Investment challenge: Alcoa vs. GM

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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About the Author

Michael Vass
Born in 1968, a political commentator for over a decade. Has traveled the U.S. and lived in Moscow and Tsblisi, A former stockbroker and 2014 Congressional candidate. Passionate about politics with emphasis on 1st and 2nd Amendments.

13 Comments on "Investment challenge: Alcoa vs. GM"

  1. A good question. Will those pundits like Krugman be investing in GM?

  2. Comments as sent to us privately.

    Please cite your “facts” on the following:

    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.

    with unions being paid at the expense of bondholders. A violation of law, and the principle of bond ownership.

    The cost of a GM car still has a built in expense of $2,000 just because of union costs

    Add to this the fact that the Government has required the creation of electric cars.

    The Bill will mandate an increase of some 150% or more on the average energy bill of individuals

  3. Comments as sent to us privately.

    Alcoa vs. GM: wherein an analysis of investments totally disregards industrial character, firm history, relationship to the epicenter of major economic events or anything else that would tell you what makes a good investment. You choose investments primarily based on market information, so why would you analyze two firms in completely different markets as your method of picking investments? If you’ve done well investing, you’ve got to let me rub your belly. Good luck and all that.

  4. Comments as sent to us privately.

    GM get 45 Billion tax break on profits
    http://online.wsj.com/article/SB1000142405274870446…

    Each volt will get a $7500 in tax cridets.
    http://www.usatoday.com/money/autos/2010-07-28-volt…

    With all this help who could pass up the GM stock.

  5. Comments as sent to us privately.

    America would never have been a world power if not for Hamiltonian protectionist policy and government subsidization of the industrial sector. I don’t see how you could support the sort of pro-American nationalist sentiment of American greatness as embodied in its great wealth, while simultaneously being against the same sort of strategy for industrial economy exercised right now to prop GM up as a competitive force in the market.

  6. Comments as sent to us privately.

    On CNN this morning the CEO of GM stated that he couldn’t promise that the loan would ever be fully repaid. If they can’t repay the money I as a tax payer already loaned them why in hell would I invest more money in the company?

  7. Comments as sent to us privately.

    You realize that is a result of the government phasing out some of its ownership when the IPO is released, right? Basically according to your line of thinking, the government should retain majority stake longer and use some of the funds to repay the bailout money directly. This still ignores that the existence of GM versus its non-existence means certain tax revenues, addition to GDP through sales, etc.

  8. There are many more sources. This information is all public knowledge and has been discussed and debated for months. I did not think there was a need for links to issues in debate for months. But I have no problem backing up my facts, and opinions based on facts.

  9. Comment as privately sent to us.

    In doing your calculations don’t forget the dividend that you get from Alcoa and not from GM.

  10. Anon5,

    Thank you for reminding me of that. I hadn’t factored that in. Was too focused on the stock price comparison.

  11. Anon2,

    Actually I was against the Government EVER taking over a private business. I did not want the Government involved at all, I rather would have GM to have gone bankrupt or in the worst case receive a loan.

    A loan that would have a defined length and specific repayment terms – which current ownership of GM does not have. I have yet to find terms that define how, if ever, the “investment” by the Government on our behalf will be repaid – or returned to the taxpayer.

    If GM went under, enterpreneurs (making $250,000 or more) would buy the assests and create several smaller businesses at a cheaper cost that the marketplace wants. That would create jobs, and improve the economy – as opposed to the lumbering giant that is bogged down with union costs and the Health Care Reform that is GM now.

  12. Anon2,

    The comparison of GM and Alcoa is not an investment grade analysis. It is a thought exercise.

    There are many reasons why I find Alcoa a good investment (detailed on the blog and updated since the purchase over a year ago). I can detail many reasons why GM is not a good investment. But the purpose is to compare a Government promoted corporation vesrus a private company. The goal is to see if Government intervention is beneficial – as seen by the interpetation of the marketplace.

    I hope I clarified what is my goal. I also hope everyone follows this and corrects any oversites I may make.

  13. More for the anon that can’t understand political commentary and wants proof of every word ever said.

    car cost – http://www.aolnews.com/surge-desk/article/general-motors-ipo-a-look-back-at-the-bailout-numbers/19724514

    Earmarks – come on. It’s a public debate happening right now. Comments from Senate Majority Leader Reid were on the news just 2 days ago – as was the GOP decision to seek to end earmarks.

    Bush Tax cuts – again this is an on-going public debate. They have not been passed or rejected yet. Democrats (Nancy Pelosi and others) say ending cuts will not hurt small business, Republicans say the opposite. It’s been national news since before the mid-term elections.

    Bonds – I stand corrected. It may not be a literal violation of law – though in placing unions infront of bondholders of GM, which is without dispute, they did violate the spirit of bond law. A bondholder invests because they are supposed to that the lead in repayment before all others as they are a creditor of the company. The GM bailout violated that, however the Government lawyers worded it. But to say in absolute terms violation, I stand corrected.

    Cap & Trade – an on-going discussion for more than a year now. You don’t like the sources, fine. There are others. But I expect you won’t accept my interview with Chesapeake Energy about Cap & Trade either. There are various opinions on how this will eventually filter to the individual investor, and increase cost. The CBO quotes $1600, Heritage Foundation quotes $1500, MIT says http://web.mit.edu/globalchange/www/MITJPSPGC_Rpt146.pdf Works out to about $3,100. Take your pick. I go with the MIT figures passed on to the public, and the experts I’ve spoken to. Which is a double in cost or more.

    Electric car mandate – Government owns 61% of GM. GM moves forward with the $41,000 VOLT, which the marketplace cannot afford nor likes. Senator Reid is set to advance the green car subsidy ($4 billion http://www.thedailybeast.com/blogs-and-stories/2010-07-29/electric-cars-subsidized-by-harry-reid-and-the-senate/

Thank you for lending your voice. We appreciate hearing what you have to say.

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