Nothing Succeeds Like a Lack of Success

April 26, 2010  |  

By Charles Payne, CEO & Principal Analyst

It’s beginning to feel like the stock market has answered the challenge that has befuddled mankind from cavemen that discovered the wheel to Blaise Pascal and his roulette wheel. After being up eight straight weeks the Dow Jones Industrial Average has become a perpetual motion machine. I understand that scientists say such a device can’t be made for numerous reasons including the fact it supposedly violates the first and second laws of thermodynamics.

Right now it feels like the market is going to be up everyday no matter what. Last Friday, I wrote about a transition from a market marked by positive rationale to one marked by sobering realities. Well that theory was debunked in about a minute. The afternoon rally was actually the key characteristic of the week. It’s a reflection of edgy pots of money, most of which have missed the rally so they’ve begun to buy in a panic.

There is a ton of money on the sidelines but less than the start of the year, perhaps reflecting a shift into the market. At some point this actually could feed on itself as it appears it did last week. The train is out of the station and every time it speeds up more and more investors rush in so buying begets buying. So, maybe the stock market isn’t a perpetual motion machine since such a machine cannot be powered by outside sources such as gasoline for cars or arm/hand movement for certain types of watches. There is a chance that this rally could be turned down for a perpetual motion machine by the U.S. Patent Office because there is a source of fuel and you can smell it in the air. Fear is in the air; no, not that kind of fear but fear of not making money. It’s not the same as fear of losing something of immense personal value like your life savings but it’s really intense, especially on the heels of actually almost losing your life savings.

Red Light = Green Light

The first known case of someone believing they created a perpetual motion machine is Bhaskara II, the Indian mathematician and astronomer, and his wheel that ran forever.

But the energy fades sooner or later. Financial perpetual machines like Ponzi schemes can last for a long time, but even the most successful crook runs out of luck sooner or later. (Of course it must have helped Madoff and A. Stanford to no end as so many people at the SEC were addicted to pornography they missed and red flags. Hard to catch red flags on Wall Street when you’re busy with the Red Light district on your PC.) So say this isn’t a perpetual motion machine and at some point the market has to stop moving higher, for the moment it’s hard to argue. At the very least the market is on autopilot. Yes, that’s not pie in the sky stuff. The first autopilot was developed at Sperry Corp. in 1912. The first use of autopilot occurred on the JA Moffet oil tanker owned by Standard Oil in 1920.

The combination of the market on auto pilot/perpetual motion higher is sparking buying from people and institutions that have been in cash too long. This is understandable for the former, but sort of embarrassing for the latter. Each time the stock market dips into red numbers that green light for those heretofore fence-sitters turns on. I understand the game and human emotions and in fact, we bet on it in our decision-making process. The hard thing to gauge and predict is when emotional swings peak. You can’t really figure that out from astrology or quant systems. Polls of Main Street help, but often it’s simply the action in the market that is the best tool. Money, it would seem, is coming off the sidelines. The rally has become a perpetual motion machine, defying a bunch of scientific laws and theories, including gravity. If people are okay with developments that reflect strong moves off abysmal lows then I’m going to go with the flow.

But, I will not abandon the law of skepticism especially when it’s backed by facts. Let’s make money but let’s not be fools.

Institutions have been easing out of money market funds at a faster pace than retail investors, lest the narrative be that somehow only retail investors missed the great rally. Moreover, I suspect this trend will hasten and feed on itself as new highs beget more participants, which begets new highs.

Blaming Wall Street Mask Individual Faults

When I was growing up in Harlem there was a prevailing wisdom that even when people did things that were wrong on a universal level somehow it was still the fault of slavery, the white man, or lack of opportunities. If someone snatched a pocketbook it wasn’t their fault. That’s where the nation is going, driven there by the White House’s agenda to make us all less confident and therefore more reliant on the nanny state. When President Obama says General Motors and Chrysler were derailed because of Wall Street I become furious. My ire has nothing to do with Wall Street per se; heck if Wall Street did the right thing for people I could never have started my own company. I become upset because the path of mediocrity is becoming wider and inviting more and more citizens. The ability to evade responsibility and point fingers to others without accepting fault is a recipe for long-term disaster.

