAA rated assets and even when it fudges on this issue it does not fudge much. So it cannot buy toxic assets and can only buy some new assets based on debt that can be sold anyway. And, perversely, the TALF program creates a two tier bond market - Fed backed and non Fed backed - and will widen credit spreads for debt other than what the Fed buys.

Whoa? What about Obama hinting he will ask Congress for more bailout money to stabilize the banks if needed? Let's say he gets it - do you think Congress and Obama will protect current shareholders after AIG, and the other deaf management groups at all the banks have absolutely hacked off Congress and the vast majority of Americans. We live in a democracy - with all its warts and wrinkles - and people are not going to let Congress do another TARP - or do it without incredible strings. And one of those strings will be "wipe out common equity."

Just look at four big banks. Citi is such a mess it is almost funny, with a $1.2 trillion in off balance sheet assets and a management group behaving like a traffic cop on valium; BOA still does not know what it bought when it bought Merrill Lynch; WFC bought more than $60 billion in option ARMs it holds and is writing down as they are impaired; JPM is doing the same with the $50 billion plus in option ARMs it got with the purchase of WAMU. Over time, Citi will be broken up; BOA will sell Merrill or at least what is left of it; WFC will do the same with Wachovia Securities; JPM has the least amount of asset shedding in its future but times will still be difficult. So avoid the big banks until they stabilize - then, when you see a trading top, feel free to short them. C, BOA, WFC, JPM.

For purposes of full disclosure, most of my assets are with Citigroup and I bank in the private banking program at BOA. Oh, I just got kicked out of that program because I will not deposit $250,000 in assets with a Merrill Lynch broker. Do you want to call a commission based program for insight into when to re-finance? If you do, he or she will send you to an 800 number. I will be moving my account. And my Citi broker left with his entire group (eight brokers) to Wachovia Securities. I asked him where he will go when that unit is slid next year. He did not laugh.

Who Should You Believe About This Market

I am smart enough to realize I am not as smart as many others who follow the market from a wide variety of perspectives - from that of a value investor such as Warren Buffet, a technician such as Louise Yamada, a market historian such as Peter Bernstein and so on. And those three, I like. But most - and occasionally dear Warren - are still falling prey to the belief we are in a very deep recession - but a sort of typical recession nonetheless. In fairness to the Sage of Omaha, you can see he is changing his mind every few months about this issue.

The problem is, we are not in that kind of recession - we are somewhere between a Great Recession and a modern, Low-Pain Depression.

• Housing prices have fallen 27%, will probably fall more than 40% peak to trough.
• The market is down just less than 50% -- and will probably fall another 20% or so.
• The world, last year, lost $50 trillion in wealth - the equivalent of one year of GDP for the entire planet.
• The US last year, lost 18% of its wealth.
• We are losing more than 600,000 jobs per month. Add the unemployment rate to the number of workers who have stopped looking and the number who are working part time and want to work full time and we are near an eye popping 20%. Add the number of people in our prison population - compared to the Depression and add the number of people in our military, again compared to the Depression and we are near 25% part of full time unemployment - what it was at the height of the Depression.
What the experts - and I do not say that pejoratively, many of these people have been more than right more than most - are missing is the change in attitudes, among individuals and businesses, this kind of recession or depression or downturn brings with it and the consequences for economic growth. And for this reason many are prognosticating about an economic rebound that will not occur with any vigor, Curiously, many of the same people are talking about a flat market for five years or more - as if they have more confidence in their market forecasting than their economic crystal ball.

My point? When doing any analysis using others' analyses, check out their complete point of view. Try to see what they see. And besides turning back here - of course - check out four analysts I have written about in other places, notably optionszone.com.

