Consumer Reports: GM and GDP land with a dull thud
By Adam Lass
In this article
GM is expected to post a 3% sales loss in May on top of April's 9.5% loss.
The Commerce Dept. has halved its estimate for Q1 GDP growth.
The last time growth was this slow, the Dow Industrials were approximately half current value.
Consumer Reports: GM and GDP land with a dull thud
Thump, thump, thump. Can you hear it? It's the sound of “other shoes” dropping.
For months, I have warned any and all who would listen that energy costs were slowly robbing Mom and Dad, and by extension, any companies dependent on Mom and Dad's largesse.
Not all at once, mind you, because that's not how it works. 50% increases in the cost of gasoline and electricity don't kill you in a day, a week or even a month. But stack up 100 bucks here and 100 bucks there, month after month, and now you've got to make some choices.
As the money slowly drains out of retail, we've heard all sorts of excuses: “January was cold, February was short, March saw a funny change in daylight-savings time and it rained in April.”
Well finally someone has stepped up and told it like it is: “We continue to expect a soft sales environment on the back of housing weakness, mixed employment data and higher gas prices.” -- Goldman Sachs' Robert Barry (via MarketWatch.com)
If you ask a real Detroit “homer,” he might tell you that GM will see a 1% return after April's 9.5% decline in light vehicle sales. Less impressionable minds are calling for an additional 3% loss over all, with most of the decline hitting the one spot on the sales floor that makes GM any green whatsoever: Light trucks and SUVs.
Tack on the additional billion GM will have to bury somewhere in the books as a result of its ongoing exposure to bankrupt parts dealer Delphi, and the shoes are tumbling down all over the place.
Needless to say, GM's share price is once again headed back to its 2007 lows at or around $28.86. But will it stop there? They should be so lucky! WaveStrength analysis indicates that we will see $25 shortly, and $20 is not out of the picture at all.
WOW readers should note that their GM puts are currently sporting a delta of 0.41, so a share price drop to $25 would add some 51%. A move to $20 would bump the calls up 102%.
But the pain is not isolated to just ailing Detroit steel. Noooo, it is starting to spread throughout the economy. Yesterday Wall Street cheered the reiteration of Ben Bernanke's prayer-driven FOMC statement with a 119-point rally.
Not that they heard anything new. Rather, the Fed released the recent FOMC meeting's notes, wherein it stated that things were really rather tepid, but might, if we are really lucky, turn around. And in the meantime, the Fed would do nothing to tip an increasingly unseaworthy boat.
Well today we found out just how little headway that boat is making, when the bean counters at Commerce conceded that their estimates for Q1 had been off a bit. Actually, they were wrong by half.
We are currently growing at an annual pace of 0.6%. In terms of actual “progress,” the amount of biz that Americans did in the first quarter of 2007 grew just over .1%. This is the slowest pace since 2002, when the Dow was approximately half of today's reading.
Apologists claim that GDP is a trailing indicator. Much like when a bear running after you is a trailing predator. Of course you don't have to run faster than the bear. Just faster than the guy running next to you.
In plainer English, that means carrying a few puts in your portfolio, such as the aforementioned GM contracts, or the El Paso calls that have made WOW readers 93% in two odd weeks.
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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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