SUNDAY, AUGUST 22, 2010
KLMNO
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G5 GM asks investors to take a leap of monetary faith
A year after bankruptcy, automaker prepares for initial public offering
by Bernard Condon
new york — Would you buy stock in a company that has hem- orrhaged tens of billions of dol- lars for years and run through four bosses in quick succession just because it has turned a profit for a few months? That is essentially what Gener-
al Motors will ask investors to do when it takes itself public again with one of the largest initial stock offerings ever. With the stock market already on edge, it’s a lot to expect. The good news: Longtime in- vestors say buying during bad times is the best way to make money with auto stocks, provided you have a stomach of steel. And for the brave, GM may offer a per- fect opportunity. “The stocks look expensive when profits are low, but that’s traditionally when you should get in,” Standard & Poor’s analyst Efraim Levy said. GM filed papers Wednesday with regulators detailing its plans to return to the stock market. Al- though it didn’t specify a date, ex- perts say the offering could come as soon as October. The company earned $1.3 bil- lion from April through June, its second profitable quarter in a row and a remarkable turnaround since its 2009 bankruptcy. In- vestors in initial public offerings like to see several quarters of earnings, especially from manu- facturers.
GM also said chief executive Ed Whitacre would be leaving Sept. 1. He will be replaced by board
2005. But the two automakers lost more than twice as much, as in- vestors pummeled them for spending too much on salaries and benefits and not coming up with enough hot cars. “The question now is: Has the American auto industry turned the corner?” said McGinn, who has been managing money for 30 years. “Do they have their costs in line? Do they have focus?” McGinn, who owns Ford shares, thinks U.S. automakers have im- proved. But he says he will wait until GM announces the price of its stock before deciding whether to buy. For years, GM stock was held by millions of Americans individ- ually or in mutual funds. But it’s uncertain whether it can return to wide ownership soon given the company’s recent struggles, in spite of all the attention its IPO is likely to draw. To be included in the S&P 500 index, for instance, companies generally need to post profits for four consecutive quar- ters. GM doesn’t plan to offer a dividend. After falling into bankruptcy,
JEFF KOWALSKY/BLOOMBERG NEWS General Motors, headquartered in Detroit, will soon get its fourth chief executive in 18 months.
member Daniel Akerson, the fourth CEO in 18 months. And GM has the misfortune of plan- ning an IPO when demand for new public shares remains low. Still, U.S. automakers have proved to be good investments if investors get the timing right. That is the conclusion of
McGinn Investment Manage- ment, run by self-described “con- trarian” investor Bernie McGinn, after studying five-year returns for investors who put money into GM and Ford a year before the
start of recessions. The firm looked back over three decades. Over the five years that began
in July 1980, GM and Ford stock rose 83 percent and 185 percent before dividends, respectively, versus a 58 percent gain for the S&P 500. They also beat the broader
market in the years surrounding the early ’90s recession, too. GM stock rose 38 percent and Ford 51 percent. The S&P: 29 percent. McGinn started his calcula- tions a year before recessions be-
cause stocks tend to slump in an- ticipation of economic slow- downs. Many economists think the Great Recession ended a year ago, so it’s not clear the trend here could apply to GM shares. But, stocks are still down sharply from before the recession, and fears of another downturn are rife. The exception to the winning
pattern was the period surround- ing the dot-com stock bust and subsequent recession. The S&P fell 19 percent in the five years be- tween March 2000 and March
GM got a $50 billion bailout, of which $43.3 billion remains to be repaid. The government owns 61 percent of the company, as a re- sult of giving GM the money. It hopes to cash out at least part of its stake in the public offering. The bull case for for GM is that it is making solid profits even though U.S. sales are still near his- toric lows, running at an annual rate of about 11.5 million cars and trucks this year. Most industry analysts predict sales will rise above 12 million next year and reach about 14 mil- lion in 2013. So if GM can hang on to or increase its market share, its profits will rise as well. GM can make money at lower U.S. sales rates because it shed bil-
lions of dollars in debt during last year’s bankruptcy. Also, it shifted billions in retiree health care costs to a United Auto Workers trust fund, and the UAW agreed to contract concessions allowing it to pay new hires about half the wage rate of legacy workers. GM closed 12 factories, and is using those remaining at more than 90 percent capacity versus 38 per- cent a year ago.