Meredith Whitney - the diva of banking stocks, I had the good fortune to meet Ms. Whitney the day the bank stocks broke - because of her, actually. She is calling for another downturn in bank stocks, the eventual restructuring of the big banks, more write downs this year and a lack of a return to normalcy in credit markets for a while. Check her out in the recent Fortune cover story or the December Portfolio article - "The End", by Michael Lewis. http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

Ivy Zelman - the diva of the housing and related stocks, she called the downturn in housing long before others and sees a larger mortgage mess looming from Alt-A mortgages, option ARMS and the good and prime borrowers now hit by the recession and upside down mortgages. My favorite piece on her can be found at http://www.housingchronicles.com/2008/05/poison-ivy-zelman-on-false-hope-for.html. She is also on CNBC< you can find it at http://www.youtube.com/results?search_type=&search_query=Ivy+Zelman&aq=f

Stephanie Pomboy - the diva of macro credit markets and in part economies, she called the credit bubble long ago. Ms. Pomboy believes the consumer in the US is permanently de-leveraging, which has massive consequences not just for the US but for the world, and sees average GDP growth of 1% or so for "five to ten years." The last major interview I found was in Barrons - it was great. http://online.barrons.com/article/SB122912505428802977.html?mod=googlenews_barrons

Louise Yamada - the diva of technicians, arguably the best technician on the planet, she also looks at fundamentals and sees the bricks of the S+P 500 earnings - the earnings of each company - falling out of place and an S+P between 400 and 600 sometime in the future. She is on CNBC Fast Money now and again. A video on YouTube you should check out is http://www.youtube.com/watch?v=M2HIM3HFXXI
Forget the others - these four - all agnostic, no perma-bears or perma-bulls, all four independent analysts not driven by the needs of an investment bank - are the best.

The Banks: Sell, Short, Stay Away

I have been urging everyone who would listen to avoid various classes of banks, starting with the some small regionals in February 2007 to the big guys in October of that same year. The reason? I can read and do my sums. Forget all the noise - the big banks are insolvent or close to it, the toxic assets at the root of this problem are not going away anytime soon because the banks are not going to get the help they do not deserve but we all need. Thank you, AIG et al.

This week's action by the Fed, expanding its balance sheet more than a trillion dollars, and this week's action by Congress, disgusting but truly democratic, is proof the problem of toxic assets cannot be solved for both financial and political reasons. And Bernanke and Geithner both know this, and neither is as politically savvy as Barney Frank, who certainly knows this.

The big banks are insolvent - oh, they may have the technically correct amount of Tier One capital, and their leverage is decreasing, and they have operating profits, and all that nice stuff - you can read the gory details and the puffed press releases and statements from Citigroup, Bank of America and Wells Fargo elsewhere. But they also have massive amounts of toxic assets that are not just illiquid but bad, getting worse and destined to get, as Dickens liked to write "worser and worser" in the coming months. Citi alone had more than $1.2 trillion (as of November 2008) in off-balance sheet assets - and they are off balance sheet for a reason. JP Morgan and Wells Fargo have more than $120 billion in option ARMs that have absolutely incredible default rates - some analysts predict these rates will climb to over 50% in the next 30 months) - and they can write these down when they are impaired as they were originated by banks bought by Wells and JP Morgan. A good deal of Tier One capital will be changed as the assets ratings are changed as they deteriorate. And some banks - notably Citi - have a lot of "tangible equity" in the form of deferred tax losses. Give me a break. So, from a fundamental point of view, they are bust.

Back to the point at hand. Can Uncle Sam help? With the AIG mess in full bloom, Treasury now must scale down or abandon efforts to raise the capital they need to fix the banks - I believe this is $1.5-$2.0 trillion - and the conditions attached to these funds are now going to be so onerous the cretins now running the banks will refuse the money, try to tough out the crisis and make things much worse. I believe this is why the Fed acted so quickly and strongly this week, expanding their balance sheet by more than a trillion in a surprise move. They now believe Treasury can do little more. The tin ear shown by the executives on Wall Street is astounding - more on that in a different piece - and reflects the difference in leadership of partnerships, where people are risking and managing their own money, the model of the 1980s and early 1990s, with that of publicly held companies, where people play God with other people's money. And tend to act like it.

