There's a sucker born every minute: Who bought GM?

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Nov 20, 2010 8:10 am

Here's an excerpt from the WSJ this past week:

Then, of course, there are all those looming costs. GM warned that it may have to make "significant contributions" to its U.S. defined-pension fund. As of the August filing, the fund was underfunded by $17 billion. Ford says its pension funds are underfunded by about $15 billion.

Last but not least is the issue of GM's internal financial controls. Deep in the fine print of its prospectus was this: "We have determined that our disclosure controls and procedures and our internal control over financial reporting are currently not effective. The lack of effective internal controls could materially adversely affect our financial condition and ability to carry out our business plan."

So they owe all the money that they just raised on their IPO redux to the unions. And of course they're still largely owned by the government. And they have no controls.  The last time GM was at $34 (circa Nov 2007), it went under $2 in a year. Talk about lipstick on a pig. This is what PT Barnum was talking about.

Nov 22, 2010 12:00 pm

I was shocked that not one of my clients called and wanted in on the GM IPO.  It was a happy shock, but I figured at least a couple would call and want to buy the next MSFT or AAPL.  Maybe LU or WCOM would be better examples, come to think of it.

Nov 22, 2010 1:47 pm

Who would buy GM, maybe the fed?

Something stinks about the whole marketing of that, CNBC hyping it, the day being a big up day. When you think about how many great companies today, with very clean balance sheets are trading at less than 10x earnings, why on earth would folks buy GM? Also, I'm pretty sure that comparitive numbers vs F, make Ford a much better value.

If I found out that  a Mutual Fund of mine picked up a significant amount of GM on the IPO, I'd be a bit concerned...

Nov 22, 2010 2:18 pm

I don't generally condone bailouts, from an economic point of view. 

Bottom line, we may look back and appreciate that America still has a domestic car industry, or other reasons. The car business is important like the housing business, don't forget about all of the local dealers, service departments, parts makers and even finance and marketing multipliers.

... don't be too quick or smug in judging U.S. government actions in light of history, versus the new global economic reality:

" BEIJING—Since the end of the Cold War, the world's powers have generally agreed on the wisdom of letting market competition—more than government planning—shape economic outcomes. China's national economic strategy is disrupting that consensus, and a look at the ascent of solar-energy magnate Zhu Gongshan explains why.

A shortage of polycrystalline silicon—the main raw material for solar panels—was threatening China's burgeoning solar-energy industry in 2007. Polysilicon prices soared, hitting $450 a kilogram in 2008, up tenfold in a year. Foreign companies dominated production and were passing those high costs onto China.

Beijing's response was swift: development of domestic polysilicon supplies was declared a national priority. Money poured in to manufacturers from state-owned companies and banks; local governments expedited approvals for new plants.

In the West, polysilicon plants take years to build, requiring lengthy approvals. Mr. Zhu, an entrepreneur who raised $1 billion for a plant, started production within 15 months. In just a few years, he created one of the world's biggest polysilicon makers, GCL-Poly Energy Holding Ltd. China's sovereign-wealth fund bought 20% of GCL-Poly for $710 million. Today, China makes about a quarter of the world's polysilicon and controls roughly half the global market for finished solar-power equipment

http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html?KEYWORDS=role+of+chinese+government+in+china+industry

"The Chinese have shown that if they have the ability to kill your model and take your profits, they will," says Ian Bremmer, president of New York-based consultancy Eurasia Group. His book, "The End of the Free Market," argues that a rising tide of "state capitalism" led by China threatens to erode the competitive edge of the U.S. "

Make sure you understand who is the sucker.

http://online.wsj.com/video/pm-report-chinas-top-auto-maker-seeks-gm-stake/D4608054-D2D0-45BD-82EA-296BF1204ED3.html?KEYWORDS=Chinese+government+GM

Nov 22, 2010 2:32 pm

The consensus on China, is that they are eating our lunch. I disagree. Their model of rapid expansion is the same old same old, just like Japan, w/o the common sense of letting their currency float. The result will be similar to Japan at least, with massive corporate and business loan failure. The amount of profit to be made in busting the Chinese currency game, is enormous, and there are plotters and schemers just waiting for the right time to make it happen. I don't think it's far away.

7, I'd agree that govt intervention in our markets was necessary, and w/o the actions of the Bush and Obama administration, run by the Fed, we'd all be sitting in the dark right now. The world was perilously close to Great Depression, complete financial washout on a global scale.  

Nov 22, 2010 4:53 pm

Agreed.

I'm not a fan of government management, and you may be right about China.

I believe we all need to think this through for ourselves. Without a strong manufacturing and exporting base, America is in a different place.

Especially with a Yuan bust, average Americans will be chasing scarce resources with inflated dollars.

There will be more wealthy and impoverished Americans. Perhaps this is unavoidable. I no longer believe in classical economic comparative advantage - the labor pool of the developing world is too large, and part of quality of life is meaningful work (making things). Not eveyone wants to work in the service economy, consumption means manufacturing.

I am shocked that "average Americans" have bought the free trade thing up to this point. Especially since we have done little to create energy independence or effectively contain nuclear proliferation and the like.

Don't tell me this isn't in the back of everyone's (investing) mind.