GM bankruptcy!

[Beyond Limits]

Originally Posted by stovt001

Let me give everyone a brief overview of the process:

Alright, let me help out a little here since you are slightly missing the fundamental concept of how the futures market works.

Speculators are also known as day traders. They take up a position in the market either long or short purely for the purpose of making a profit based on the market movement. If they believe the market will go up they will purchase (or go long) a contract and (ideally) they will sell that contract when the price increases and make a profit. However if the market moves down they may have to sell their contract at a loss because the selling price it worth less than the purchase price. The opposite is also true. If they believe the market will go down they can sell a contract first (there are no rules in the futures market about short selling like there are in the stock market) with the hope of purchasing it back when the price drops and the difference in price would be whatever their profit or loss would be (for every one contract a speculator owns a $1 dollar move equals $1,000 (if you purchase 1 contract (a contract is worth 1,000 barrels, you cannot purchase just a single barrel) at $100 and sell it at $101 you would make $1,000. If you sold a contract at $101 and had to buy it back at $100 you would loose $1,000. Speculators have absolutely no interest in taking delivery of the physical commodity, their only desire is to make a profit on the price movement prior to the expiration of that contract (the date that the contract becomes deliverable). In order to avoid delivery they will offset their contract (if they purchased they will sell and vise versa) prior to contract expiration.

The remaining market participants are made up of Producers, the group that actually produces the raw materials i.e. Chevron, Consumers, an entity that will consume the raw materials for whatever purpose they may have. This combined group is commonly known as Hedgers. The price fluctuation has a direct impact on operational costs so they turn to the open market to lock in their profit and loss. (Because oil is so testy I will use corn here for an example) For example you run 5th Gen Farms. You grow 10,000 bushels of corn annually. You know that your operational expenses for a year will be X. You also know that in order to cover your expenses and make a set profit you need to sell your corn for Y per bushel. Because the price of corn fluctuates you have no way of ensuring that you will be able to sell your corn for Y when it comes time to harvest it. So you go out to the futures market and you sell 2 contracts at the current market price (let’s just assume it is Y). Now no matter what the market does in terms of price you are assured that you will make Y when it comes time to harvest your corn (because you grow it you are naturally long (you own it) and by selling it someone is now legally obligated to buy it from you at the price you sold it at). The reason you do this is because the market can just as easily go down as it goes up. A real world example is airlines. Look how many airlines are now having serious financial problems because of the cost of fuel. Southwest however has a very good hedging program and they have locked in their fuel prices over a year ago so even though their competitors are paying $3.30 a gallon for jet fuel they are paying half of that since that is what price they hedged themselves at was. (the exact prices are my guess but the principle is correct).

The exchange serves as a clearing house and a guarantor. They guarantee that every contract sold on the exchange will have a purchaser (in the commodities market for every buyer there is a seller, period. For every person that is long a contract of crude oil there is also a person short that same contract of oil). They act as facilitators so that when it comes time to deliver a contractor every person who is long (purchased a contract) is matched up with a person that is short (sold a contract). (note of caution… this gets into the realm of crossing over from the futures market to the spot market and this really is a glossy overview).

Contracts mature based on set dates (Contracts for August delivery expire on July 22nd, Contracts for September delivery expire on August 20th, etc). They can be bought and sold an unlimited number of times up until that contract expires at which time it will convert from the futures contract into the physical commodity at a physical exchange will take place.

Speculators do play a heavy role in the pricing of a commodity (although hedge funds play a far more significant role). And don’t kid yourself about Onions… they are still traded, just on the spot market, not on a commodities market as a futures contract.

This really is a simplified version of the commodities market, however I just wanted to set the record straight.

Also, since I used to work in risk management in a commodities firm I am a licensed series 3 broker and I am actually required by law to disclose that trading futures and commodities carries significant risk of profit and loss. Nothing in here is intended, nor to be considered a recommendation to buy or sell a specific commodity. (yes it is dumb, yes the NFA and CFTC requires me to do this).

And now back to your regularly scheduled program…

[PA FAST]

Originally Posted by stovt001

Yup they probably could. Hopefully it won't come to that and conditions will allow them to peacefully and quietly kill off excess brands. The good news for GM is that more and more dealerships are multi-brand dealerships, making it easier to kill a brand without totally killing a dealership.

I think GM will be able to recover without going bankrupt, but the rest of this year will be rough for them. I guess even without bankruptcy they will slowly kill some excess brands over the next few decades.

[stovt001]

Beyond Limits, that's what I was trying to say, but I was also trying to put it as simply as I could, as not everyone has a background in markets, economics, or something similar. When you simplify, a lot gets lost in translation. Apparently I gave up more accuracy than I should have. But yup, you are correct. Anyway...

PA Fast, this year will be rough, but 2010 is a new sunrise for GM. They just gotta hold on...
They probably won't slowly kill brands. That's just too painful and expensive. Given the interest Chinese and Indian countries have in the American market, my guess is they'll sell brands. Hummer, Saab, and Saturn are the most likely to be sold, if any. If they do kill a brand it probably be Pontiac, Buick, or GMC as those brands are moving towards a single sales channel and so killing one would mean the dealerships wouldn't be killed. I don't see much of a future for GMC but I think Pontiac and Buick will be ok. Just my opinion/guess though.

[PA FAST]

Originally Posted by stovt001

Beyond Limits, that's what I was trying to say, but I was also trying to put it as simply as I could, as not everyone has a background in markets, economics, or something similar. When you simplify, a lot gets lost in translation. Apparently I gave up more accuracy than I should have. But yup, you are correct. Anyway...

PA Fast, this year will be rough, but 2010 is a new sunrise for GM. They just gotta hold on...
They probably won't slowly kill brands. That's just too painful and expensive. Given the interest Chinese and Indian countries have in the American market, my guess is they'll sell brands. Hummer, Saab, and Saturn are the most likely to be sold, if any. If they do kill a brand it probably be Pontiac, Buick, or GMC as those brands are moving towards a single sales channel and so killing one would mean the dealerships wouldn't be killed. I don't see much of a future for GMC but I think Pontiac and Buick will be ok. Just my opinion/guess though.

Nice post, it's how I see it in my head.

Your right, I forgot that Chinese, and Indian companies are interested. I can see GM selling those brands, which is a great idea. GMC really has no reason to exist, but it still sells to many loyal fans that would never buy Chevy's. Like I said in my first post in this thread, I would kill GMC and just offer a "GMC Denali" trim at the Chevy dealerships. Shouldn't be hard since GMC's are just Chevy rebadges. Keeps everyone happy.