Automaker Investing: General Motors is Ready to Throw in the Towel
By Adam Lass
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In this Article:
Domestic auto sales are down 14%
GM is attempting to clear out inventory with steep rebates and 0% financing
As profits fail, GM’s stock price will dive
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Automaker Investing: General Motors is ready to throw in the towel
General Motors (GM: NYSE) is caught between a rock and a hard place. Plainly put: Groceries are up 20% and domestic auto sales down 14%.
American Moms and Dads are faced with a dramatic choice. They can buy a new car or feed the family. And that choice is only going to get worse as long-threatened electricity rate hikes as high as 50%, 60, even 70% arrive along with the summer cooling season.
Suddenly the idea of driving the old clunker (regardless of its lousy gas mileage) another two, four or even six months becomes increasingly attractive. And this is putting an enormous whole in Detroit’s bottom line.
Automaker Investing: Can this ailing giant stand another hit?
In yet another desperate attempt to tease buyers back to the showrooms, GM is resorting once again to steep incentives including either $1,500 rebates or interest free financing. The catch: Even if this does succeed in clearing out burgeoning inventory overages, it will undercut profits in either GM’s manufacturing division or its banking unit, the already beleaguered GMAC.
GM has lost already lost more than $12 billion over the past two years, as high labor costs and slumping sales of profitable trucks and sport utility vehicles chew up its bottom line. But until recently GMAC has been its one shining star. They may lose a dollar on every sale, but they usually have been able to make it up on financing fees.
Can GMAC afford to take this hit? GM Vice Chairman Bob Lutz has already conceded that he expects it will feel the impact of the stress on the housing finance market: “The market as a whole has been a little weakish. That has come as a result of the housing market problems and the mortgage industry meltdown. A lot of people are finding themselves in a position of reduced affordability and that has had an impact, not just on us, but across the industry."
Automaker Investing: GM crosses its line in the sand
No wonder GM’s stock chart looks so miserable. At S29.55, share price is currently flirting with its very last support node prior to a sizable drop. This is the sort of Technical Analysis a grade-schooler can perform with a thick black crayon.
What that grade-schooler would miss is GM’s plunging corollary indicators:
- Both the 11-day and 51-day moving averages have crossed below the 211-day average,
- Momentum is currently -1.42,
- And MACD’s fast moving leading line has crossed under its slower moving lagging line, indicating that a corner has indeed been turned.
What lurks around that corner is ugly indeed: We can expect share price to drop$10 as it seeks support at its 52-week lows between $18.47 and $19.41. This will represent an additional 38% loss piled on top of the 19% losses investors have already “enjoyed.”
The last time GM groveled at these levels, bankruptcy rumors ran wild. I can’t think of a better short candidate right now. Even better, a properly selected put option stands to double a buyers investment in short order!
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength’s proprietary analysis system, Adam’s expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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