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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:24 PM
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fminio, the yield is great but only if you get your money back in 2033 (or whenever you plan to sell). If you buy at 80 and get 100 back in 2033, those are very nice capital gains.

The problem is that no one can be sure that GM will still be around in 2033. And any of a variety of things can happen between now and then which will cause you to lose your investment.

In particular, GMs total assets are probably tied up with their labor contracts to provide health insurance and pensions for retirees. A strike could bankrupt GM. Unions might take control of the company. Bond holders might get nothing if this happens.

To survive, GM needs concessions from its unions. Unions seem to be coming around to the idea that concessions that keep GM in business is best for everyone in the long run. But that is iffy until its a done deal. And as soon as GM gets on its feet, expect unions to want an increased share.

GM also has the problem that it makes money mostly with large gas guzzlers. Small economical vehicles have always been losers for them. They need to downsize overhead to the point where those small vehicles can be profitable. They need to chop excess capacity. Lay off many surplus workers. Discontinue the "jobs bank" (which pays surplus workers when they have no work). They also need to come up with some vehicles that are attractive, popular, and sell well. Styling has been a problem. Market share continues to fall. They need to make some very painful, large scale adjustments to survive. Otherwise, the Japanese are going to be the surviving US automakers.

Finally, viewing this just as a bond investment. If a company is doing well, you can probabably guess that it will continue to do well for the next half dozen years or so. Beyond that, it is hard to know as much can change in the economy, govt, competitors, technologies, unanticipated developments, etc, etc. Bond buyers usually prefer to own intermediate term bonds or less. Taht is usually 12 years to maturity or less. Longer than that at least requires a very stable company that you cannot manage going away. Bonds rated less than investment grade (BBB minimum) are not usually suitable for individuals. And especially you do not want long bonds.

So think about it carefully. You are gambling that GM will do OK in all of this. But your money is definitely at risk. If your number comes up, you will wish you had left your money in nice safe, govt insured CDs.
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