BERKO: General Motors still not a good investment
Dear Mr. Berko:
My broker has recommended that I buy 1,000 shares of GM at $18. In a column late last year, before GM went public, you were bearish on the stock. It’s down 5 points from its initial offering price, and revenues as well as earnings look very good. And some of the big investment firms like Bank of America, Citigroup and J.P. Morgan are recommending the stock.
Have you changed your opinion on GM? If not, please tell me why you are still bearish on this company.
My last question concerns your prediction on the Dow Jones industrial average in January of this year. You predicted that the Dow would close at the 11,800 level. Do you still feel that it can close at or near that number?
F.S., Erie, Pa.
Dear F.S.:
Unless General Motors Co. (GM-$20.24) finds a new market for its automobiles in Somalia, the Australian Outback, the Amazon jungle basin, North Korea or on Pluto, the next few years will be disappointing for its shareholders.
Though the Street, GM’s executive team and your broker are certain as sunshine that revenues will zoom in 2012 and 2013, they seem to ignore the following facts:
● Europe’s economy is in tatters, and auto demand is very tentative.
● The U.S. auto market is becoming more crowded, with Hyundai and Volkswagen likely to take market share from GM.
● In the collective bargaining agreement between GM and the United Auto Workers, GM, as usual, gave away too much of the store.
● Unemployment in the United States will probably exceed 10.3 percent in 2012 (the non-political number is more than 18 percent), and there’s a 71 percent degree of probability that we’ll suffer a double-digit recession.
● The consumer is cutting back on spending and is unwilling to take on more debt.
● Wages, which have increased less than 1 percent annually for the last decade, are beginning to fall as states and municipalities require workers to contribute to their health-care and retirement plans.
● Banks are reluctant to make auto loans, because most consumers have poor credit scores.
● Disposable income is declining because homeowners, health and auto insurance costs have increased 25 to 50 percent, while heating and air conditioning bills plus gasoline and food costs continue to take bigger bites out of Americans’ paychecks.
I’m mindful that quite a few big brokerages are bullish on GM. UBS has upgraded GM to a “buy.” Argus Research ranks GM as a “buy.” So do analysts at Merrill Lynch, Oppenheimer, Barclays, Morgan Stanley, Goldman Sachs and J.P. Morgan.
However, these esteemed gurus are the same lads who were solidly recommending GM before it went belly-up in 2009. I would trust their recommendations about as much as a laboratory rat would trust a research biologist. Many mutual funds own million-share blocks of GM at the November 2010 new issue price of $33. These funds can claim multimillion-dollar losses because they accepted advice from Goldman Sachs, Merrill Lynch and Morgan Stanley.
Yes, I still stand by the advice in my November 2010 column: Don’t buy the stock. But if you must, purchase it at the IPO price and sell it immediately when it moves up.
In late January, I suggested that the Dow would close the year at 11,827.27, and I made a wager with a good friend of mine who manages a megabillion-dollar mutual fund. His projection was 12,711.11. If I lose, I pick up his airfare from New York to Tampa and buy him dinner at Don Shula’s steakhouse. If I win, I fly to New York City on his nickel, and we have dinner at a supercalifragilistic-but-not-yet-popular steakhouse in Brooklyn.
I really, really hope I lose.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775, or email him at mjberko@yahoo.com. © 2011 Creators.com
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