Investment challenge: Alcoa vs. GM
Written by Michael Vass
Let’s take a trip through time. Back in February 2009 I purchased Alcoa (symbol AA) at $5.55. It was an investment that I bought with a 2 year timeframe. And I further used this purchase to provide an example of the benefit of investing versus trading.
Today, Alcoa closed at $12.94, down from the pre-election surge. The benefit of Republicans winning the election has given way to the reality that a stalemate in Government is coming. That stalemate will NOT result in a repeal of Health Care Reform, with the taxes and increased regulations it requires. The stalemate will NOT lower the deficit, and may only marginally slow the growth of the Government - according to the resistence to ban earmarks that Democrats are currently proposing. At this point it cannot even be clear that the Bush Tax Cuts will continue, causing a tax hike to small business owners and further damaging investor returns.
Given these facts, I continue to hold my investment of Alcoa. My target continues to be a 2 year objective. I still expect to reach a $18/share or better exit (though I did have 1 opportunity to exit the position in this range already).
But let’s compare that investment to something else. The “investment” America made into GM, via the $49.5 billion bailout. An investment that was made with our tax dollars with a promise of not only repayment but also profit.
To date $9.5 billion of the bailout has been repaid. The bailout provided the Government 61% ownership, with unions being paid at the expense of bondholders. A violation of law, and the principle of bond ownership.
GM will be introducing a new IPO potentially at $33/share as soon as tomorrow. The Government will wind up with 412 million shares (reducing ownership to 26%), unions will have over 100 million shares. Foreign investors will gain 16% of the new stock (China will own some 5% alone). A dozen major brokerage firms will make tens of millions off the offering. The American public will receive… nothing.
Which investment (both occured within months of each other) seems the most beneficial? Which might help encourage job growth or pump critical spending into the still failing economy?
Why is the Government holding the shares of GM? Why not give this “investment” to the public (maybe 1 or 2 shares to each person that has filed an income tax since 2009) to spur potential investment and allow individual taxpayers the opportunity to determine when they have made enough of a profit? Why wouldn’t the Government want to let tax payers invest - with the potential to gain increased tax revenue from the sale of that investment while providing a critical institution the potential of tens of millions of new investors?
Lets look forward. GM still has problems that have not been resolved. Unions still cost too much, the retirement funds are still too expensive. The cost of a GM car still has a built in expense of $2,000 just because of union costs. Which says nothing of the impact the Health Care Reform will have on this company.
Add to this the fact that the Government has required the creation of electric cars. The Volt, an electric car from GM built on the chasis of an existing $16,000 car will cost $41,000. There is no market for this vehicle. It is so expensive and unwanted that the Government will provide a subsidy for its creation. Senate Majority Leader Harry Reid is about to propose $4 billion to supplement the creation of this car.
If GM is required to make cars that have no market, at a cost that is too expensive to own, how successful will the company be? How long will GM remain at or above the potential $33 IPO price?
But there is more. Remember that Democrat leadership and President Obama want to pass Cap & Trade. The Bill will mandate an increase of some 150% or more on the average energy bill of individuals. To force people to conserve energy. To be more “green”.
If the Government is successful in “necessarily skyrocketing” [President Obama quote from January 17, 2008 - see Cap & Trade link above for video] energy costs, while mandating electric cars in an auto industry the Government holds sway over, how many people do you believe will want to buy electric cars? Electric cars that are so expensivce they require Government funding to make. Cars that will require an increase in the electricity that the Government does not want individuals to use?
And exactly what might happen to the share price of GM in this scenario? How likely do you think it will be for GM to repay the bailout, or to pay a profit on that bailout? How long might that take?
Returning to the original thought. When investors are allowed to make decisions on their own, profit can be made. That profit will eventually benefit the Government in taxes - assuming that the taxes do not absorb the profit. That profit allows for consumer purchases and job growth, which benefit the economy.
When the Government interferes, as in the case of GM, there is a mess. The company is not better off. The investors are potentially at significant risk. The product is impared and unwanted. No one wins, except foreign governments and selected special interest groups (like unions).
Is GM a good investment? Will the IPO make money for individual investors, or for the American taxpayer? Will GM be worth more or less in 2 quarters, in a year? All good questions. I would say the prospect, based on Government interference is no. I would say that I won’t sell my profit in Alcoa to buy GM. I would say that in 5 years I think that GM will be in as bad a shape as it was 2 years ago.
So here is my challenge, my thought experiment. Taking the closing price of Alcoa vs. GM after the IPO, I will compare the profit/loss in 6 months and 1 year. Let’s see if Government intervention and mandates are a benefit or loss to investors and taxpayers.
What do you think will happen?
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