So, this weekend President Obama said Wall Street is to blame for the woes of those bailed out automakers. He also said the bailouts worked and these companies are doing better. Yet, they will NOT have to pay back their TARP largess…that bill is being handed over to Goldman Sachs et al. The downhill slide of U.S. automakers began before the President was born. I would say with respect to General Motors when Alfred P. Sloan resigned in 1956 it was all downhill from there, albeit in slow motion, but disasters like this never bloom overnight. On that note, mistakes being made by the government now will take a while to go into full bloom but it’s going to happen unless there are huge changes made, and made immediately. In fact, let’s take a look at GM and see the real culprit behind the failure of what was once among the mightiest of them all.

This is a cautionary tale for anyone that thinks making America a giant welfare state is smart or fair. The downtrodden will have no way out and achievers will be deterred along with being tarred and feathered. If you are looking in a mirror and can’t be honest with yourself the areas you need to fix your personal anchors will only become heavier. This goes beyond denial, however. The finger pointing enables behavior that is against our best interests. I’m overweight and would be lying if I blamed McDonald’s (MCD). Yet, what if the government said we will tax McDonalds and take that money (after our cut) and distribute it to fat people. Well, many fat people would sign the dotted line. And just think their inability to control impulses could be financially rewarded. Talk about having your cake and eating it too. But, would we be doing fat people a favor? Would such a law generate more fat people?

If you think fat people die too soon then encouraging them to be fat or rewarding them for being fat the way GM and Chrysler were rewarded for running terrible businesses means aiding and abating physical harm, even death. I’ve witnessed first hand kids with poor work ethics being coddled and passed along to the next grade despite not having the academic acumen. The further up they are passed the more of a crime in my mind. But, it was never just about passing along kids that didn’t do homework or pass basic exams but telling them over and over it wasn’t their fault because they were born poor or born in the wrong neighborhood, or the wrong color. Instead of being insulted by such patronization many parents jump on the bandwagon, never allowing accountability to play a role.

Of course there was, and is, racial discrimination and it does limit opportunities. School is so much more pleasant in richer neighborhoods. My son has never witnessed a fistfight at school, I witnessed a couple each day at PS 136. My grades were much better than my son’s grades are now. But, there is no doubt many are disadvantaged by things outside of their own control. Yet, in this country we can make up for starting in a hole. U.S. automakers had a head start, they not only led the pack they were the pack for decades. Blaming their demise on the crisis that began in 2008 opens the door for a repeat of behavior that made them like a termite riddled house that crumbled when there was a tremor.

U.S. automakers losing market share was the end result of poor products and service that came from arrogance and complacency. The fate of General Motors and Chrysler was set decades before the current crisis.

Rise and Fall, and Rise and Fall, of GM

On September 16, 1908 GM was founded by William C. Durant who later acquired Buick, Olds, Cadillac, Pontiac, Champion ignition, and AC spark plug. Durant lost control of the company but regained it in 1916. Although many successes followed earnings were never up to snuff. Still, General Motors’ market share grew and the company became a proxy for the entire country. “So goes GM so goes America.” The success came under legendary chairman Alfred P. Sloan, whose innovations included the ladder of success that connected buyers with GM throughout a lifetime by providing car brands aimed at different income levels.

* Chevrolet
* Pontiac
* Oldsmobile
* Buick
* Cadillac

Alfred P. Sloan resigned from General Motors in 1956 and the road became rockier from there.

Throughout the 1960s, General Motors grew and market share remained above 50% while imports were only 7.7%. But the underpinnings were shifting and complacency was beginning to erode the company’s foundation. According to a New York Times article the company began losing customer loyalty in the 1960s “through a series of strategic and cultural missteps”. By 1979, the company employed 618,365 people in the United States but in 1980, the company’s losses mounted to $750.0 million. The company was a giant juggernaut but it wasn’t making money. Something was horribly wrong and it had nothing to do with Wall Street. Fortunes for the company over the next several years resulted in 1988 earnings that topped $4.6 billion on revenue of $123.6 billion. In 1991, the industry lost $4.45 billion.

