Exacerbating the post-retirement liability situation is the unrealistic assumptions GM is using in its calculations (year-end 2007), including an 8.5% return on U.S. pension liabilities, 7.85% on non-U.S. pensions, and 8.4% on post-retirement health care. Those return assumptions may not seem unreasonable given long-term market returns, but considering the asset allocations of the three plans, they seem overly optimistic, to put it nicely. If they indeed are, the liability situation -- as bad as it already is -- is understated.
Allocations as of Year-End 2007
Asset Class
U.S. Pension
Non-U.S. Pension
Health Care
Equity
26%
62%
53%
Debt
52%
25%
25%
Real Estate
9%
10%
4%
Other
13%
3%
18%
I believe GM common stock will head toward $0. But since government intervention is likely, shorts need to be limber enough to close their positions if the bailout chatter becomes real. While GM the company will ultimately survive, I'm not sure that the equity, in its current form, will.
As a postscript, the company announced Monday that it may scuttle some of its current brands in favor of smaller cars and is also looking to either sell or shut down its Hummer line. What the company could use now is a little of that spark and ingenuity that helped the company transition plants from autos to airplanes back in 1942. It may be too late.
P.S. Will you be there when Cramer makes his next move?
Strong brands and companies with vast market exposure can help bolster your portfolio. Jim was able to lock in a 64% gain by buying Ingersoll-Rand at $13 and selling at $22.50. Action Alerts PLUS members were the first to see these moves. Were you among them? Get Free Access Today!
At the time of publication, Heller had no positions in the stocks mentioned.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.
Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.
RSS FEEDS
PODCASTS
