Thursday, November 18, 2010

An American Icon Returns

   The first half of this week has been more chaotic than any the past few months as QE2, Irish debt and Chinese monetary tightening have weighed on the markets. After falling rapidly yesterday, the stock market managed to maintain the flat line amidst a slight pullback in the dollar and renewed data showing minimal inflation in the U.S. Bond markets in the U.S. have continued their wild ride since QE2 began on Friday. After rising sharply on Monday, yields dropped at the open Tuesday, rallied back and then fell dramatically into the close. Today, yields started the day to the downside then moved lower throughout the morning before making a strong comeback to finish the day moderately higher. Commodities and emerging market stocks have sold off considerably as well in response to forthcoming Chinese tightening and potential price controls. Despite all this news, general conviction remains that this is a much needed correction and I'd agree a few buying opportunities are starting to arise.

   General Motors (GM) greatly anticipated return to the public market has finally arrived. The size of the IPO has been increased substantially and the initial $33 price tag is at the high end of an already heightened range. Considering all the hoopla leading up to tomorrow, it seems likely the stock will shoot upwards when it opens. After the initial hype subsides, likely next week, the real questions will start to be answered. Although some investors recently have opined that GM was merely an unfortunate consequence of the recession, I'd beg to differ. Years before the recession began, GM was saddled with a cost structure equivalent to paying salaries more than twice that of foreign competitors. Due to concessions made to the UAW, retiree benefits were spiraling out of control. At the same time, GM was burdened with several unpopular brands and numerous gas guzzling vehicles that fell out of favor as oil prices soared. Based on these fundamentals, GM's fate may have been sealed before the recession, which merely finished off the job.

   Oddly, the recession may also have been a blessing in disguise for GM. As the country watched in horror as millions lost their jobs, saving the American icon and its couple hundred thousand jobs was imperative. Over the past two years, with government aid, GM has disposed of several brands, written off billions in debt and restructured contracts with the UAW. GM is absolutely a stronger company now than it was before bankruptcy. However, is it so certain that the problems of the past will not come back to haunt the company? As profits roll in and the government ultimately relinquishes its stake, will the UAW not fight for better compensation? If oil rises above $90 or $100, will the current lines of not so fuel efficient vehicles still be in demand? Beyond these questions, trying to predict the future earnings at this time is incredibly difficult. What if cash for clunkers has brought a significant portion of demand from the next couple years forward? For my money, the current hype and high expectations aren't worth the risk of buying in at a potentially terrible price. As interested as I am in the outcome over the next few days, I'll be watching this IPO from the sidelines.

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