Rescind Tracinda

For the past year or so, I've been puzzled as to why Kirk Kerkorian (through his investment firm, Tracinda Corp) has continued to waste both his time and investors' money on GM (NYSE: GM) stock. Over the past 5 years, GM plunged in value by about 20% per year, compared with gains of 5% and 23% per year for Toyota (NYSE: TM) and Nissan (NasdaqSC: NSANY), respectively.

I understand Kerkorian had some success as an activist investor in the past, namely with DaimlerChrysler. Another thing to keep in mind is that Kerkorian’s investors, diversified financial institutions, private banks, wealthy families and individuals have vastly different risk/reward profiles than Joe and Jane Investor, and can afford to have some money in such risky assets as GM stock. So unless your one of the lucky few who happened to inherit things like yachts or a classic car collection, its important to realize that today, there’s far easier money to be made, with substantially less risk.

Thus far, Kerkorian has taken a loss of roughly $200 million on his GM stock, some of which Tracinda sold, for "tax-loss" benefits in December. In a speech delivered two weeks ago in Detroit, Jerome York, advisor to Tracinda and Kerkorian explained this move, and went so far as to state that Tracinda would not only be interested at repurchasing the twelve million shares it sold, but would also consider picking up an additional twelve million shares under the right set of circumstances. Kerkorian is likely a far smarter (and wealthier) man than I, but for the life of me, I cannot imagine what sort of return he expects to get out of the General, and lest we forget the concept of opportunity cost here. For example, if Tracinda had invested the $870 million it initially offered for GM shares in May, 2005 in risk-free Treasury 10-year bonds yielding 4.3% he would now find himself more than $37 million richer on an accounting basis, and more than $200 million on an economic basis! 10-year bonds also have the edge in that, unlike GM, they lack massive pension liabilities, spiraling health-care costs, or ever-increasing threat of cutthroat foreign competition.

While some of GM's brands are making a comeback with more inspired design and better marketing campaigns, General Motors has routinely proven its uncanny ability to deliver disappointing financial and operational performance. All things considered, most individual investors would best be served to bet against Kerkorian, at least until, as Mr. York pointed out, GM management accepts the dire situation at hand and establishes an all-encompassing restructuring plan.