General Motors’ troubles were not a mystery over the past two decades. The fact is the company had management that lost its way and a union that got too greedy. All the while the rest of the world began catching up quickly. The first foreign threat to American carmakers came from European carmakers whose small cars led to an explosion of tiny cars on the road, which inspired Ralph Nader’s “Unsafe At Any Speed.”

The real challenge has come from Asian automakers that took advantage of the complacency of U.S. players and embedded costs to put products on the road that Americans found more attractive. The stroke of genius was to build these cars in America without union labor taking away the patriot impulse of buyers that may have otherwise settled for inferior products.

Those labor costs were so high in fact that George Will called it a welfare company in an article in May 2005. Pointing out at the time the stock was down 45% over the past year. General Motors needed an infusion of the form of the then largest corporate debt offering in history to pay for the extraordinary pension plan that included small co-pays, no deductibles, and no monthly premiums. At the time, healthcare promises to employees added $1,525 to each car, more than the cost of steel for each. These companies were in a death spiral not unlike the situation in Greece and states like California. I’m sure someone did the math as Internet searches are stacked with cautionary articles about the path U.S. automakers had embarked upon.

Chrysler survived a near-death experience with government bailouts, innovative products, and using the patriotic card. The plan worked, and Chrysler really paid back its loan faster than expected (no financial hanky-panky) and the die was cast. Just as Wall Street knew in the back of its mind the government would make their actions unaccountable so, too, did that thought prevail in Detroit. The latest rounds of bailouts and loans for failed automakers began with the Bush Administration, which forked over $9.0 billion in aid after the elections were over and there was nothing to gain politically. When an outgoing Republican president writes a huge check only to be followed by an even more generous amount of money from the incoming Democratic president there is no doubt the auto industry enjoyed the same lofty status as Wall Street.

Ironically, it’s easier to connect the dots on why Wall Street should be bailed out. Considering the success of foreign automakers operating in the United States, the industry itself wasn’t threatened. Moreover, sales trends at GM and others prove free markets work.

GM Sales Trends (%)

Summary

General Motors was a poorly run company where salaries and benefits were too high for it to be competitive. The U.S. auto industry has changed over the past two decades as work has shifted to right to work states. In the meantime, Ford (F) had the foresight to plan ahead and didn’t need massive amounts of taxpayer funds. I happen to like GM’s new CEO but those commercials were not honest. Moreover, I’m not impressed with a company getting almost $70.0 billion bragging about its ability to survive. How much of that money came from people without jobs or lost homes? The big deal is not to ever buy into the notion that these bailouts work or are good for everyone, that is the public relations campaign under way right now. It stinks. The government shouldn’t pick winners and losers in any industry.

As for the notion General Motors and Chrysler were humming along doing the right thing only to get snared in the Great Recession, it’s just not true. These companies were a wreck (pun intended). The UAW wasn’t a team player. Now the more than 90% of private sector workers not in unions are being sold a bag of goods. Told to hate Goldman Sachs (by no means a nice company) so much we allow the redistribution of our hard earned money and principles. It’s the last thing we should fall for. But, that’s what’s happening. If General Motors is so hot it must pay for its TARP money out of its own pockets. Beyond the whole thing not being fair to taxpayers or competitors, especially Ford, the message to Americans makes the nation weaker. Many people made mistakes. Mistakes are good when we admit them and learn from them.

Everyone sitting at home without a job didn’t get there because of greed on Wall Street. If you allow the President to convince you your own mistakes don’t count then you are doomed to make them again. It’s time for straight honesty, but it’s not going to happen. In the end be honest with yourself or you will find you fortunes linked to the whims of government assistance.

Instead of making personal adjustments that glide you up the ladder of success you can wallow in the valley of despair satisfied with blaming Goldman Sachs for your circumstance.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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