The Congressional reaction is disgusting - but we live in a democracy, wrinkles and all. I remember a line from a Law & Order - Jack McCoy explaining why society wants and often needs the death penalty - it is to "keep the mob at bay and do the mob's work for them" or something to that effect. Ditto for Congressional reaction to the AIG and other bonuses. And to that point, until the people get their revenge through Congress the banks will not get any reasonable amount of money without unduly tight restrictions governing their use and the management of the institution receiving the funds.

I mentioned Barney Frank earlier because everyone agrees, enemies and friends alike, he is by far the smartest person on the Hill. And he is supporting the bandwagon for bonus revenge - which means he knows this is necessary, long term, for democracy to play itself out. Bottom line: whatever help the banks needed and could expect from Washington is going to be smaller and more difficult to use. The only possible exception will be if Geithner purposely queers the stress tests - a 50/50 probability right now.

What about the toxic asset purchase plan? Too little money - there is a growing sense their will be federal strings to getting money or guarantees, how many hedge funds so you think will participate with vigor? It is, simply put, a mess.

So, forget the short term action - the big guys are a wreck and won't get help soon. Not from clean capital injections, not from simple toxic asset purchase plans. Wait until next year when they break up, their assets are sold here and there. That may be the time to buy. More on that later as well.

How to Fix the Banks in 24 Hours

Hour One: A Conversation Between Uncle Ben and Cousin Tim
The following takes place between 11:00 AM and noon, Sunday, March 22.

(Sound effects) - Clink, clink, clink

Ben Bernanke: "Hello, Tim, this is Ben."

Tim Geithner: "Ben who?"

"Ben Bernanke Tim, Ben Bernanke."

"How are you Ben? How is your bracket doing, Ben. You know, I am a public official and all, but we actually have a little pool going and...."

"Tim, we need to talk. About the banks?"

"Which banks, Ben? All of them, some of them - I mean, there are a lot of them."

"The big ones, the big ones creating systemic risk to the world economy. Those banks Tim."

A pause and a cough. "OK, Ben, but you know, I am unveiling my plan tomorrow at noon and ...."

"That is why I am calling. We are running out of time to fix this and your plan is not going to do it."

Another pause. "Well, I know that. But I have to do something, you know."

"Well, I have a plan that will work and we can get it all approved in the next 24 hours if we work together."

A pause. "OK, Ben, I am listening. But remember, Treasury is gonna be broke soon and..."

"Sh, Tim, shhh."

"OK."

"First, you give me, the Fed I mean, the last $250 billion left in the TARP."

"Why would I do that Ben? I told you, once I unveil my new plan I am going..."

"Focus, Tim, focus. Make believe this is a new plan. Remember?"

"Sure, Ben, sure."

A pause. "Now, you give me the last $250 billion. By statute, you can. The Street loved the $1.2 trillion I created last week, this will give me the ability to create another three trillion."

Some silence. "That's a lot of money Ben."

"Yes, I know. Anyway, you give me the rest of the TARP and I turn around and create three trillion dollars. I then lend part of this money to the banks against their AAA rated assets. And then you provide the same guarantees to the banks you have provided for Citigroup on their less than AAA rated assets, that won't cost us any money for a couple of years and boom!, the banks' assets are now all AAA rated and I can buy as much of them as I want."

Silence. "Is this legal?"

"Yes, we both have the authority to this now."

"What about Barney Frank and all those guys who yell at me all the time. I mean I get headaches. Do you know how bad those headaches are, Ben? I mean..."

"Please, Tim, focus. We will keep Congress informed of everything, they will love we are not asking them for more money right now. Now, in return for the guarantees every asset you are guaranteeing gets put in an escrow account. After that..."

"A what, an escrow account?"

"Like when you buy a house, where the money goes during closing."

"I am not buying a house, I like the one I am living in right now. Well, sure, I know what you mean."

