Friday, November 7, 2008

Have a Few Extra Dollars? Time to Short GM Stock.

Ford and General Motors release their earnings numbers this week. The important bits of information to look at are the cash flows. GM and Ford are rapidly burning through their cash reserves. GM Burned through $6.9 billion in cash during the third quarter of 2008 (that doesn't include October, when things reallly got bad). GM now sat with $16.2 billion at the end of September. Ford is fairing slightly better, but not much.

GM Is warning that they may run out of money to pay the bills by the end of this year. Essentially, they will be insolvent. Check out a few important stories on the subject:

What's going to happen? Most likely, GM will file for bankruptcy some time this year. Of course, they are angling for another $50 billion in low-interest loans from the governmet (in addition to the $25 billion already approved). This is the wrong thing to do. Why? Because GM and Ford (and Chrysler) failed to keep themselves solvent. They made bad decisions and they should pay for them.

A GM bankruptcy will not put the company out of business. It will allow them to reorganize, shed unprofitable lines of business and contracts, and emerge more fiscally sound. You don't see Toyota with its hands out for government money. They have run their business well. Even though they are affected by the current economic mess, they can survive it because of past good decisions.

These bailouts just prolong the pain. One or more US car companies will fail, it's just a matter of when. What happens to these loans if/when these companies goes under? The taxpayers get stuck with more bad debt. The national debt is already over $10.5 trillion (almost three times higher than when George Bush took office). The government can't (and shouldn't) try to fix everything. Let the market work.

No comments:

Post a Comment