Since the US taxpayers bailed out GM in 2008, it has been largely heralded as a success; however, only a few short months after the company reissued its stock in November of 2010 it began to sink in value and hasn’t looked back since. To date, this leaves the American government on the hook for a total of 500 million shares.
Despite the fact that several Wall Street analysts list the stock as a buy, much of their projected profitability is predicated upon a rebound in the global economy (and American economy particularly.) The bailout funds which have already allocated and various stimulus measures embarked upon by the government since the initial TARP fund have certainly helped the economy avoid falling off a cliff and GM has turned profitable on the coattails of programs like Cash For Clunkers, but their performance (financially at least) leaves much to be desired and their stock has suffered accordingly.
Among other problems, GM executives have shown their dissatisfaction with the profit margins on their vehicle sales; however, when faced with decisions like spending $109 million earlier this year to save 96 jobs in their Flint and Bay City, Michigan, it is difficult to understand from where, other than poor business decisions, an atrophied profit margin relative to competitors like Ford might stem.
What’s more troubling is that GM’s travails came at a time when Uncle Sam has been extremely supportive of car manufacturers in more ways than is immediately obvious. Following the announcement of September consumer credit numbers last week, it became obvious that even as consumers deleverage their credit cards (revolving credit), non-revolving credit surged with the majority provided by the Federal government. What does non-revolving credit fund? You guessed it: car loans (among other things, of course.) Had it not been for an almost $10 billion increase in non-revolving credit from the Federal government in September (the net increase in all consumer credit was $7.4 billion), consumer credit would likely would have fallen for the month. This is tantamount to a direct subsidy from the government to car manufacturers who will benefit from increased sales as consumers respond to low interest, highly available credit… and GM is still concerned about its profit margins.
Before we move on to the macroeconomic environment, it is important to consider one more interesting part of GM’s business. While some analysts have been pounding the table all year about the inevitable pick up in orders for car makers due to “lean inventories” at dealers, it seems that these analysts have not had a chance to look at GM month-end dealer inventory numbers which have been consistently hitting new highs for much of the year and have been holding at over half a million vehicles (and this is just in the US.) In case you were wondering, the inventory to sales ratio for the entire car industry recently had its biggest relative jump in history, so GM is not alone.
Think things may be turning around? Think again. While the most recent trade balance numbers released on November 10th showed a surprising drop in the US deficit (which could be loosely extrapolated to mean that companies like GM are selling more overseas), some quick back-of-the-napkin analysis uncovered that almost the entire gain was due to a 76% rise in exports to Hong Kong (an unsustainable development to say the least) and this has led some to question whether Hong Kong has become the world’s newest channel-stuffing center. As for America, expect the numbers to look increasingly harsh in the days to come as Wholesale Inventories numbers (which include much more than auto inventories, but tend to indicate the overall economic trend of increasing/decreasing inventories) fell for the first time since December 2009.
So what does the macroeconomic picture suggest about the future of the car industry? Since it is already clear that consumers are deleveraging (not good) and that dealer end-of-month inventories have soared all year (not good), consumer sentiment numbers can give us a good indication of where we’re headed and perhaps offer a different picture. No such luck. Starting in early 2009, there has been a gross and consistent disconnect between retail sales and consumer sentiment (as reported by the University of Michigan Index) that is unprecedented. Since the emotional and financial bottom in the economy in March of that year, retail sales have soared back to where they were in the heady days of 2006-2007 while consumer sentiment peaked in early 2009 at levels roughly commensurate with the heart of the crisis in 2008 and have moved steadily lower since. Can you say unsustainable?
Where exactly does that leave the US taxpayer with respect to their 500 million shares of GM common stock? Most likely holding the get-paid-last-in-bankruptcy-court bag, that’s where.
– By: Haig Altunian
Source: Detroit News