Why assume that GM is failing?

When news anchors go on the air, they are often seen as experts. What they say may be viewed as valid by the unwitting public. There are examples that I'll get into in other postings, but today I want to cover the economic downturn.

In particular, because of pundits' commentaries, General Motors has had to assure the world that bankruptcy is not in its plans. When GM's stock fell to a small fraction of last month's value, people (news anchors among them) began asking if the company would fail.

Arriving at such a question illustrates the lack of understanding that prevails.

Stock prices may have something to do with the health of a company, but just as often, the price of stock is quite unrelated to what the company is doing or not doing.

The stock market is just like any other market. The price of tomatoes can be related to

• the quality of the tomatoes
• the quantity of tomatoes available to be bought (supply)
• the number of folks who want to buy tomatoes (demand)
• how many tomatoes the buyers THINK will be available next week (by looking at weather reports, for example)
• whether the tomatoes from another country have been contaminated with E Coli
• and so forth.

Only one of these reasons has to do with the quality of the tomatoes. The stock market has one huge difference from the tomato market. For the most part, there are no new stocks being sold on any given day in the stock market; there are new tomatoes sold every day.

That's right. In the stock market, people are just buying and selling stuff that has been hanging around for a while. If I own a share of Widgits, Inc. I own 1/1,000,000 of that company – maybe a set of screwdrivers. If I sell the stock to my neighbor, then he owns the same 1/1,000,000 – the screwdrivers -- of the company that I previously owned. The company hasn't gained or lost any money; it hasn't changed at all; the owner of a fraction of the company has changed.

There is no question that the stock values of many financial institutions (banks, mortgage lenders,...) have fallen because the companies are truly not worth today what people a month ago thought they were worth. The quality has dropped, and people don't want to own part of those companies any more. A lot of folks want to sell, and not many want to buy; so the price falls.

To be entirely thorough, if people are buying fewer cars because they have less money coming in from their ownership of a bank or because they were laid off by the bank, then GM is not paying as much to stockholders in the form of dividends, and the stock would not be worth as much.

On the other hand, GM, as an example of a company whose stock price has plummeted, is fundamentally no different today from what it was a month ago. What has changed is people's general perception of the stock market. Perhaps GM isn't as good at making and selling cars as its foreign competitors, but there is no reason to think that it's 31% less competitive today than it was yesterday.

I wish a) I were not retirement age so that I had more years to wait, and b) I had enough money, because I'd be scarfing up stock in companies that make stuff.