Why Handouts Might Not Be a Bright Idea

by George Leong, B. Comm.

The rally has been impressive, with the major indices up over 20% since touching levels not seen since around 1995. Yet there are still questions regarding the sustainability of this rally and whether it is merely a bear market rally. I’m not sure, but given the continued problems in the world economies and in the U.S., I remain unconvinced that this rally has staying power. Yet a bottom may be in place. We could see stocks trade in a sideways channel if major indices cannot break higher. There are bullish “V” formations on the charts, but unless we see strong upward moves with higher volume, there will be risk.

Not only does President Obama have to deal with Wall Street and the banks, but also there are other sectors of the economy that are failing and will likely require added government involvement to try to correct. The reality is that the government is starting to get more involved in the running of certain sectors because they are lending funds to these areas.

On Monday, there were renewed fears of a potential bankruptcy at troubled General Motors Corporation (NYSE/GM). The government rejected the auto plans of GM and Chrysler and will move to set its own agenda in how the U.S. auto sector should run. Part of the change was the resignation (or firing) of GM’s CEO due to governmental pressure. It is clear that there are more problems brewing in the auto sector that could require more federal assistance or the government may allow bankruptcy to set in. Under bankruptcy, like what the airline sector went through, GM could restructure, get rid of negative debt, and come out stronger. But these are numerous assumptions here and we are talking about a sector that is in the dumps and in which consumers do not want to spend money.

General Motors, for instance, lost a whopping $9.6 billion in its fourth quarter and burned through $6.2 billion of taxpayers’ money. The reality is that consumers are staying away from auto showrooms. The issue is that GM has proposed a plan to make its operations viable, but it is based on numerous assumptions that may or may not pan out. The only thing we know is that taxpayers will have to continue to bail out automakers unless they are allowed to file for bankruptcy and reorganize, which in itself may not be a good idea, as it could erode the confidence of potential buyers.

Also at risk are the millions of auto jobs, along with the negative impact on the auto supply sector, which has also asked for government help. The sad reality is that the government cannot help every sector that is in trouble. Next we could see the retail sector seeking help. The deficit will run in the trillions and could swell even more. As a government, you simply cannot just hand out money. The recent weak action of U.S. debt is a concern, as the money loaned has to come from somewhere — you cannot simply go out and print money. Mind you, in Europe, the idea to print extra money was floated around.

Times are tough for all of us, but we cannot just go to the government and get handouts. Perhaps corporate America should do (or not do) the same.