Today’s jobs’ report raises worries that the US may be headed for a double dip recession. Jobs creation was much lower than expected and the unemployment rate rose to 9.1%. And where is President Obama? Traveling to Ohio to brag about how many jobs were saved by spending billions of taxpayer dollars to bail out the auto industry. Oh well, Nero fiddled, Obama campaigns. While Obama tries to convince the majority of people who will be voting in 2012 that auto bailouts are a wonderful thing, individual investors in General Motors should consider the specific risks the company faces if the economy does not improve.
GM has staked much by investing in raising production capacity and freely spending taxpayer money on environmentally friendly plant upgrades as well as on spending to create high paying jobs for the politically powerful UAW. While these moves help Obama on the campaign trail, investors are at risk if auto sales do not meet rosy projections. A slowing economy with rising unemployment and high gas prices is a recipe for disaster for an economically sensitive company like GM that does not curtail rising costs.
There have been many warning signs that GM is being managed more for the benefit of political gains than for profitability gains. Huge expenditures in green technology and the Chevy Volt expose a philosophy that neglects shareholders to the benefit of politically motivated environmental agendas. Putting aside debates on how much value the Chevy Volt offers, let’s face one most important fact. GM loses money on every one sold! There is not an endless supply of taxpayer money to keep funding this agenda.
The claims of job creation by GM are also a telling sign of the political agenda at GM. One plant actually laid off 100 newer UAW workers to rehire 150 workers making twice as much. Again, it seems the loyalty is reserved more for the politically powerful than it is for shareholders. Tim Geithner’s words that “it is not about profits, it is about creating jobs” should strike fear into the hearts of capitalists. And GM pushing for production expansion and spending at a time when cash should be conserved is a dangerous game, especially when that spending is based on political rather than economic factors.
GM has also staked a great deal on the prospects for China. CEO Dan Akerson has said that China will drive GM profits and is the “crown jewel.” This is turning out to be another inaccurate claim by GM as China sales slowed and profitability for the region actually dropped in the first quarter.
Under-funded pension obligations at GM stand at over $21 billion. Any stock market downturn may adversely affect the underlying assets in the plans and require additional funding. I don’t believe the balance sheet and financial condition of GM are as strong as they would have us believe. GM offered a half billion dollars of junk bonds by its subsidiary, GM Financial, after making promises that the balance sheet would be “pristine” and without debt. A very small portion (less than 1.5%) was used to eliminate other debt; the majority is to be used for “general purposes.” Moody’s also seems to question the financial strength at GM; the bonds are rated B1 and considered high risk.
There is much to be concerned with regarding the prospects for the future health of GM. Investors considering placing their money on GM should realize that much of the positive coverage may be attributed to the vested interests of those presenting the data. Contrarian views should be considered along with all the mainstream hype.