GM: Caveat Emptor

Includes: GM, MTLQQ
by: Chris Ridder, CFA

General Motors Co. rode expense cuts from its bankruptcy and strong sales of redesigned models to its first quarterly net income in nearly three years, drawing the company closer to a stock offering that would repay at least part of its government aid. (1)

Could it really be that GM is ready to be a good investment? I read this and thought, "when has the government ever run a business so well that I would want to buy it?"

Of course clarity soon came about when I stumbled across this article headline: "GM wants more subprime buyers; will lender agree?" (2) and the money quote I found in it,

GM's top North American executive Mark Reuss, under pressure to quickly sell more cars and boost GM's value as it gets ready to sell stock to the public, said a shortage of subprime lending is holding back sales in the U.S.

Now I can understand a government run firm's executives not wanting to listen to the experience of the private sector based upon hubris and the corresponding deftness to those not in the "family". However, it appears that the executives of our government owned auto company learned very little from their brethren in Fannie (FNM) and Freddie (FRE) about lending to subprime borrowers.

I did a quick look at GM's current balance sheet, using I-Metrix (3) , and it showed that GM still has 5 times more debt then equity; and now its owners want to shift some of that capital structure from debt to new equity holders. As a young college student I spent a summer, in 1994, clerking on the Chicago Mercantile Exchange and came across the trading adage, "Picking bottoms makes for dirty fingers."; which means don't try and be a hero and pick the bottom of a move because it will cost you capital if done repeatedly over time.

So I am much more content to let someone else try and "pick the bottom" in GM. Of course being a public tax payer I am already "long" GM, but I split that ownership with over 300 million other Americans. I do not wish to take a more concentrated position than I already have to.

Most investors still want a recommendation to buy something and not go away empty handed. So in order to not have anyone feel disappointed I recommend going long Lipstick Futures. Unfortunately they do not exist yet, but maybe my summer intern stomping grounds, now the CME Group (NASDAQ:CME) (4), will develop this complement to their Pig contract which goes by the more respectable term "Lean Hogs". For I am certain after reading about GM that the demand for lipstick will be very high.


Disclosure: None - and glad of it.