I was a big General Motors fan until its March 2009 bailout. I own a 2005 Suburban 1500 LT that I bought brand new. It now has over 125,000 miles on the odometer.
The car’s been great, but I cannot abide by the wildly preferential treatment the company got in the bailout, which included a $50 billion taxpayer “investment” when no sensible person would do such a thing… the ability to write off loans… the reprioritizing of creditors to put (unsecured) union claims ahead of (secured) bondholders… and a $30 billion tax credit.
With that being said, I recognize that the company is now in much better shape than it was in back then. Of course, if I could write off my debt and get $50 billion, I’d be OK too.
But is the company zooming to the moon? Its sales and recent marketing approach seem to indicate it is… but when I look at those numbers, I just see a warning sign…
When Is a Car Officially Sold?
GM keeps touting its improved sales, but there is a back story worth noting that begins with a question…”Is a car sold when it gets into the dealer’s hands or when it is actually transferred to the buyer?”
Most reasonable people would say the latter. But GM has been counting sales when cars are sent to dealer lots.
OK. That’s not a big deal… if the number of vehicles on dealer lots remained constant. In that case, a car sent to a dealer simply replaces one sold to a customer.
Of course, that’s not how it’s working out. Instead, the number of cars on the lots of GM dealers is growing and has increased by almost 300,000 in the last two and a half years.
In fact, in various months since 2009, the number of cars in GM’s “channels” were:
438,000 November 2009
536,000 November 2010
623,000 November 2011
701,000 June 2012
This activity – counting inventory as sold when it is simply sitting on the shelf or lot of your retail locations – is called “channel stuffing.” And it turns out that GM is pretty good at it.
While it might make the company look better in the short run, this inventive way of counting sales can also make some people very angry, like shareholders who rely on these sales figures.
As it turns out, several investors who purchased GM’s “new” stock in the 2010 IPO are now suing the company for engaging in channel stuffing to make sales numbers look better. I guess they’re not fans of the practice either…
All of this highlights the precarious position of what has been hailed as one of the brightest spots in the U.S. economy. Auto sales are supposed to be telling us that the consumer is back; he is ready to spend big and ready to borrow to do it. GM’s channel stuffing reveals a different reality.
There is no question that auto sales have rebounded from the awful lows of 2009 and 2010, but to believe they’ll zoom to the moon from here is just wishful thinking. While economic activity rarely comes to a complete stop, we do anticipate a protracted season of weak economics as consumers continue to repair and improve their financial position.
This is where the fight starts…
P.S. All of this is to say that you should never blindly trust the numbers that corporations or the government put out there. We certainly don’t. We look behind the numbers to see how much is fact and how much is fantasy because basing your investment decisions on anything but the former is a fool’s game. And we’re not fools. Nor are you. That’s why we’ve created this video for you to show you what’s really going on.
Ahead of the Curve with Adam O’Dell
GM’s Channel Stuffing Cost Its Share Price 40%
In response to General Motors’ slight-of-hand tactics, a class-action suit was filed against the company on June 29, 2012. But news of the channel-stuffing practices Rodney described above surfaced over a year ago, in the first week of July 2011.