Share Price Madness

July 30th, 2012 at 6:17 pm

Just did a CNBC segment predicated in part on the question that given the recent decline in GM’s share price, was the government’s auto-rescue the right policy?  To which I say…Oy.

Look, share prices go up and down with lots of things, not least of which is the weak economy both here and especially in Europe where GM’s market share is 8% (it’s about 17% in North America).  The bailouts have nothing to do with that, and if you don’t believe me, look at the chart below showing the percent decline in GM’s stock price compared to that of Ford, who didn’t take government help (GMs in red, Ford’s in blue).

As I stress here, absent the bailouts and given credit market conditions at the time, bankruptcy at GM and Chrysler were virtually certain, as no private investors would have stepped up to rescue the companies from liquidating their assets. 

Instead, the US auto sector has added over 100,000 jobs since early 2010, including 7,000 last month.  Sales are up from 12.5 million in the first half of 2011 to 14.3 million in the first half of this year, and employment is expect to grow in July as American auto producers cancelled summer re-tooling shut downs in order to maintain production.

I don’t like the share price decline either, and yes, it would have been much better for the American auto sector not to have had a near death experience.  But absent the rescue, we wouldn’t have much of a sector to be arguing about.

Source: Google Finance

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3 comments in reply to "Share Price Madness"

  1. Adi Venkata says:

    The real reason why Ford and GM shares are taking a tumble is because of the operational losses from the European subsidiaries. For both these companies, the last 12 months has been one of the most profitable ever in North America. Also, the companies are shrinking their balance sheets by offloading a lot of pension commitments.

    While i don’t dabble in shares, i would pick them now if i did. The only major question mark is their Europe story and i think it will resolve in the medium term (3-4 years)

    These are the fact and the CNBC folks are entitled to their opinions – however dubious they are!!!

  2. Nick says:

    Yes, but SOSHULISM!!!!

  3. readerOfTeaLeaves says:

    Share prices rise, and share prices fall.
    What matters much more is that GM still controls valuable patents.

    The control and licensing of GM patents represents ongoing wealth, particularly as new technologies come online with new carbon fibers, electric engines, newer navigation systems, etc.

    A patent is potentially a license to create wealth. In comparison to a good patent, a share price is a relatively trivial matter.

    By bailing out GM, the US federal government kept GM patents -representing years of R&D- under US control. That alone may have been a reasonable argument for the bailout — despite that fact that the word ‘bailout’ makes me break out in hives 8(

    What does Ford control? Patents.
    What does GM control? Patents.
    What does IBM control? Patents.
    What does AT&T control? Patents.
    What does Boeing control? Patents.
    What does Microsoft control? Patents.
    What does Amazon control? Patents.
    What does Adobe control? Patents, particularly the PDF file format.
    What does Google own? Patents.
    I hope that I’ve made my point…?

    Currently, Apple and Samsung are in an epic court battle over patents. They don’t pay expensive lawyers to argue over share prices.

    FWIW, one reason that I find Romney’s claims about his so-called ‘economic success’ downright weird is that I can’t see what patents any of the companies he owned either: (a) developed, or (b) controlled. As near as I can tell, Bain cut the R&D in just about every company they purchased. In other words, the Bain wealth seems to have derived from accounting tricks (including offshoring and tax havens and ‘finance’), rather than from the much more difficult long-term work of R&D — which is a *far* dicier proposition.

    The obsession over share price (in US culture) emphasizes the trivial and fleeting over the longer term processes of wealth creation. Obsessing over ‘share price’ feeds into a mindset that is expedient and opportunistic. It strikes me as futile and juvenile.