GM - General Motors

[ERICOPOLY]

I figure if somebody buys GM common and shorts the warrant, they'll get a nice little low-risk yield.  Then perhaps you buy at-the-money calls with that yield.

 

I wonder what the warrant borrowing costs are looking like.

 

I guess you would have to short in a manner to keep the leverage equal, right?  Otherwise you would lose if the common appreciated more than the 4.5% hurdle rate.

 

See, here is what I'm thinking.

 

1)  Buy the common for the dividend

2)  Short the warrant to eliminate common stock pricing risk of dropping down to warrant strike

3)  Purchase put on GM with $18 strike for 20 cent (asking price)

 

You basically have a risk-free dividend, less the 20 cents for the put.  And less the borrowing cost on the warrant.

 

So I'm kind of curious how much the borrowing cost is going to cost for the warrants, and what the premiums will be for the warrant.

 

EDIT:  well, I suppose there is risk of rising volatility premium in the puts (come time to roll them) if stock drops down near strike.  However, that's not a big risk..

[yitech]

I think the premium of [b warrant] versus [stock - strike] has been shrinking ever since the hint of re-initiation of dividend payment. It was above 60c and now it's below that. I'd expect it to shrink further tomorrow or gradually when people realize the extra leverage will now cost them 30c/qtr or ~3%/yr.

 

I switched to common two days ago thanks to the discussion on this topic. I was going to wait till right before the actual dividend payment, but thought the shrinking of premium would likely happen long before that so I switched early.

[yitech]

http://finance.yahoo.com/news/gm-declares-30-cents-per-214400322.html

 

GM declare 0.30 dividend

 

warrant holders, plan to exercise?

 

You can exercise now and lose the ~ 60c premium versus stock (equivalent to 2 dividend payments) for early exercise of American option or simply sell them and switch to common. You should never exercise an American option until right before the actual dividend payment.

[hyten1]

i hear ya, i am still figuring out what to do

 

due to tax implications

 

 

 

http://finance.yahoo.com/news/gm-declares-30-cents-per-214400322.html

 

GM declare 0.30 dividend

 

warrant holders, plan to exercise?

 

You can exercise now and lose the ~ 60c premium versus stock (equivalent to 2 dividend payments) for early exercise of American option or simply sell them and switch to common. You should never exercise an American option until right before the actual dividend payment.

[Avyalake]

I think the premium of [b warrant] versus [stock - strike] has been shrinking ever since the hint of re-initiation of dividend payment. It was above 60c and now it's below that. I'd expect it to shrink further tomorrow or gradually when people realize the extra leverage will now cost them 30c/qtr or ~3%/yr.

 

I switched to common two days ago thanks to the discussion on this topic. I was going to wait till right before the actual dividend payment, but thought the shrinking of premium would likely happen long before that so I switched early.

 

yitech,Eric Do you expect premium to go negative? Why would that ever happen since I should then be able to pick up common stock at less than common price by merely buying and exercising for less than the price of common stock?

Also why would there be no positive premium for the leverage and the long expiry date at all?

 

Re-doing my math, it is necessary to switch to common stock as compared to the Warrants if we even expect < 15% p.a. return (outside of divs at 3%)? But if we expect more we should be holding the common stock?

 

Also, do you expect a strategy to buy the warrants post-dividend date while holding common stock before divs would work in a non-taxable account?

 

 

[yitech]

I think the premium of [b warrant] versus [stock - strike] has been shrinking ever since the hint of re-initiation of dividend payment. It was above 60c and now it's below that. I'd expect it to shrink further tomorrow or gradually when people realize the extra leverage will now cost them 30c/qtr or ~3%/yr.

 

I switched to common two days ago thanks to the discussion on this topic. I was going to wait till right before the actual dividend payment, but thought the shrinking of premium would likely happen long before that so I switched early.

 

yitech,Eric Do you expect premium to go negative? Why would that ever happen since I should then be able to pick up common stock at less than common price by merely buying and exercising for less than the price of common stock?

Also why would there be no positive premium for the leverage and the long expiry date at all?

 

Re-doing my math, it is necessary to switch to common stock as compared to the Warrants if we even expect < 15% p.a. return (outside of divs at 3%)? But if we expect more we should be holding the common stock?

 

Also, do you expect a strategy to buy the warrants post-dividend date while holding common stock before divs would work in a non-taxable account?

 

The premium would never get negative as market makers/arbitrageurs can simply arbitrage it away by buying warrant and shorting the underlying stock at the same time, then exercising the warrant to get stock to cover the short to lock in the risk-less profits. This in theory should push up warrant price and keep the premium larger than or equal zero if we ignore the spread and commission costs. I did not say there would be no positive premium. I meant whatever it was, it ought to be smaller than before.

