The S&A Digest: GM's chairman checks in

GM's chairman checks in... On the way to Omaha... Offending both Democrats and Republicans...

It's a short Digest today... because we have another letter from the "chairman and CEO" of GM to share with you. (See it below.) He says GM will file for bankruptcy within the next 12 months...

Goldsmith, Ferris, and Dyson are en route to Omaha today to attend Berkshire Hathaway's annual meeting. We'll hear from them on Monday.

New highs: Sadia (SDA), Valhi (VHI).

In the mailbag... We've managed to offend both the Democrats and the Republicans about equally. Quite frankly, we think that's a terrific accomplishment... maybe our finest work yet. We promise to read your notes, if you send them here: feedback@stansberryresearch.com.

"You say that there is no difference between the Democratic and Republican parties. You are just as wrong on this as you were on global warming, where you have apparently retired from the fray with your tail between your legs. The party difference is a simple one of membership. The Democratic party has a good sprinkling of progressives in it and the Republican has none. If the Democrats win in November then the progressives can get moving to claim the party. There are collateral benefit differences as well, for example, a Democratic win will see the end of the Republicans stuffing right wing judges in the Federal judiciary. I could go on and on, but you see there are real differences between the parties." – Paid-up subscriber Frank Roberts

Porter comment: Oh... I see... you're saying that Republicans aren't "progressive." They don't seek to make the government more useful and responsive to the wants and needs of the mob. They don't want to grow the role of government in society. So...

Republicans would never do something like pass a steel tariff (in 2003), which raises prices on millions of Americans to benefit a dozen steel companies, most of which happened to have been recently taken over by private-equity firms. Republicans, who don't care about the little guy, would never start an entire new federal entitlement program to pay for prescription drugs – a program which will send hundreds of billions of dollars into the coffers of Big Pharma companies. And the Republican leaders behind such a progressive program wouldn't dream of leaving Congress to take high-paying jobs as lobbyists for those same pharma companies that stand to benefit from the dole. Republicans have repeatedly criticized those foolish Clinton attempts to "nation build," where the military is sent to mediate between warring religious sects in godforsaken places like Somalia or Iraq. And Republicans would never dream of spending billions on a small group of military contractors, like... oh, I don't know... the vice president's former company?

We're talking about progressives, right? Republicans would never do these things. They'd never start an entire new federal bureaucracy to handle airport security... or send hundreds of billions of dollars in foreign aid to puppet regimes in Africa... or pardon politically powerful people who have been convicted of crimes... or send U.S. citizens to secret prisons in Eastern Europe and Cuba, in direct violation of the U.S. Constitution and nearly 1,000 years of common law... All these things are far too progressive for Republicans, right?

"I wanted to share with you a bumper sticker that I observed a long time ago in a campground near Crescent City, California: 'When the Republicans are in office, Man oppresses Man; When the Democrats are in office, it's just the opposite.'" – Paid-up subscriber Kurt Schultz

"Porter, I have disagreed with you on your various misguided libertarian rants and off the wall views; but this time, I agree with your accurate analysis of Obama, Hillary, and Bush (who I think is a slightly worse spendthrift). Obama is a hollow politician and empty suit. His 'movement' is finally being unraveled and revealed for what it really is. Why would anyone associate themselves with a racist for twenty years. And by the way, I am black and teach my children to despise both black and white racists." – Paid-up subscriber Bertram Val Crick

"I signed up for your advise on investing, not your political view point. If your financial opinions are as distorted as your politics, perhaps you are not the adviser one should listen to. Please stick to the world of investing and leave the political musings to others. If you really think that Sen. McCain actually knows what he's talking about, or that his ideas are actually good for this country, then you need to throw in the towel and find another line of work." – Paid-up subscriber Leon Miller

"Dave Johnson, you rich snob, you're breaking my heart. I'd love to have your 'problems.' So you pay $250,000 a year in federal taxes. Big deal. Thanks to President Bush's tax cuts, you've been paying substantially less for years now. And here's something I never hear the well-to-do say: You get a 7.5 percent tax cut on social security that the 'common folk' don't get. Every penny of my wages is taxed for social security. Can you say the same? The real problem here, the one you rich folks don't help solve with your mindless rants, are federal deficits fueled by runaway spending. We had balanced budgets under the dumbocrats in the '90s. Bush has failed miserably to do anything but cut taxes. The only reason increased tax rates are even on the table is because the Republicans (I used to be one) have showed absolutely no fiscal responsibility since Bush took office." – Paid-up subscriber Jim T.