So, do you buy GM or not? It’s too early to tell, of course, until a price is set. But Kirk Ludtke, an analyst at CRT Capital Group, says GM could be worth more than ever in the stock market. He said many automakers over the years have been valued by in- vestors at five times expected cash flow. Investors like to focus on cash flow because, unlike prof- it, it ignores costs for which mon- ey never changes hands, like wear and tear on factories. Ford recently traded at five times, Toyota at 5.7 times. So to es- timate GM’s market value, Ludtke multiplied its $13 billion in expec- ted cash flow this year by five, then added the company’s cash and the value of stakes in subsid- iaries among other adjustments. The final figure: $82 billion — $25 billion more than GM was valued at by investors at its peak stock price in 2000. Ludtke says that lower debt and lower labor costs justify the price. Whether the shares are ulti- mately priced at that value re- mains anybody’s guess. Former U.S. budget director
David Stockman, who made and lost millions in the auto industry while working on Wall Street, urges caution. He said that the United States faces a glut of cars for years to come and that even a leaner and meaner GM is likely to get hurt.
—Associated Press
After 30 years, hedge fund manager says it’s time for less stress druckenmiller from G1
Kovner, Michael Steinhardt and Soros, the Hungarian-born bil- lionaire and his former boss. The decision to shut Duquesne sug- gests that in an era in which the biggest hedge funds oversee $30 billion and are adding even more assets, they may no longer be able to routinely outperform conventional funds by wide mar- gins.
Duquesne returned about 11 percent in 2008, when hedge funds on average lost a record 19 percent. It rose about 10 percent in 2009, when the average gain was 20 percent.
“I felt I missed a lot of opportu- nities in 2008 and 2009 and a huge move in bonds this year,” he said during the interview in his New York office, on 57th Street overlooking Central Park. In the past three years, his re- turns have trailed those of the 10 portfolio managers who manage about half of Duquesne’s capital — a first. Druckenmiller will create a family office overseeing some of his fortune, estimated at $2.8 bil- lion by Forbes magazine, when he winds down the firm and returns money to clients sometime in 2011.
“I plan on managing a decent chunk of my money, but only an amount that will be fun,” he said. He will invest with Duquesne
portfolio managers who are plan- ning to open their own hedge fund.
Druckenmiller, an established philanthropist, said he intends to spend more time with his family and friends, play golf during the week, and work on his charitable pursuits, including Harlem Chil- dren’s Zone, a New York charity he chairs and to which he’s given more than $25 million. He’ll also continue to follow the Pittsburgh Steelers, the National Football League team he tried unsuccess- fully to buy in 2008. While financial markets have been volatile, he said that’s not the reason he’s closing his firm. “I’ve been through difficult
markets before, and I’ve always been able to meet my standard” for investment returns, he said. Druckenmiller has run Du- quesne since 1980, even while working for two other organiza- tions: mutual fund manager Dreyfus, from 1986 to 1988, and Soros Fund Management, where he was chief strategist from late 1988 to 2000. Both Soros and Dreyfus Chairman Howard Stein wanted Druckenmiller badly enough to let him continue man- aging his own fund.
