The Stock Market Has Spoken – Even Government’s Biggest Bailout Success is a Failure

Fact and fiction are often separated by nothing more than a thin line. Some consider GM as a government bailout success story and the performance of the Consumer Discretionary Select Sector SPDR (XLY) seems to suggest that this claim is legit. What does the final authority – the stock market – say?

General Motors is once again number one in car sales worldwide. For this and other reasons GM is often heralded as the biggest success story of government bailouts. Is that really so?

According to a September 23, 2010 Wall Street Journal article, the U.S. must sell GM shares at $133.78 to fully recoup the $49.5 billion it spent to rescue the auto maker. The United States owns about one third of General Motors.

Shares of General Motors are currently trading at $22.50, 35% below its IPO price. GM saw a 41% profit decline in the last quarter. Production for the Chevy Volt, anointed to be the car maker’s financial savior a couple years ago, is being suspended due to poor sales.

One Step Forward and Two Steps Back

In an effort to make GM cars more attractive, GM is making it easier to own its product. How? With “attractive” loans, otherwise known as subprime loans.

According to an auto report published by Standard & Poor’s, the weighted average FICO scores for GM owners is only 579. 78% of all GM loans are for more than 5-years and the average loan-to-value on new cars is 110% (the average loan-to-value on used cars is 127%).

Haven’t we seen this movie before? Isn’t that what contributed to GM’s bankruptcy in 2009? Isn’t that what caused the real estate collapse in 2005?

Consumer Anomalies

The Consumer Discretionary Select Sector SPDR (XLY) is trading at an all-time high while consumer confidence shows little confidence.

It’s ironic that the consumer discretionary sector trades at all-time highs even though consumers didn’t get bailed out. The recipient of literally tons of bailout money on the other hand, the financial sector represented by the Financial Select Sector SPDR (XLF), trades 60% below its all-time high.

What’s the moral of the story?

1) The government’s definition of success is likely different from the common sense definition of success.

2) The government can give money to the financial sector. Financial conglomerates turn around and buy consumer discretionary stocks and even though American’s are hurting it looks like consumers are buying. It’s a win/win scenario for everyone but the consumer.
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