"Regarding Dave Johnson's letter. In '95 I figured it all out. I was working for the government. So I retired and have been living quite comfortably and with a fraction of the tax bill ever since." – Paid-up subscriber Hugh McKenney

Letter from the Chairman of GM

By Porter Stansberry

Dear shareholders,

The good news is I can finally see the light at the end of the tunnel.

The bad news is the light I see is shining from the front of a huge freight train. It's heading right for us. And the name of that train is "GM's bankruptcy."

As the chairman and CEO of General Motors, I will go down in history as the executive who bankrupted the greatest industrial company of the 20th century. Even if I quit now, I'll still get the blame. My reputation has no escape. But each year I can hang on to my job, my pension fund grows by millions – no matter what happens to our poor shareholders. Besides, it's clearly not my fault. My hands are tied, as I'll explain.

The larger lesson you should learn from the events now unfolding at GM is a company cannot suffer 40 years of bad decisions, bad ideas, and bad debts and expect to compete with the rest of the world's automakers. And the same thing is true, on an even larger scale, of our nation. It used to be said, "What's good for GM is good for America." But in about a year, when we file for bankruptcy, that motto will be turned around. People will say, "What killed GM is killing America."

As I have told you repeatedly in these letters, what's killing us is a legacy of debts and obligations we cannot possibly repay. Managers of GM now decades in the ground made promises to our workers without any understanding of how expensive those promises would become. The profits we made in the '50s, '60s, and '70s were very much borrowed against our future earnings in the '80s, '90s, and 2000s. And now we simply cannot afford them anymore, nor do we have any pleasant way to repudiate our promises. The only answer is bankruptcy. (The same thing is true, by the way, of all of the social welfare promises the U.S. government has made since the 1930s: There is no real way to pay for Social Security and Medicare without utterly bankrupting the United States.)

Our obligations have made it impossible for us to invest in the capital equipment we need to build more efficient, more reliable, and more comfortable cars. Our aging plants and infrastructure make it impossible for us to compete with our foreign competitors. Have you ridden in a BMW lately? Or the new Honda? Those cars are exceptional – built with new tools to incredibly small design tolerances. We simply cannot build cars approaching that quality anymore. To do so would require $50 billion in new investment – and that's $50 billion we don't have.

In a very real way, our debts are strangling us and killing us, bit by bit, a little each year. They bound us up, causing our muscles of innovation to atrophy since we did not have enough money for new investment. And now these cancerous debts are eating the marrow of our business, sucking our cash reserves away one bad quarter at a time.

Last year, we suffered the biggest annual loss of any carmaker in history – $38 billion. And now we're well on our way to another disastrous year. We lost $3.3 billion in the first quarter, mostly due to losses in our U.S. mortgage business, but also because a strike disrupted our U.S. operations. As you know, we sold 51% of GMAC, our finance company, a few years ago. We should have sold all of it. We "think" it's still worth about $5 billion. But, truth be told, we are eventually going to have to write off the whole thing.

The real problem with our business, though, isn't bad mortgages. Quite simply, we cannot make enough money selling cars to afford the service on our $33 billion debt load. This year we will spend close to $4 billion simply paying interest – not including any principal. That's also not including the estimated $47 billion we owe to fund our retirees' health care. Or the $11 billion we owe in cash pensions. These debts are killing us. And given that every year our competitors produce better cars, using newer tools, it seems extremely unlikely we will ever turn a real profit selling automobiles.

Take the last quarter. We made $1 billion in our overseas operations, where we don't face nearly as much competition as in the United States. These profits, unfortunately, are not nearly big enough to keep us above water. In fact, we lost three times that much money on our North American operations in the last quarter.

The only way to save GM would be to increase our global market share substantially by selling a lot more cars. And yet, every quarter, our global market share declines and our revenues fall. We're now at 12.5% of the global market – below 13% for the first time. And the number of cars we sold in the first quarter fell by 1%.

I think we've finally entered the end stage – the death spiral. Our cash balances are now eroding quickly. We lost more than $3 billion in cash in the first quarter, more than 10% of our total reserve. We now have just more than $20 billion in cash on our balance sheet. Given our current burn rate, I estimate we will declare bankruptcy in a little more than three quarters. We can't operate this business with less than $10 billion in cash. Our suppliers will stop offering us credit, the banks will pull their credit lines, and the whole thing will finally collapse.

At least you'll know it's coming.

Please invest accordingly,

Your Chairman

Regards,

Porter Stansberry

Baltimore, Maryland

May 2, 2008

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