Breaking the bank He made some of his biggest
trades working with Soros, in- cluding one that cemented So- ros’s reputation as a preeminent speculator: a $10 billion bet in
September 1992 that the Bank of England would be forced to de- value the pound. By August of that year, Druck- enmiller said he had initiated a $1.5 billion trade that would prof- it if the German mark rose vs. sterling. He expected Europe’s Exchange Rate Mechanism (ERM), in which the currencies moved against one another with- in a limited band, to come under pressure as Germany raised in- terest rates to prevent inflation after reunification. Germany’s move forced Britain and other members of the ERM to decide whether to increase rates, which could have damaged their al- ready troubled economies, or de- value their currencies and fall out of the ERM. Druckenmiller said he calcu-
lated that the Bank of England didn’t have enough reserves to prop up the currency and it couldn’t afford to raise rates. He was right, and selling by the So- ros fund is credited with pushing the pound out of the ERM. “He was so proud because until
that point Soros had never made $1 billion on a bet,” said Roger Entress, a Pittsburgh surgeon and early Duquesne investor who was golfing with Druckenmiller the weekend before the devalua- tion. It turned out to be a big year for Druckenmiller. He said he made another $1 billion a few months later betting on a decline in the Swedish krona. Druckenmiller’s friends say the
money isn’t the reason he’s con- tinued to trade long after becom- ing wealthy. “It’s about winning — he’s a
fierce competitor,” said Kenneth Langone, 75, a co-founder of Home Depot and an early Du- quesne investor who calls Druck- enmiller one of his closest friends. Druckenmiller is a macro trad- er who seeks to profit from broad economic trends by trading stocks, bonds, currencies and commodities around the world. He’s been able to produce bigger returns than rivals such as Kov- ner, founder of Caxton Associ- ates, and Tudor Investment’s Paul Jones in part because of a lesson driven home by Soros: When you’re sure you’re right, no trade is too big. And the bigger your gains in a year, the more aggres- sive you can be.
Getting it wrong “It takes courage to be a pig” is
Druckenmiller’s motto, and he has a yellow porcelain pig named Jerome on his desk to remind him. He’s also quick to change his mind when he’s wrong. Drucken- miller said he reversed a bet that U.S. stocks would fall the Friday before the Oct. 19, 1987, stock market crash, thinking that the week’s 9 percent decline in the
2000 PHOTO BY PETER MORGAN/REUTERS
Stanley Druckenmiller, left, took this lesson from his onetime boss George Soros: When you’re sure you’re right, no trade is too big.
“It takes courage to be a pig” is Stanley Druckenmiller’s motto, and he has a yellow porcelain pig named Jerome on his desk to remind him.
Dow Jones industrial average had been overdone. Over the week- end, after studying trading charts and talking to Jack Dreyfus, who founded the Dreyfus mutual funds, where Druckenmiller was then working, he knew he was wrong, Druckenmiller said. On the following Monday morning, he took advantage of a brief rally to sell his holdings. The Dow lost more than 22 percent that day and 13 percent for the week. He finished the week with a profit. Druckenmiller said his success is in part due to lessons he learned from his mentor at his first job at Pittsburgh National Bank, Speros Drelles.
Drelles taught him to use tech- nical analysis to help gauge whether prices were poised to jump, while most analysts de- pended on a company’s financial reports to decide whether a stock was a good buy. If a company has good charts and fundamentals, he’d put it in the portfolio. His training as an economist also helped him identify macro themes such as housing starts, re- tail spending and unemployment that would cause shares to climb or swoon. “I’ve always loved to play games, and face it, investing is one big game,” said the 6-foot-5- inch Druckenmiller. “You need to be decisive, open-minded, flex- ible and competitive.” His drive to win extends to ev-
ery contest he enters, be it horse- shoes, bocce or golf, which he’s played since he was a child. He has a lower-than-average seven handicap.
