The Market Loves GM Bankruptcy

I kid, of course. The market is up 200 points Monday, not because GM is filing bankruptcy, but rather because investors seem to understand that the event itself is not at all catastrophic. After all, Chrysler is emerging from bankruptcy shortly and actually saw sales go up after they filed. It seems that most people, investors and car buyers alike, understand that Chapter 11 is a legal corporate process first and foremost and should be an afterthought to car buyers. Still, who would have thought the market would react quite so well initially?

Two short points on GM. First, the stock is up 20% Monday to about 90 cents. It’s worthless, folks. Those who still grip their “efficient markets hypothesis” tightly can use this as a perfect case study against the theory.

Second, how will we be able to judge whether “New GM” is viable long term after they emerge from bankruptcy (which many say will be before summer ends)? It’s all about cost structure. Many attribute their latest woes chiefly to the weak economy and lack of credit, but they seem to have forgotten that GM was a money loser in 2006 and 2007, when credit was flowing more freely than any other time in our history.

Consider the chart below, which shows how far from profits GM has been over the last three years:

As you can see, GM needed a near-10% mark-up over cost to breakeven on their vehicles. They never hit that goal in 2006-2007, even before they started selling cars for less than they built them for in 2008. If “New GM” can get their costs down, and have them be predictable and stay low, the company might be able to make a comeback down the road. It won’t be easy, but Chapter 11 was the only way to make it even a reasonable possibility.

Disclosure: No position in GM, past or present.

Comments

[User 283977:]

People covering their shorts?

Jun 01 05:04 PM

[tedster98:]

Barack O'Commie (doesn't understand Capitalism because he's a communist. Instead of throwing billions of wasted taxpayer dollars into GM, it should have been allowed to bankrupt right off the bat and restructure. It would have saved a lot of taxpayer money and would have expedited job saving through streamlining. Yes. Some would have lost jobs, but it would have been less painful in the long run for all as an aggregate. The same goes for the other companies like AIG - except AIG is used to launder political money - there's the salt in the wound.

Jun 01 05:10 PM

[Fighting Yoda:]

Abomination

Jun 01 05:52 PM

[Frohickey:]

Name-calling of communist, socialist are not required in these posts. All that is needed is to see which group of constituents are protected in a government bailout and 'bankruptcy' of GM.

UAW is the biggest beneficiary of this GM bailout and bankruptcy. A normal bankruptcy would have destroyed the UAW, and the Democrats could not afford that, not if they want to keep winning elections.


On Jun 01 05:10 PM tedster98 wrote:

> Barack O'Commie (doesn't understand Capitalism because he's a communist.
> Instead of throwing billions of wasted taxpayer dollars into GM,
> it should have been allowed to bankrupt right off the bat and restructure.
> It would have saved a lot of taxpayer money and would have expedited
> job saving through streamlining. Yes. Some would have lost jobs,
> but it would have been less painful in the long run for all as an
> aggregate. The same goes for the other companies like AIG - except
> AIG is used to launder political money - there's the salt in the
> wound.

Jun 01 07:51 PM

[cameroni:]

This is only GM's first bankruptcy. Another will follow when they don't get it right, which they won't since this is the most one-sided subsidized chapter 11 filing ever on the books. It's a toothless paper tiger.

Jun 01 09:13 PM

[rick12345:]

Selling anything in the marketplace is 90% marketing and 10% product. Financiers and management alike are quick take accept credit for a company's profit, but will wipe thier hands clean if losses are incured, sighting poor sales and increasing advertising costs. This mentality alone is the reason why GM will not succeed in the future and why it makes more sense to let a tech company run the show; it understands the dynamics of a marketplace with more than two competitors (in the past GM thought it was only competing against american car manufactuters).

Jun 02 12:22 AM

[jgbooker:]

Let's see, $50 billion equals $167 per man, woman, child in America. And that's just to "save" one company. A company that may very well end up in bankruptsy again.

Jun 02 07:19 AM

[JCC:]

GM moves forward with $70 billion in tax loss carry forward (the rules were modified to allow this), minimal debt, dramatically reduced labor costs and a much lower break-even point.

In the intermediate term, they will be wildly profitable. Who knows what will happen in the long term.

Jun 02 09:22 AM

[Mad Hedge F...:]

buy the rumor, sell the news. General Motors (GM) is finally gone. Don’t look at the share price, which now trades in pennies, down from $90. Look at the labor force, which has shrunk from 360,000 to 39,000 on its way to 18,000. I sat at Ralph Nader’s knee (because there were no chairs) 40 years ago, who wore his unfashionable trademark white shirt and pencil thin tie, fresh from the runaway success of his anti GM crusading book Unsafe at Any Speed, listening to him predict the demise of GM. Companies that recklessly kill off their customers and produce inferior products at high prices can’t last, he said. Fuel efficiency and the environment came later. Many people considered him a communist then, for bashing GM was considered unpatriotic then. No doubt J. Edgar Hoover’s FBI was following his every move. I think that Obama should now make Nader a director of GM, along with that other GM hater, Michael Moore.

Jun 02 10:53 AM