Merrill Lynch Downgrades GM from Outperform To Sell. More Importantly, Merrill Cut By Oppenheimer

The chart says it all. Need I say more? Can Merrill get out of its own way these days? GM has dropped 75% since 2007 and now we get a sell rating? If I were a speculator, I would be looking to start accumulating GM between $8-10. GM was around $11 at the time of the downgrade. What was Merrill thinking when pickup truck sales were tanking and we were writing about it back in the fall of 2006? Isn't the idea to buy low and sell high? To not see this coming is to not understand the basic fact that GM gets disproportionate profits from home financing and pickup truck sales. It is utterly ridiculous to be downgrading GM now. A monkey throwing darts at a board could have more effectively managed recommendations on GM's shares and outlook.

For a speculator, there is some measurable reason to believe GM will not go bankrupt. Merrill states GM may need another $15 billion. Given their call on the stock, I have no confidence anyone at Merrill understands anything about what is going on at GM. More appropriately, I have no confidence anyone at Merrill knows what's going on inside of Merrill.

The financial system is so weak right now that GM creditors may not be able to absorb a GM bankruptcy let alone the impact to the economy. I am confident GM would clearly articulate their intent to file well in advance, giving Washington, private investors or creditors a chance to respond. I am even more confident many eyes of government oversight are focused on GM. A GM bankruptcy could very well have as significant of an impact on the financial system as a major bank failure. Especially given Ford and GM are two of the largest names in the wild and woolly CDO markets. For these reasons speculators have some reasonable rationale to soon start accumulating shares while Merrill is now issuing a sell signal.

While today's management at GM cannot be blamed for mistakes made fifteen or thirty years ago, there is no doubt that GM is still an insular culture that is just now awakening to the reality that it must finally change. This cycle will likely cement that change and cultural shift as crisis dramatically assists in change. GM management has focused on the rank and file as the problem when the reality is it has been exclusively a GM management issue. In a great act of the student teaching the master, Toyota's management and methods have been used at GM's Fremont plant for decades to produce world class products using GM employees. Work rules and unions are simply market-based responses to situations where employees have no voice and corporate management abuses its authority. After decades of blaming everyone but themselves, GM management finally seems to generally get it. As I wrote in one of my early GM posts, they just weren't getting it fast enough but I am confident they now get it 'fast enough'.

Many signs out of GM are very positive yet some remain negative. A few negatives were its foray into financial services beyond vehicle financing and management's current perspective that emerging markets will help offset underperformance in North America. The first one has been addressed. GM jettisoned half of that business to Chrysler's owner Cerberus, although there remains substantial liability. I have little doubt GM will ultimately jettison all of that business sans auto financing. On the topic of emerging markets, they will most assuredly be wrong. Growth in emerging markets has allowed them to be far too lazy in responding to market demands in North America. For that they have been paying a serious price. Ultimately, the burden of past mistakes is now what most immediately threatens GM.

Isn't it ironic that many American prognosticators like to consider our markets more responsive yet GM and Ford's global operations are substantially more customer focused and innovative? Most likely because they are far removed from the gargantuan beast of bureaucracy residing in Detroit. The same reason NUMMI is more responsive. Both cultures are finally moving rapidly to take advantage of their international operations by adopting some of the world's finest automotive designs into the North American market. Ford has announced they are accelerating that program with at least four high volume, fuel efficient products slated for introduction here. Doing so will very likely offset SUV and pickup truck sales losses by a wide margin. Although, profits per vehicle will also be less.

My point is that GM and Ford have been transforming their businesses over the past handful of years and those predicting their death are missing that very fact. Those people are still living through the past mistakes so chronically prevalent at these companies. I am not making light of the current situation but we are seeing a resurgence in competitiveness and focus at these companies regardless of their stock prices or weak fundamentals.