Ford stock is taking a hit today after reporting earnings that missed analysts’ estimates. European losses accounted for much of the earnings disappointment. General Motors is also known to have major issues with its European brand, Opel. GM recently assigned Alix Partners to oversee their European unit’s “turnaround” plan. Alix Partners is a bankruptcy consulting firm that was hired by GM prior to their own bankruptcy filing. This is just one of many risk factors that have been glossed over by media coverage.
Early reports question why the expectations for Ford were set so high. Anyone who has followed the media coverage for the domestic automakers recognizes that the news that has been reported of late has had a very rosy slant. It is not hard to discern why analysts have been overly bullish of late on the auto sector. Biased analysts who work for General Motors’ IPO underwriters have touted the strong prospects for GM and the industry as a whole while neglecting warning signs. The Obama Administration has a vested interest in seeing GM share price increasing, as well. Add to these catalysts the fact that television networks receive hundreds of millions of dollars in advertising revenue from auto manufacturers and it should come as no surprise that most of the news on GM and the industry is quite optimistic.
The Obama Administration hopes to sell the taxpayers’ stake in General Motors in the future at as high a price as possible. GM share price and general market conditions govern the decision as to when the sale of the Treasury’s stake will occur. It is ironic that an administration that has scorned any ideas of investing social security assets in equity markets now sees fit to market-time taxpayer investment in GM stock. This hypocrisy comes on top of the administration’s decision to allow GM to benefit from a $45 billion tax write-off for tax loss carry-overs gifted to GM that normally would not have been allowed for a corporation emerging from a 363 bankruptcy filing as a “new” company. President Obama and friends boast of taxpayer returns on investment as GM is allowed to make billions of dollars in profits with minimal tax responsibility.
There will be much to watch for when General Motors reports its earnings on February 9th. The quality of the earnings also comes into question since GM has admitted that its accounting processes are unreliable. This is another seldom mentioned risk factor. The dire situation at Opel may also be a factor. Mom and Pop investors should be aware of all risks when deciding to invest in any corporation, the fact that GM has friends in high places should not alter the tone of coverage.
The bottom line is that our government’s intrusion in to the free markets (as in the General Motor’s bankruptcy process) should not be celebrated as a great success. Wall Street fat cats like Steven Rattner and Harry Wilson, who were involved as members of Obama’s Auto Task Force, do not deserve praise for their actions. In the case of Steven Rattner, it should also be noted that his alleged corruption in a “pay to play” scheme as a hedge fund guy further exposes the hypocrisy of President Obama as he vilified hedge fund managers while hiring one to head his task force.
The auto bailouts should be viewed as an overreach by the US Government that should never again be repeated. Praising the results leads to moral hazard and temptation to repeat the process elsewhere. The Obama Administration should exit its position in General Motors, Chrysler and Ally Financial as soon as possible. Meanwhile, individual investors who bought in to the hype surrounding GM should consider that they may have been sucked in to history’s largest pump and dump scheme as orchestrated by our own government.