 

Buying warrants post-dividend date repeatedly in non-taxable account may work so long as you are okay with paying 3-4 cent spread due to illiquidity of warrants at times for 4 times a year.

 

EDIT: I was incorrect when I said buying common and shorting warrants... It was the other way around.

[dpetrescu]

Unless the leaps calls or warrants have a low delta and are really really in the money or unless you expect GM to increase by just 5% a year or so, don't see the rationale behind selling warrants or leaps calls because of the dividend announcement. It's a matter of scale. volatility, time remaining, and delta/leverage and stock price movement have a much bigger effect that far outweighs the impact of dividends. Same with interest rates, sure options are cheaper because of all time low rates but it isn't very significant. It would be interesting to run some scenarios to put actual numbers to this with a BS calculator but just got back from work and it's been a long day.

[dpetrescu]

I can't believe I just wrote that last post, it must be late. I made a couple very fundamental errors 10 minutes ago.

 

1. A longer dated option will be more negatively impacted by the dividend announcement. This is because more time remaining on the option means you will miss out on more dividends

2. The more out of the money options will be more negatively impacted compared to in the money options. This is because you're controlling more shares with less cash commitment.

 

So it depends on the option structure if it makes more sense to sell.

 

For a GM at the money call with 1 year jan2015 strike with no dividend, the current value is $4.5. If we input a dividend of 30 cents quarterly starting march 18, that call is now worth $4.0, more than 10% less (assuming no price movement). Assuming the 3% after hours gain holds, and taking into account the dividend, that same call is now worth $4.67. So overall for a 1year at the money call, a 3% stock price increase has about the same effect as a 3% dividend.

 

I have 1 year left on my GM leaps and they are ITM.

 

[yitech]

I can't believe I just wrote that last post, it must be late. I made a couple very fundamental errors 10 minutes ago.

 

1. A longer dated option will be more negatively impacted by the dividend announcement. This is because more time remaining on the option means you will miss out on more dividends

2. The more out of the money options will be more negatively impacted compared to in the money options. This is because you're controlling more shares with less cash commitment.

 

So it depends on the option structure if it makes more sense to sell.

 

For a GM at the money call with 1 year jan2015 strike with no dividend, the current value is $4.5. If we input a dividend of 30 cents quarterly starting march 18, that call is now worth $4.0, more than 10% less (assuming no price movement). Assuming the 3% after hours gain holds, and taking into account the dividend, that same call is now worth $4.67. So overall for a 1year at the money call, a 3% stock price increase has about the same effect as a 3% dividend.

 

I have 1 year left on my GM leaps and they are ITM.

 

I agree with 1. above. The only options not affected by the dividend hike are the ones expire before March 18. All others are affected by it roughly proportional to time to expiration of the options/warrants. B warrant is deep in the money, so I am not sure why you mentioned 2....

 

Dividend attracts yield seekers like mechanical dividend ETFs that may help pump up the stock a bit, so net net like you mentioned option holders may not be affected much. But we were comparing options and common on share-per-share or same notional basis. If we use your example, common now gained 3% in addition to 3% dividend yield versus just a 3% by holding 2015 Leap. Leverage by itself is not an edge... It creates more beta, but not more alpha. Alternatively you could capture the (missing) dividends by buying using margin (via cheap financing ~ < 1% using IB) with similar leverage like the B warrant.

 

Guess it comes down to whether the benefit of non-recourse minus cost of loan-equivalent interest costs of the option and dividend streams outweigh the cost of margin financing and other psychological costs associated with margin(for regular folks like us, except for Eric). Anyway, it's really up to individual preferences. Leaving aside the benefit of non-recourse leverage via options versus margin, dividend hike is a risk that all option/warrant holders should be aware of before entering the trade.

[jeffmori7]

So finally GM is down this morning! Ah, Mr.Market.

[racemize]

So finally GM is down this morning! Ah, Mr.Market.

 

I think due to the "modest" profit increase comments.  So that killed the dividend enthusiasm.  Too bad, I was hoping to see what the warrants and common would do with just the dividend announcement.

[yitech]

So finally GM is down this morning! Ah, Mr.Market.

 

GM Calls for Modest Improvement in 2014

Auto Maker Expects to Spend About $1.1 billion on Cost-Cutting Measures

http://online.wsj.com/news/articles/SB10001424052702303465004579322332779109034?ru=yahoo&mod=yahoo_hs

 

Market doesn't like it. Yeah. Racemize just replied before I did.

[jeffmori7]

Ok thanks, I missed this news.

[yitech]

So finally GM is down this morning! Ah, Mr.Market.

