Binary Outcome: GM Is Either Going Bankrupt or It's a Screaming Buy Right Now

GM (GM) is either going outright bankrupt or these stocks are screaming buys right now. The biggest problem for this company isn't their lack of fuel-efficient vehicles or the exhausted consumer... the biggest problem is the same problem the financials have -- nobody believes anything on the balance sheet.

GM and Ford finance hundreds of billions of dollars to enable their customers to buy their cars. And we all know that the ratings on any debt from any ratings agency is a sham of a joke and can't be taken seriously. And so how many write downs on the balance sheet are these guys gonna have to take over the next year? Do they have the capital sufficient to cover those losses?

If they actually disclosed their balance sheet to you, would you consider the company solvent, much less invest-able? And yes, I'm still talking about GM here, though the line of questioning can be applied to any financial institution as I've noted often on Happy Hour and on these pages.

The big difference between GM and those investment banks is that GM actually sells a product, a real tangible product. And the good news there is that that product's market typically works in a pretty obvious cycle. And if the company can just stay solvent on the balance sheet side of the equation, they're probably going to see sales improve and cash flows return to the operations side of the business. I know -- that sounds outrageous! GM, seeing things improve and even profitable...you're thinking I can't be serious. But as always, isn't the time to buy a stock when nobody thinks you can be serious about buying that stock?

There's blood in the streets of Detroit. I think putting a little bit speculative capital into some GM stock and bonds and/or long-dated calls would probably pay off a bit over the next few years. I'd hedge any long positions with some long-dated puts, and if you play the position sizes and strike prices right, you'd probably end up profiting from the positive gamma in the positions even if GM went to zero.

I'll explain positive gamma again sometime soon, but if you search the Internet hard enough, you can find lots of posts I've written on the topic before. Stay tuned .