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General Motors (GM) is an auto company owned largely by the UAW and the U.S. and Canadian Governments (note; link is to original ownership breakdown in 2008). That fact alone would normally disqualify GM from ever catching my attention, even if they are still considered an American auto company. Everything about the company is a repellent to believers in the free market system, private property rights and the sanctity of contract law. There are however other views, and for a good back and forth on the technicals vs. the fundamentals, watch this video.

Why then am I writing about GM? Because GM is a great case study of the concept of "overhead supply." Overhead supply is when there is a large number of people that are holding a stock at a loss and are just waiting to get out even or cut their losses. If you have every found yourself saying "please God, just get me back to even and I'll never buy this stock again," you are part of what is called overhead supply.

Overhead supply acts as a headwind against any advancement in a stock price, as once price levels are reached, the sell orders are triggered. GM has an astronomical amount of overhead supply. The US Treasury owned 241 million shares at the end of April and plans to sell 30 million shares once the stock re-joins the S&P 500. They plan to be totally out of GM by Q1 2014. The UAW Medical Trust also plans to sell 20 million shares, so 50 million shares of GM are going to be unloaded on the markets in a relatively short period of time.

Once that happens however the selling pressure disappears. As the above linked video points out, "just like with AIG, once you get down to the "tag ends," this is where you want to own it." The Treasury and UAW with their predetermined path to exiting their holdings are telling the markets that the overhead supply is being eliminated, and they even provide a timeline for the process. Also as highlighted in the video, the government exiting GM will be like lifting a boot off someone's neck, and should allow GM to return to the free market principles and forces that created them in the first place.

In conclusion, while I'm not a fan of GM, I do find the overhead supply story compelling. Just as QE is an artificial distortion to the 10 year Treasury yields, the Treasury's GM overhead supply is an artificial depressant on the price of GM stock. As Ben Bernanke unwinds QE, one can expect the 10 year rate to increase, and I would expect that as the Treasury unwinds their GM position, it too will increase, and seek a more efficient market determined price. Personally I'd be more likely to buy a Volt than GM stock, but I will be watching it out of curiosity to see if the theory is validated.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Source: GM: A Case Study In Overhead Supply And Government Distorted Pricing