Worst Yet to Come For General Motors
Rick AckermanThursday, Mar 17
Excerpt from the current Rick's Picks (website).
You can subscribe here.
[Note: I will be on holiday with my family beginning tomorrow, so this will be the last commentary until next Wednesday.]
With GM taking an historically unprecedented beating today, the following came across my desk: "I understand that GM cut a bunch of numbers this morning, so its shares are 'leading the market lower'. My understanding of the firm (I have no positions in it) is that it's a zombie. The finance arm carries the burden of paying for the enormous pension/health care/featherbedding boners long-ago managements gave away to the auto workers' union. The only interesting question about the firm is WHEN not IF it'll try to punt its liabilities onto the taxpayers.
"So, the stock is a down a bunch today because, shock of shocks, GM's business is crumbling exactly along the well-publicized lines that've been covered in the press for a couple of decades. Is there some mechanism that accounts for this seeming re discounting of known news? Is it just the teeter-totter of cap structure arbs, where folks keep the (weakening/widening) bonds 'in line' with the stock?"
Voodoo Financing
Zombie is the right word, since only the voodoo magic of creative financing can make GM appear viable as a going concern over the long run. We should all be mystified by the fact that a company offering zero percent financing to so many buyers is supposedly making all of its profits from consumer loans. But that’s another story for another day, one that I’m sure will be written. For now, though, even with the massive shrinkage of the firm’s capitalization today, we need to recognize that GM shares are not going to zero in a month, or a week, or a year, or even in five years. To paraphrase Adam Smith: There's a lot of ruin in a nation's biggest manufacturer. How much ruin lies just ahead for the stock? My best-case target for the next 5-7 months is 17.13, a hidden pivot.
Meanwhile, it's apparent that neither American nor German car makers can compete with Toyota, even on their own turf. But whereas GM can continue to furlough workers and downsize, Daimler Benz doesn’t have that option, at least not in Germany. Over the long haul, non-Japanese car makers will have but one choice: get smaller. For the time being, though, they are likely to continue to employ the interim solution of making shoddier and shoddier cars so that they can compete on price alone, albeit barely; for even then they fail manifestly, since dealer incentives keep getting more and more outlandish.
Why Buy a Chevy?
With respect to materials, workmanship, design features and overall quality, dollar for dollar American and even German SUVs aren’t in the same league as their Japanese counterparts, Lexus, Acura, Infinity. That's why it currently takes...what? $8,500 of incentives to move a Chevy behemoth off the lot. However, even with the increasingly generous deals, it’s a mystery to me why anyone would buy a Suburban, an Expedition, a Tahoe, or a Durango in preference to the Japanese alternative. Don't the buyers read Consumer Reports, where ratings for American cars are blighted with the magazine’s dreaded black dots? Maybe it's just patriotism that keeps customers coming back to Ford and Chevy showrooms. And maybe its also patriotism that has restrained investors from dumping GM shares wholesale, at least until Wednesday.
(Click on image to enlarge)
If you want to know the future of GM, just read the reviews of its new Cobalt model. What the heck could the company's engineers and marketing honchos have been thinking when they set out to update a design more than two decades old? They can't even copy the innovations of Japanese automakers, let alone come up with good ideas of their own. Bottom line, American cars stink, and the industry can only continue to lose market share to Japan. Japan will have similar worries from China someday, but that day lies well down the road. Eventually the Chinese will export luxury models that will sell for a third of the price of comparable Mercedes Benzes. In a perfect world, one managed by Adam Smith, the U.S. would be out of the car business by then and into something we can do better. “Like what?” you ask. Unfortunately, there is no obvious answer.
***
Penny Pinching
Grappling with the trend? Check out Rick's Picks' archives to see how well Rick Ackerman has done with his forecasts and trading strategies.
Rick Ackerman
***
Email this page to a friend
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents ©2005, Rick Ackerman. All Rights Reserved. You can subscribe here.
_______________
321gold Inc