Sunday, October 12, 2008

GM news

I found the stock price drop-off on Thursday surprising. If you'll read my commentary Wednesday you'll see why. I had thought the fall-off earlier in the week was the result of a one-time event: pressure on a lot of hedge funds to liquidate some of their equity holdings in order to satisfy end-of-quarter redemption demands from dissatisfied investors.

I had hoped/expected some levelling off by Thursday. Instead, the DOw fell another 600-plus points.

Allow me then to make the point that this proves how I don't know nuttin'. So don' take this blog (or any other blog!) as a dispensary of investment advice. Please.

My best guess about Thursday is that the market was spooked chiefly by an S&P announcement in the late afternoon Wednesday. Standard & Poor's put General Motors, a US corporate icon if ever there was one, on "credit watch negative."

By the end of the week, Barclay's had lowered its loss-per-share estimate for GM for 2008. It had previously predicted that when this year's books are done, GM would lose $15.68 per share. Now it's guesstimating $15.87.

How has GM responded? Officially, thus: "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets. But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers or customers."

Unofficially, GM is said to be in talks with Chrysler -- or rather with its parent company -- about a merger. How will that help? Won't that simply absorb badly-needed cash (or strain the credit that S&P just put on watch)? Apparently, the idea is that GM will pay for Chrysler with its remaining interest in its financing arm, GMAC. General Motors spun off GMAC two years ago, selling a bare majority of the equity, retaining 49%. So now it will give Cerberus that 49% and ger Chrysler.

Why? To increase its market share, presumably, though that hardly amounts to a cure to its ills. Chrysler suffers from the same ills, which is why it isn't part of Daimler-Chrysler any more.

The reported talks leave me wondering: why has it still occurred to no one that the most logical business combination of the world would be a takeover of the auto industry by the petroleum companies?

I've raised this before, hoping to get some explanations of why I'm wrong. Still nothing. But it seems to me that the logical model here is that of the shaving-blade industry. Gillette sells the razors at a loss. It can afford to do so, because the economic significance of a razor is to lock a consumer into buying a stream of blades that fit it, and the profit from those blades more than compensates the loss on the razor.

If Exxon-Mobil and its peers bought up the US auto industry, they could afford to sell automobiles for a loss, for the same reason. The economic significance of a car is to lock a consumer into the purchase of fuel.

So get to work, deal makers!

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