Investment Implications Of The GM Bankruptcy

The General Motors (GM) news is a big business story, the largest industrial bankruptcy in history.

Is it a big investment story?

We encourage investors to be politically agnostic, to distinguish between interesting political stories and their own investment decisions.  We acknowledge, with thanks, the comments from Abnormal Returns on this distinction, as well as reader emails.

The Business Pitch

Those doing business stories - television, print media, or online, have an audience.  Their consumers are more affluent, more educated, and more conservative than the average reader.  One result of the current economic downturn is that every media source is playing to the existing audience in a quest for hit count and ratings.

The result is predictable.  Here are the main business themes (sources omitted since there are so many):

• This is a huge government bailout, destined for failure;
• The union is getting a gift, bondholders are getting shortchanged;
• Obama is setting a precedent for future actions;
• The government will be deciding which cars should be built;
• The taxpayer will lose this investment, and perhaps more.

We are not going to disagree with these positions, since that is not our mission.  Each point is hotly contested by Obama supporters.  We shall leave it as that, although regular readers know that we believe in free markets and generally support only government actions that create useful private incentives.

The Investment Implications

The first question is obvious.  Did any skepticism about the expected GM bailout help an investor?  If it caused you to sell short GM stock, the answer is “Yes.”  If it caused you to sell short the rest of the market, the answer is “No.”

Why the disparity?

The market critics are relying upon a long causal chain, where something bad is going to happen many months in the future, often requiring several different events.

Meanwhile, the immediate impact is that fewer jobs will be lost, auto parts suppliers will stay in business, and the general adverse economic impact will be mitigated.

Thirty billion dollars was viewed as a lot of money at the time of the Bear Stearns buyout.  Here we think it is still important, despite the massive scale of other government interventions.

Our own time horizon is one year or less.  This viewpoint is widely shared by investors, so it is no use fighting it.  Most people see the immediate economic impacts as positive, despite the pounding criticism from the punditry.

Perhaps it will all play out badly in a year or so.  We will have time to adjust our positions as the story plays out.  If Obama and Barney Frank start dictating the details of auto production, there will be time to react.

Meanwhile, investors must decide whether they want to use their politics as the basis for their investments.

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