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GM's Illusion


Much has to do with change and the tendency for people to be optimistic.


We are pretty sure that Mr. Kerkorian's ultimate intentions for General Motors (GM) is to simply get the stock price up so he can sell it. He doesn't see some long term value that can be unlocked by restructuring the company that the rest of the market is missing. Rather, he understands why people buy stocks (driving short term stock prices) and sees a fluid situation that can be manipulated because of a company bloated with costs. Why do I say this?

It has to do with perception. Burston-Marstellar, a public relations firm did a study that confirms that 75% of retail investors buy a stock because "they like management." Now how do they "know" management? Have they met them? Do they look at long term or short term results?

Much has to do with change and the tendency for people to be optimistic. Mr. Kerkorian knows that if he can reduce the big negative (costs) and change management (new management has to be at least better than old management, right?), he can get people to buy into a "turn-around" story and get them to buy the stock.

Some high profile "talkers" on Wall Street are buying into this story and helping him.

I talked about Mr. Carlos Ghosn before. He is a typical slash and burn executive, cutting fat and unprofitable divisions at Renault and Nissan. They are now much smaller companies, but also slightly profitable. That is the easy part. Taking those small companies and making them grow again in a profitable way is a much more difficult and riskier proposition. In fact, recent performance of those companies is showing just how difficult that is and that Mr. Ghosn has no special talent for it (not that anyone really does). For his own part, Mr. Ghosn is intelligently deflecting this fact by wanting to take on another slash and burn situation.

It is unimportant that Mr. Ghosn probably cannot cut costs at GM better than current management can. It is only important for Mr. Kerkorian to get the market to believe that he can and that he can also get the company to grow again profitably. An illusion in our opinion.

Mr. Kerkorian merely wants people to "like" the new management better than the old.

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Position in GM

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