As GM Goes, So Goes the Country

I have heard this comment for years. General Motors is considered a bellwether company. If you want to know how the overall economy is doing, just look at GM.

Is it accurate? I dont know. I believe there have been times that the economy and General Motors tracked each other pretty well. With the recent news about GM, lets hope that rule no longer applies.

For one thing, General Motors has found itself in a bit of a fix with regard to each pension obligations. The company reported in 2004 that total obligations were in excess of $57 billion. At the time the total market capitalization of GM was only $17 billion.

Additionally GM is saddled with $300 billion in debt. In fact in 2003, GM had to sell $17.6 billion in bonds just to meet pension obligations. No wonder Standard and Poors reduced GMs bond rating to junk status. Who would want to own stock in a company with those kinds of outstanding obligations? In fact, who would want to work for a company in that condition?

Now yesterday, Delphi Corp. CEO Steve Miller, while announcing that his company was declaring bankruptcy warned that if GM could not renegotiate contracts with the company's unions, it would follow in Delphi's footsteps. Bankrupt General Motors...bankrupt United States. You read it here.

For those of you who keep track of the economic indicators that the government releases, yesterday the BLS announced CPI numbers for September. There are two numbers that they release and only one is important. The overall CPI for the year ending September was 4.7%.

The core CPI, which excludes fuel and food costs, actually shows a decrease. From my previous posts you know what I think of the core CPI. It's a waste of time. Where are the people that do not spend money every month on food and fuel? My point exactly.

In a recent article, Bill King, author of the "King Report," at M. Ramsey King Securitites provided evidence of how the government manipulates the CPI data. The Bank of America has a fairly accurate breakdown of the typical monthly expenses incurred by typical Americans. What Bank of America found is that the BLS alters the percentage mix of those monthly expenses. For example, healthcare expenses typically represent about 17% of our monthly expenditures, but the BLS only weights healthcare costs at 6%. In this way, the huge increase in insurance premiums is lessened in the CPI calculations.

Using this information, Bill King believes that instead of the annual inflation numbers coming in around 3%, they are probably more like 6%.

Now if you plug 6% into the governments Gross Domestic Product calculations, you will find that our economy is only growing at about 1% annually. Not exactly robust growth.

All of this is further proof that our economy is faltering and when you put all of the pieces together, you arrive at a market risk assessment that is extreme at this point in time. When will it all come tumbling down? No one knows. There is no one who can time the market or the economy, but with the risk assessment as high as it is, we have no doubt that it will happen.

That is why it is so important to prepare yourself financially for tough times.

I have written a special report entitled, "5 Things You Must Do Now to Protect Your Investments." To get your free copy, send a blank email to investoralert@freefollowup.com.