Wednesday, June 3, 2009

Volume 3, Issue #46

Also in Today's Issue...

General Motors filed for bankruptcy protection Monday morning

GM's much-anticipated filing took place in the federal building that houses the bankruptcy court for the southern district of New York. It's only a few hundred yards south of the iconic charging-bull statue that represents the bravado and perhaps also the hubris of Detroit and of the financial capital of the world. Neither will be the same: Any records or plaudits either achieves hereafter will be accompanied with an asterisk after this losing season.

Lehman Brothers' Chapter 11 filing was bigger, but General Motors' matters more. This bankruptcy is one we can all feel, one we can all relate to, some of us by looking no farther than our own driveway...

Here endeth the elegiac prose. You know the news, you know the scale, you've heard the stories. Let's talk about what it means to investors.

One thing: You don't have much time.

Now, I could begin at the beginning and tell you how Billy Durant founded the company and how Pierre DuPont and J.P. Morgan bailed it out and ousted him. I could tell you about stern old Alfred P. Sloan or the great "Engine" Charlie Wilson. We could talk about John DeLorean's famed GTO or Bob Lutz's remake of Cadillac. I could hold forth on the decline of GM's market share from more than 50% in the 1960s to about 20% today. We could commiserate that General Motors, once the most admired of companies, the bluest of blue chips hasn't had investment grade debt in recent memory and how last year it lost its No. 1 automaker status after 77 years.

The secret to what investors need to know about today's market can not be found merely in the letters G and M but in the letters VIX. That's the ticker for the Chicago Board Options Exchange's Volatility Index. This complicated financial yardstick uses options trading to gauge investor sentiment. The higher the reading, the more volatile the market.

During the manic swings of the early downturn, the VIX nearly reached 90. The mathematical limit was thought to be 50. Today, the floodwaters have receded, the dove has made it back to the Ark and the index stands at 30. That's still elevated, but to a far more muted degree.

It means things are changing -- changing back to the way they were. It means time is running out.

The great dichotomy of Wall Street is that it trades on one of two things, and on one of these two things only: Fear or fundamentals.
 
When fear eclipses rational thought, fundamentals are ignored. Reaction? Stocks fall like stones through the air. Fearful investors -- many of whom didn't know what or why they were buying in the first place -- always sell on the way down. They're glad to get something, anything, before the whole market crashes to zero. That's the mindset investors been fighting for the past eight months or so. That's certainly where we were in early March when the Dow dropped to 6,500. That's a market climate I never expect to see again in my lifetime.

And it's too bad, because those downturns are always the best times to buy. Smart investors can always make more on the upswing from these lows than they do on the way down. All of us have seen individual stocks in these past few months that have made +100% and even +200% gains. But fear -- and, thus, opportunity, is fading.

What does all this mean? What does GM's filing mean?

It means that the last major bit of news has played out. It means you don't have much time to pick up fear-laced bargains. It means the time to buy is now.

-- Andy Obermueller
Editor
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