 

I think due to the "modest" profit increase comments.  So that killed the dividend enthusiasm.  Too bad, I was hoping to see what the warrants and common would do with just the dividend announcement.

 

Premium of B warrant over [stock - 18.33] went from yesterday's close of 59c to today's 47c. It could be due to both the div. payment and the sell-off effects, but warrant and common no longer moved in lockstep as before.

[fareastwarriors]

Detroit's Gonna Drive a Corvette Over a Cliff

 

 

http://www.bloomberg.com/news/2014-01-16/detroit-s-gonna-drive-a-corvette-over-a-cliff.html

[hyten1]

not a very good article. (bloomberg one)

 

auto loan/delinquency/sub-prime is definitely worth watching

 

"...The American Bankers Association says delinquencies of 30-plus days on indirect auto loans, the kind originated at dealerships, were 1.64 percent in the third quarter of 2013, down from 2.08 percent a year earlier..."

 

 

http://www.autonews.com/article/20140115/FINANCE_AND_INSURANCE/301159941/fewer-late-payments-point-to-easy-car-loans-in-2014#axzz2qaEZ8fWW

 

http://www.autonews.com/article/20140108/FINANCE_AND_INSURANCE/301089974/automakers-shrug-off-subprime-worries#axzz2qaEZ8fWW

 

so far nothing alarming ... yet

 

hy

 

Detroit's Gonna Drive a Corvette Over a Cliff

 

 

http://www.bloomberg.com/news/2014-01-16/detroit-s-gonna-drive-a-corvette-over-a-cliff.html

[bmichaud]

I struggle to get to Einhorn's $6 mid-cycle EPS figure: http://www.valuewalk.com/2012/10/david-einhorn-speaks-at-value-investing-congress-2012-live/

 

Curious what others get to for mid-cycle and how.

[txlaw]

I struggle to get to Einhorn's $6 mid-cycle EPS figure: http://www.valuewalk.com/2012/10/david-einhorn-speaks-at-value-investing-congress-2012-live/

 

Curious what others get to for mid-cycle and how.

 

He's probably baking in GM's mid-decade EBIT margin goals.  I can get to $6 in GAAP EPS, but I would note that depreciation will be lower than capex going forward, which means that EPS likely overestimates economic earnings.

[txlaw]

I struggle to get to Einhorn's $6 mid-cycle EPS figure: http://www.valuewalk.com/2012/10/david-einhorn-speaks-at-value-investing-congress-2012-live/

 

Curious what others get to for mid-cycle and how.

 

He's probably baking in GM's mid-decade EBIT margin goals.  I can get to $6 in GAAP EPS, but I would note that depreciation will be lower than capex going forward, which means that EPS likely overestimates economic earnings.

 

Actually, now that I think about it, maybe I can't get to $6 GAAP EPS.  Because my numbers take into account the non-cash taxes.

[bmichaud]

Using Morningstar's 2014 sales estimate of 158,561, a 7% mid-cycle EBIT margin, interest expense of 530, a 40% tax rate and after-tax JV earnings of 1,995, I get to $4.50 EPS with 1,853 shares outstanding.

 

That rises to $6.04 assuming a 10% m-c EBIT margin. Though 10% seems unrealistic anytime soon given how bad Europe is. Hence why I can't conservatively get to Einhorn's $6.

 

Agreed on CAPEX v. D&A, but difficult to ascertain in the medium term given the investments required to rationalize the global manufacturing platform and revamp product. 2011 D&A was $7.4B and Morningstar estimates "steady-state" capex of $8B, so not a huge difference.

[fareastwarriors]

http://online.wsj.com/news/articles/SB10001424052702304419104579325012996071596?mod=WSJ_business_whatsNews

 

Cadillac Chief's Challenge: Clear Dealer Lots

 

Luxury Car Brand Faces a Glut of Unsold Inventory as it Looks to Compete With German Rivals

[fareastwarriors]

http://www.ft.com/intl/cms/s/3/8c124f8a-7e0b-11e3-95dd-00144feabdc0.html#axzz2qIcZZaE0

 

 

 

GM: driving force for change

 

 

 

 

 

It is good that the carmaker plans use its cash to expand

[racemize]

so it appears that the warrants have lost no premium based on the dividend.  Perhaps that will change once the dividend starts being paid though?

[Avyalake]

Any buyers of GM B Warrants here after a > 15% run down?

[fareastwarriors]

GM's New Chief to Accelerate Profit Push

 

Barra Says New Top Managers in Synch on Margins, Market Share Goals http://online.wsj.com/news/articles/SB10001424052702304632204579338751924201992?mod=WSJ_hp_LEFTWhatsNewsCollection