It was just yesterday that shares of General Motors Corporation (NYSE: GM) went to the lowest price since 1933. Shares were around $1.15 on that alert. It has become even worse. Shares hit the $1.00 level for a few seconds today. The stock is down 7% at a whopping $1.06 as of 10:12 AM EST. If you can imagine it, GM’s stock market capitalization is now under $1 billion. GM is somehow and some way still a DJIA component and is also still an S&P 500 component. By our count GM does not qualify for either index any longer.
It is no new notion that GM is at risk for losing its index membership. The DJIA has probably been asked (more than by suggestion) to not boot GM from the index. That is pure speculation, but GM’s situation is so bad that there was even the going concern notation before and this is so far out of the DJIA criteria that it is almost a footnote rather than a full index member.
There has been much talk that GM was going to perhaps do a reverse stock split of 1 for 100. Reverse split or not, it won’t matter if the company goes into a government bankruptcy reorganization. If it did a reverse split tomorrow, would the DJIA want GM to be the largest weighting of the index? We think not.
GM’s stock is now representative of nothing more than a long-term call option that is a mere “hope index” for a trade. Last month it looked like there was actually going to be a value to the company’s stock even in a reorganization. After what you have seen with Chrysler and the war with creditors against the government, we would expect only more of the same here at GM. If not worse. Chrysler was at least private and controlled by Cerberus in the private equity sector. GM is public and still has thousands and thousands of stockholders and bondholders.
Guess what the prediction market INTRADE.COM has a “GM Chapter 11 bankruptcy filing by December 31, 2009″ priced at. The last price is 90.0, although we will be the first to admit that this is a very thin ‘market’ by anyone’s standards.
GM does have a future of some sort. It is just a much smaller future than even today’s shrunken status. It is unlikely to be a DJIA component for very much longer. For that matter, it looks like Standard & Poor’s is just being nice by keeping GM in the index.
The DJIA is a price-weighted index, so at a total ZERO, the DJIA would hardly be affected if you just zero-out the price of GM shares. The S&P 500 Index is a market-cap weighted index. At under $1 billion and with shares around $1.00, this would not even be up for consideration by S&P for any index inclusion other than the S&P Small Cap 600 Index if this was under review for a new inclusion.
JON C. OGG