General Motors = General Malaise

I’ve never been a fan of General Motors [GM].  At RealMoney, I had somewhat more than 70 notes on GM across five years, though I stopped writing about it because I got bored of waiting for the disaster.  Oh, also, the market moved temporarily against my views, and I had better things to write about with the pains in depositary  and credit-sensitive financial stocks.

One of my basic rules is that heavily indebted corporations with bloated cost structures facing stronger competition are rarely good investments. How will the equity get dividends?  Who would buy the company out?

You can’t cut your way to greatness, particularly when there is high debt and high overhead costs.  Those costs need to be spread over a large volume of cars/trucks.  Cutting volume will not help much, except for cash flow in the short run.  In the long run, the accrual items will bite, whether pensions or other fixed obligations.

As Felix points out, bankruptcy may offer options.  That said, the surviving company would be much smaller and less significant to the US economy.  I also doubt that Chevrolet could be spun off without a fraudulent conveyance suit from the senior bondholders.

When I was a corporate bond manager, I sold all of my inherited GM exposure at significantly over par in 2001 (spreads were under 200 bp).  I did not want my clients to face the degradation of value from a mismanaged company.  Not owning GM and owning a tiny amount of Ford debt was a big bet relative to the indexes, but it was one that paid off.

My advice remains the same.  Underweight GM and Ford, both equity and debt.  It may take a while, but eventually the overindebted companies with high fixed costs will be outcompeted by their Japanese rivals.