"Yes. Anyway, the assets you have guaranteed go in there. No more toxic assets but we have not spent any money. And as these assets mature or are impaired, over time, they get written down by the banks. Payments on loans to these assets go into the escrow account as a reserve against losses."

Silence. "Is all this legal?"

"I can set it up - we have the authority - you have the authority to make the guarantees. Anyway, no need to change mark to market..."

"Mark to what?"

"The mark to market accounting rules that..."

"I know what they are Ben. The game just started and I couldn't hear you well. It's a team in blue and a team in white and my bracket is all teams with primary colors. And blue just got the ball, I got distracted."

"As I said Tim, focus, we can do this and we are running out of time. You know what will happen next?"

"Uh, halftime?"

"No. With the cash I give the banks, lend them, they will pay back the TARP funs they received from Treasury."

"Why would they do that?"

"So they can collect as much bonus money as they want."

"Ah, that makes sense. First thing I think you have said I really do understand, you know when I was the Fed we always argued with management - I mean you, my ex-boss" there is a snicker into the phone "that we wanted bonuses too. I mean..."

"Tim, please. The banks pay you back. You give me that money and I multiply again by twelve and we have more than enough money to re-capitalize the banks and take care of some of the European banks that are going to fail through their central banks."

"Is that legal?"

A pause. "It is not illegal. Besides, I already loaned them half a trillion, I called them swaps, who is going to stop me now?"

Another pause. "Tell me again why are we doing this?"

A sigh. "First, to end the systemic problems in the credit markets. Save the economy, that sort of thing?"

"Yeah, sure. I use those bullet points all the time, you don't need to repeat back to me what I probably told you. What other reasons my friend?"

"If we do this - when we do this - it gets me back into banking and out of regulating these guys. It gives you the time and support on the Hill you need to draw up new rules and regulate the hell out of them, just like you have always wanted."

"That would be fun. And I still get to go to those meetings in the big rooms with the flat panels and the free food. You know, Bear always had the best food, they used to have bagels..."

"Let's focus on next steps Tim, OK, You get to do your old job - stimulate the economy and regulate banks; I get to do my old job - work in the credit markets and with banks. And we get to get things rolling again without asking Congress for more money they will not give us."

"Give me, Ben, give me. And Treasury. I give you money, don't forget that."

"That is why I called Tim. I need you to ditch your plan and announce this tomorrow. I have set up an appointment at the White House, one on the Hill and another with the big banks for the rest of today."

A pause. "But I still have five teams playing today Ben. Nice colors too. I mean, today? I already have the press conference scheduled but that is a day from now and can't we do this over a big breakfast, one at the Mayflower, they serve these great omelets..."

"Back to the point at hand. Tim, please. No, the politics here are daunting. We need to work this through everyone and get everyone to buy in."

"God, I hate politics. Its like who you are is as important as what you say and what you do. Can you imagine?" A sound of glass being smashed is heard on the line. "Are you all right Ben?"

"Yes, I am fine Tim. So, can we get together, now?"

"Can I watch the games at the same time?"

"Yes."

"I will be over soon."

"Good, Tim, because we are running out of time."

The Banks, Again

I just finished reading Geithner's plan and the new mark to market modifications being proposed by FASB. Some thoughts on the new rules in light of the Geithner plan.

Positives for banks

- Illiquid assets can be considered just that, illiquid, rather than impaired.

- Losses from impairments can be written down over the life of the entire bond.

- Securitized mortgage inside a bond goes bust, house is foreclosed, bank takes a loss and it can write that loss down over the life of the bond assuming it holds the bond.

- Banks must include in definition of impairment their own estimates of what will be impaired in the coming 18 months, I believe, leaving them within existing guidelines.

Negatives for banks:

- This ends opacity -- the banks will have to specify what is impaired and by how much versus how much is illiquid. They can no longer hide impaired assets under the rubric of "illiquid assets."

- Geithner's plan, when implemented, theoretically ends all notions of illiquidity of RMBS once the first bid is accepted. Will that moot this new definition or will the banks be allowed to stretch the definition if illiquidity.

