How To Stock Markets Work: General Motors Edition

Wed, Jul 18, 2012

Stock Markets and How They Work

stock markets workInvestors’ confidence in banks, Wall Street, and stocks is at multi-year lows. Most investors now view it as “rigged” for Wall Street insiders.

They’re mostly right too.

But the Stock Market Works. The latest action from General Motors (NYSE:GM) is the exhibit A.

GM’s prepackaged bankruptcy bailout forced significant changes upon the company. It also left many parts completely intact.

The restructuring eliminated a lot of debt, all of the shareholders equity, and a lot of other balance sheet problems which, honestly, were preventing the company from succeeding.

As a result, “New GM” emerged with less debt, a new share structure (with the U.S. government as a major shareholder which will not sell and help keep GM’s share price higher than it would be otherwise), and a well-funded financing arm-that’s-not-officially-a-financing-arm in Ally Financial (formerly GMAC).

But it was also still burdened with high healthcare costs, labor costs, and the same management and union workforce which prevented the company from succeeding and sent GM into bankruptcy in the first place.

The markets have reacted the way a rational investor would expect them too. Since GM re-IPO’d in 2010 its share price has steadily fallen steadily. And the worst is probably yet to come as the next “savior” product from GM is off to a terrible start.

GM recently released its next savior model – the Chevrolet Malibu Eco.

The new Malibu needs to be a Corolla, minivan, or some type of “company-maker” success in order to save GM from the same problems which drove it into bankruptcy the first time.

general motors business strategy

Regretfully, it’s not off to a great start.

Mickey Kaus at the Daily Caller breaks down the truth about the latest GM car-to-save-it-all in “Keeping up with the Rattnerized GM”

He found the Malibu Eco is already winning awards. Fortune magazine hailed it as The Worst Car of the Year (So Far). Other reviews aren’t much better.

In short, it’s another GM disaster.

The bad news couldn’t have come at a worse time for GM. After we spent much of the last year maligning the economics of the Chevy Volt, its sales are expected to soar this year. But sales going from virtually nothing (less than 10,000) to next to nothing (less than 50,000) is not much of an achievement and it’s not nearly enough to make the line even close to profitable.

So GM may not be working, but the markets are. GM shares are down and falling.

The lessons here for Contrarian Investors are many. Two stand out.

The first investment lesson is to avoid investing in companies aimed at “doing good” generally instead of focused on “doing good” for customers and shareholders.

Government’s heavy involvement has forced GM to focus on doing good for its workers (more specifically, the unions claiming to represent the workers), the environment, politicians, the city of Detroit, and other concerned interests.

It clearly hasn’t focused on building cars potential customers will want. The results show.

The second investment lesson is the markets work. At least they do over time.

Forget the short-term daily ups and downs. The markets will reward good decisions over time.

Good investing,


Andrew Mickey
Executive Editor, Contrarian Insights

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