I’m an avid trader. I like to trade options, stocks and forex. While I do not claim to be an expert, I’ve enjoyed some success over the years. Not long ago, I noticed that GM was producing a lot of cars. I figured that they must have some pretty good sales to back up that production, but as I did the research, I couldn’t find the correlation between the production numbers and sales, resulting in a “scratch your head” moment that generated deeper research. Obviously, they must know something I don’t know.
After all, I’m not an expert on the auto industry. So I asked my brother – who is a manager at Ford Motors – why GM was producing so many cars. He had no idea. Now I have been known to take some crazy risks, but they have all been calculated very carefully. In this case, there was something about this trade that didn’t pass the smell test, so I left it alone.
Fast forward to the present: a friend of mine posted this article on his Facebook page and I noticed it at once because I was researching GM at the time. When I finished reading it, I felt like I’d been hit with a ton of bricks.
Long story short: GM is stuffing their channels with inventory – more inventory than they really need and in record amounts. How is this going to play out? Let’s take a stroll down one avenue. Please stay with me, because this is very important.
There are certain key indicators that help people like economists, financial analysts and politicians determine how well the economy is doing. Most people wouldn’t dream of cheating, but what if you could skew those numbers in your favor? What if you could make the economy look better or worse than what it really and truly is? If you could do that, then you might be able to affect stock prices, or legislation or even elections.
Automobile manufacturing – the production of cars and trucks – directly affects key economic indicators such as GDP (Gross Domestic Product), CMI (Consumer Metrics Institute) and PMI (Purchasing Managers’ Index).
PMI is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. If the PMI is greater than than 50, the sector is increasing, if it equals 50 then it is holding steady and if it is less than 50, the sector is contracting.
CMI is a growth indicator which helps analysts to understand whether a company or sector is growing or shrinking.
Gross Domestic Product (GDP) refers to the market value of all final goods and services produced within a country in a given period.
There are basically three ways to determine GDP. Bear in mind that this formula works under the condition that all products produced are purchased by someone. Therefore, the value of the total product is equal to the total expenditure. This is key to my analysis because GM is manufacturing the product in great quantities but not selling it.
If we can artificially improve CMI, PMI and GDP, these indicators would tell people that the economy is heading towards a sustained recovery. But that would be a façade, an illusion…ultimately, a hoax. By manufacturing so many cars, regardless of sales trends, GM is artificially boosting its CMI, PMI and GDP numbers. If you have enough companies like GM stuffing the sales channel, you can essentially boost these economic indicators in a significant way. And if this is done month after month, the effort will generate the illusion of sustained growth. But why would a major manufacturer – or a group of manufacturers – want to do this?
I believe the answer may be found in the 2012 election. We have a government controlled company in GM that is essentially run by the White House and the trade unions anxious to see President Obama reelected. One way to help coax that along is to somehow help make the economy better. But what if you really can’t do that? Well, you do the next best thing by manufacturing more and more products month after month, creating the illusion of an economic recovery that is reflected in the economic metrics.
But why now? Well, we all know that it’s really hard for Obama to run on his current record. Without the ability to create jobs, he needs some good news for his campaign to latch on to and what better news than an improving economy? We heard about last month’s improved unemployment results – it dropped from 9 percent to 8.6%. Or – did it? If you know the formula behind determining the rate of unemployment, you would understand that it’s fuzzy statistics at best. The REAL unemployment figure is significantly higher.
So what are the consequences? For starters, we can ask what GM will do with all of those cars sitting on dealer lots. At some point, the manufacturer will run out of the capital needed to make those cars. If they have enough money and credit to sustain them for another 5 or 6 months – they can then begin to slow down that pace. If the rest of the economy begins to improve – this could still keep those economic indicators riding high until after the election is past. But the problem, sooner or later, will be what to do with that excess inventory?
As a businessman – I know that inventory costs money. The faster I can turn over my inventory, the better my bottom line will be. But right now, GM isn’t overly concerned with their bottom line. Sooner or later, they will be – but for now, it appears that they are not. What do you do to reduce your inventory? For one thing, you can incentivize people to buy your products. The auto industry likes to use rebates or sell at discount prices. Okay, but will they be able to sell off all of their inventory with rebates? Probably not. Then what? Well, they’ll probably give bigger rebates – and all of this at a time when the economy is sputtering along and where people can afford to have only so many cars. With insurance costs and fuel costs and every day costs, I’m only going to keep 3 cars. That’s it. No matter how great the deal, I doubt if I’ll be able to sustain 4 cars on my current budget. So, when the market becomes saturated and sales slow down even more – then what?
And we haven’t even looked at the industry as a whole. When GM begins to flood the market with their excess inventory – what happens to the auto dealers and manufacturers? If I can save $1000 on a GM pickup truck, I won’t bother even checking out a Ford Pickup truck. So, what happens to Ford sales? Honda, Mercedes, Hyundai or Toyota sales? (By the way, Toyota is still reeling over the tsunami that hit Japan earlier this year). What happens to those dealers and all of the people who work in the rest of the industry?
What happens to the used car market? Those prices will plummet as well. Why buy a good used car when you can buy a cheap new car. What happens to future sales? You deplete your future market by over-saturating the current market.
As you can see, the auto industry is in really deep trouble. GM will take a big hit because they are paying top dollar right now to produce all of those cars which are going to gather dust on a storage lot. And when they do sell, steep discounts will necessary to reduce that excess inventory. This is a losing proposition for GM. I have a feeling that their survival will depend on another government bail out. Whatever their story for requesting the bail out – don’t believe it. You can blame them for stuffing the channel and their irresponsible management practices.
The other manufacturers are being responsible, but they will take a hit too. They have no choice. If they see this coming, they will be able to prepare for the oncoming price wars that will severely damage the US economy. As for GM…without another bail out, it will be a dead company walking.