-The banks have to state that they will hold the security to maturity or for an extended period of time. This creates a potential clawback on earnings if they decide to sell the asset before it matures or in a too short a period of time.

The larger issue is where do the new rules fit with the Geithner plan and the stress tests. Before I read these documents, I assumed Treasury would queer the stress tests and make the banks look better than they are. Now I am not so sure -- the one thing all three initiatives have in common is a push towards transparency and although I don't believe on conspiracies I also do not believe in coincidences outside of a Dickens novel. The Geithner plan will identify who is selling assets and wt what price; the new mark to market rules will identify what is impaired, what is illiquid and create a situation for a bank holding illiquid assets where they have to defend not participating in auctions; the stress test will be able to be run against assets banks have declared impaired, not the bucket that includes illiquid assets, so the banks have no where to run and hide.

Interesting -- and this should give every person looking to short a bank -- not the sector -- more information over time to do so. The charts say the bank stocks could be nearing a top. With Citi more than a triple and BAC more than a double, they might be right.

Whither General Motors?

If you take the "h" - for help - out of whither, you get wither - and that is what would happen to GM without massive help. And that help has now been put on a 60 day leash - something its board and creditors should have done a generation ago.
For almost two years I have answering emails and otherwise writing that GM was already bankrupt, just not legally so, and the shares would en up worthless. I am writing this today for the same reason - "is GM a buy" is the common headline for an email this morning. No - the price of the stock is now a put or call on the company, depending on your view.

The bulls see the departure of Rick "Management by Valium" Wagoner as a positive; the bears see no way out. Give this one to the bears - the auto industry is in for a five to ten year trough due to tightening credit standards, a deep Great Recession and a combination of the two creating a shift in consumer discretionary spending from "want" to "need." And as auto sales get stuck in neutral, GM will struggle mightily long term. The question for the stock, right now, is how much will it struggle short term? Will the bond holders relent? Will the unions give away a good deal of health retirement benefits for equity that may end up worthless?

First, the bond holders - they may cave but only a handful who would rather take the hit in bankruptcy and move on could derail the proposed swap if p to two thirds of debt for equity. But all the big guys have to live with each other when this is over so I would say the odds are heavily in favor of a successful negotiation. Next, the union - you would think it almost impossible the union would tank the deal with Uncle Sam to secure a right virtually no other working group in the US has - cheap, high quality medical insurance for erstwhile retirees long before they reach the age qualifying them for Medicare. That is a better deal than virtually all working Americans. If they balk, and the company goes into bankruptcy, they get nothing - they are on line. So maybe they will come around.

But something will happen. You notice the Michigan Congressional delegation said nothing yesterday - a true indicator this is for real and Obama will put GM and Chrysler into bankruptcy if things don't happen.

What does this mean for the stock? This is as much a guess as anything I have written in a long time, but I think you can wit for a long time for the stock to slide - I would not play the short side given that negotiations can end, successfully, at any time - and if the stock goes way down into pennies, it may be a reasonably priced call - a trade, not an investment. As an investment, the value of the company long term depends on how much debt they shed - including debt to Uncle Same - and how many operations and dealers they can lose quickly and without too much damage to their balance sheet, or what is left of it.

That being said, Obama did say that GM and the auto industry are not going sway - a stake in the ground - and if the stock goes down to pennies, in or out of bankruptcy (some bankrupt company shares actually survive a bankruptcy, long story that), and the restructuring looks solid, then it may be a great investment. What would look good? No more excess wages or retiree health benefits - and these are mostly gone anyway after 2010; just Chevy and Cadillac, no Saab, no Hummer, no GMC, no Pontiac, no Buick; a new board of directors; and manageable debt.

By the way - I own three Chevy SUVs, a Tahoe and two Trail Blazers, great cars. I hope the rumors are true that GM will stick with Chevy and Cadillac and ditch the rest, I have always wanted a Caddie.