Not an academic Druckenmiller studied English and economics at Bowdoin Col- lege in Brunswick, Maine, where he earned money by playing pok- er and by running a hot dog stand with fellow student Larry Lind- sey, who later became a Federal
Reserve governor. He briefly op- erated a casino at a fraternity house. After graduating in 1975, he en- tered a doctorate program in eco- nomics at the University of Michigan, hoping to become an academic. He quit in his second semester, finding the courses too theoretical. He took a job at Pittsburgh Na- tional Bank as an equity analyst. He was quickly promoted to chief of research and then, at age 26, head of investments. In 1980, af- ter the head of a New York securi- ties firm offered Druckenmiller $10,000 a month to give him ad- vice, he opened Duquesne with $1 million in separate client ac- counts, a secretary and an analyst from the bank. When that securi- ties executive ended up in prison a few years later and Drucken- miller’s monthly stipend van- ished, Roger Entress let him live in an apartment he owned rent- free. In 1986, Druckenmiller,
strapped for cash, was lured by Howard Stein to Dreyfus, where he ran the country’s top-ranked mutual fund. That same year, he borrowed $75,000 from a friend to start a formal hedge fund, meaning it charged 1 percent of assets and 20 percent of any prof- it he made.
Soros recruited him near the end of 1988. He thought he would be fired after a year, given the mercurial nature of his new boss, and thought of it as the finishing touches on his investing educa-
tion. Within the first six months, Soros sold one of his bond posi- tions when Druckenmiller was out of the office, and the younger man called Soros swearing and threatening to quit. Soros prom- ised he would leave the manage- ment of the fund to Druckenmill- er and moved to London. “Now we’ll find out whether
I’ve just been in your hair too much or whether you really are inept,” Druckenmiller recounted Soros as saying. Left alone, Druckenmiller made money, and the collabora- tion lasted until April 2000. Druckenmiller said he will con- tinue to focus on philanthropy. Last year he and his wife, Fiona, a former Dreyfus fund manager, gave $100 million to the New York University Langone Medical Center to establish a neurosci- ence center. He’s contributed at least $30 million to Bowdoin since 1991 and manages its en- dowment free. His biggest cause has been
Harlem Children’s Zone, run by fellow Bowdoin graduate Geof- frey Canada. The organization aims to eradicate poverty in a 100-block area of the New York neighborhood by providing edu- cation, health care and job train- ing to the community. Asked whether he expects oth-
er hedge fund managers in their 50s to follow him into early re- tirement, Druckenmiller said it’s harder for those with bigger firms to disband. “But they’ll be jealous,” he said.
500+
AUCTION STARTS: SEPT 18TH 11TH& 12TH
TEXT ALERT! Text Auction24 to 878787 to be notified of important auction updates and late additions!
ONLINE BIDDING AVAILABLE OPEN HOUSE: SEPT 4TH ,
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Subject toAuction Terms and Conditions. Real Estate Disposition, LLC, 1 Mauchly, Irvine, CA92618. PAReal Estate Disposition Corporation RE Brkr RB067122; Auction Firm Real Estate Disposition Corporation RY000927; Auctioneer Mark Buleziuk AU005557, Michael E. Carr AU005518; Rick Alan Kigar AU003388R; CT RE Brkr Mary C. Quella REB.0788534; MD RE Brkr Mary Claire Quella 632690; Anne Arundel County Auctioneer Mark Buleziuk A000288, Jeffrey Johnston A000287; NJ Real
Estate Disposition Corporation RE Brkr 0894621, Mark Buleziuk0787053, Jeffrey Johnston 0788545; NY Real Estate Disposition Corporation RE Brkr 109901870, Mark Buleziuk 41BU1172378; Auctioneer Michael E. Carr 1310812; MA Real Estate Disposition Corporation RE Brkr 7990,Auctioneer Michael E. Carr 2888, Mark Buleziuk 2788; Jeffrey Johnston 2789; Mark Buleziuk 1182103; VA Real Estate Disposition CorporationREBrkr 0226 020092,Auctioneer MarkBuleziuk 2907003422, Michael E. Carr 2907003599, Jeffrey Johnston 2907003428,Wayne Wheat 2907003002;NHREBrkr Dwight Keeler 001194:PAReal Estate Disposition CorporationREBrkrRB067122;Auction Firm Real Estate Disposition Corporation RY000927; Auctioneer Mark Buleziuk AU005557, Michael E. Carr AU005518
MUST BE SOLD! NORTHEAST HOMES
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