Despite rock-bottom price, don’t buy GM stock

GM’s historic bankruptcy filing this week has a Wisconsin reader wondering if the worst is over for the iconic American car maker — and if so, is now a good time to buy the stock? We suggest he put the brakes on that idea.

GM stock just fell to 75 cents per share as of Saturday (May 30). By GM going into bankruptcy Monday (June 1), can I buy now or do I have to wait until GM clears bankruptcy court? Is this the right time to buy GM stock, knowing that GM will see a turnaround in the future?
V.P., Milwaukee, Wis.

Best to keep you powder dry, V.P. Those “old shares” are probably not going to be worth much more than a souvenir of a bygone era in American manufacturing.

When a company files for bankruptcy protection, the idea is to take all of its assets and use them to pay off as many of the company’s debt as possible. The remaining debt is wiped out, which gives the company a “fresh start.”

The bankruptcy process is designed to decide who gets paid — and how much. The list includes everyone from parts suppliers who haven’t been paid to investors who bought bonds that are backed by specific assets. In this case, the U.S. government is also looking to get paid back the tens of billions of dollars of taxpayer money it lent GM to keep it afloat while the company tried to come up with a plan to avoid bankruptcy.

Unfortunately, common stockholders are at the very back of the line. And according to its bankruptcy filing, GM has just $82.2 billion in assets to cover $172 billion in liabilities. Based on those numbers, it looks all but certain there won’t be any money left over to pay existing shareholders after everyone further ahead in line has gotten their share. (A posting on GM’s Web site put it this way: “We think it is unlikely that you will receive payment.”)

That's one reason GM shares were recently de-listed from the New York Stock Exchange. In theory, you could buy shares if you found a dealer to clear the trade. But we don't recommend it.

If you already own shares, you may get some relief once the proceeding is over. Existing shareholders can declare their losses and use them to offset any capital gains on other stocks. Shareholders will have to wait until the court officially declares “old” GM shares to be worthless.

As for whether it makes sense to invest in shares of a “new GM” — the much smaller company that is expected to emerge from bankruptcy — that’s an entirely different question. Currently there are no plans to have publicly traded shares of the new company, although that could change in the future.

In any case, the prospects for a new GM are far from certain. Car sales have to recover, and there’s plenty of evidence that the rogue consumer lending during the credit bubble drove the car market to new heights that were unsustainable. Until it becomes clearer what the post-recession car market looks like, buying stocks in carmakers will remain risky.

Why does milk cost more than gasoline? All you have to do is milk a cow. Look at what you got to do to get a gallon of gasoline. Strike oil, drill for it, ship it to refinery and refine it. I suspect that there is a force keeping the price of gasoline low.
— M.C, Center, Texas

Based on the routine howling that floods our Inbox every time gas prices tick a few cents higher, I'm not sure many readers would agree with you that the system of gasoline production in the U.S. is designed keep prices low.

But it’s true that, as of the latest data available, a gallon of milk cost more than a gallon of gasoline. According to the latest figures available from the Bureau of Labor Statistics, a gallon of fresh, whole, fortified, milk set you back $3.08 in the month of April, while a gallon of unleaded regular cost just $2.06. (Note to readers: Before firing off an e-mail informing us that these prices have nothing to do with the prices you pay, we’ll take this opportunity to remind you that these are national averages.)

I’ve never worked on a farm, and I’m going to take a wild guess that M.C. hasn’t worked on one either. It turns out there’s a little more to producing a gallon of milk than just milking the cow.

To produce that gallon of milk you have to buy a farm, buy or breed some cows, feed the cows, pay the vet bills when they get sick, buy or lease the trucks to haul supplies, keep those vehicles fueled with diesel or gasoline, fix the vehicles when they break down, mend the fences so the cows don’t walk away, pay the utility bill to keep them warm in the barn, pay the mortgage on the barn, hire people to help you with all this, pay those worker’s payroll taxes, pay taxes on your farm and pay the freight to get your milk to market. It adds up.

In fact, according to the Center for Dairy Profitability at the University of Wisconsin (where they have lots of dairy cows), the average annual cost of keeping a dairy cow in 2007 (latest figures available) was $3,259.38.