(GM) Archives

Pulling the Ripcord on GM

Ouch. To get snake bit twice in two days hurts. But three times?

I thought that when the General Motors (GM) ignition recall was announced last week, it was a nice entry point on the long side. I was right for at least a whole day.

This morning news hit that there would be a congressional investigation of GM?s handling of the issue. Usually these are no big deal, go nowhere, and have little impact on the stock. But then we learned that prosecutors in New York State were planning a criminal investigation of the company, as are other states. That is a big deal.

This all happened against a backdrop of deteriorating economic news from China and endless, frightful rumors from the Ukraine. I sailed right into a perfect storm with this trade.

If you are active in the markets as I, this kind of out of the blue flock of black swans is inevitable. It is a good rule of thumb that when the wheels fall off, cut your capital loss to 3%. That?s why I issued my stop loss Trade Alert to bail on the position.

That way you live to fight another day, as I plan to do.

Sometimes They Bite

March 12, 2014/by Mad Hedge Fund Trader

The Market Leadership Change Has Begun

Newsletter

Owners of technology (XLK) and health care stocks (XLV) have certainly had a great year.

Except for the round of profit taking that did a quick hit and run in January, these two groups have been moving from strength to strength, punching through to multiyear highs.

That is, until last week.

Starting with the Ukraine induced plunge a week ago, these two leadership groups have started moving in a rather arthritic fashion, substantially underperforming the S&P 500 (SPY). It is all unfamiliar territory for these golden boys.

You also see this in the broader indexes, with NASDAQ starting to trail the main market for the first time in ages. This is why Mad Day Trader Jim Parker shot out Alerts to buy protective puts in the (QQQ) with a one week view.

Is the bull market over? Should you sell everything and immediately go into cash? Is it time to go hide under your bed?

I don?t think so.

All we are seeing is a long awaited leadership change in the market. Tech and health care will throttle back from their torrid pace. It doesn?t mean that these sectors are now to be given up for dead. You should wallpaper your spare bathroom with high tech share certificates (as I once did with my Japanese equity warrants after their crash). They just need a rest. This is why I skipped Apple (AAPL) in my latest round of ?RISK ON? Trade Alerts.

In the meantime, financial stocks (XLF) have moved to the fore to grab the baton after a two-month rest of their own. This is why I sent you Trade Alerts last week to buy Bank of America (BAC), Goldman Sachs (GS), and General Motors (GM).

A shift like this makes all the sense in the world. Bonds (TLT) were great performers in 2014 until a week ago, when they double topped on the charts at $109. That was the logic behind sending you my Trade Alert to sell short bonds.

When bonds fall, interest rates rise, some 20 basis points on the ten year Treasury bond in a mere five days. Who does well when rates rise? Banks, which can now charge more for their loans while the cost of funds, the deposit rates you earn, are still close to zero. That widens bank profit margins, increasing profits. The technical term for this, which you will hear about on TV, is the ?steepening of the yield curve.? Bottom line: buy bank stocks.

They could rise a lot. If Treasury yields back all the way up to 3.05% and the (TLT) revisits its $101 low, the bank shares could go on a real tear. Jim Parker?s medium term target for (BAC) is $23, up a robust 30% from here.

I already have written up a Trade Alert to pick up another bank, JP Morgan (JPM). But I will sit on it until I can catch a dip in the share price, even a piddling one.

And what about the autos? The message shouted out as loud and clear by the red-hot February nonfarm payroll print of 175,000 is that the economy is stronger than anyone thinks. This is an out there view, which I have been arguing vociferously since the summer.

The ferocious winter will no doubt cost retailers some clothing sales. No one is looking to buy a new winter coat in March. Year on year, Chicago has gone from six inches to an astounding seven feet of snow, and I?m told that everyone there is in an unspeakably foul mood, throwing empty bear cans at the TV set when the weather man appears.

This is not so for the auto industry. If buyers couldn?t find their local dealers under the snow, they will return during fairer climes with a check to take advantage of record low interest rates. At the end of the day, buying a car on dealer credit, or a lease, is a nice way to indirectly short the bond market, which we all know, is now in a new 30-year bear market.

Despite the endless blizzards that kept much of the east buried this year, the auto sales figures have held up surprisingly well. The industry is now running at a 15.7 million unit per year annualized rate, up from the 9 million unit trough seen in 2009.

It all sets up a nice upside surprise in carmaker profits after the spring thaw. You want to go out and purchase the entire sector, including General Motors (GM), Ford (F), and all of the subsidiary parts suppliers.

But Which One is On Sale?

March 10, 2014/by Mad Hedge Fund Trader

An Evening With ?Government Motors?

Diary, Newsletter

Long-term readers of this letter are well aware of my antipathy towards General Motors (GM). For decades, the company turned a deaf ear to customer complaints about shoddy, uncompetitive products, arcane management practices, entitled dealers, and a totally inward looking view of the world that was rapidly globalizing. It was like watching a close friend kill himself through chronic alcoholism.

During this time, Japan?s share of the US car market rose from 1% to 42%. The only surprise when the inevitable bankruptcy came was that it took so long. This was traumatic for me personally, since for the first 30 years of my life General Motors was the largest company in the world. Their elegant headquarters building in Detroit was widely viewed as the high temple of capitalism. I was raised to believe that what was good for GM was good for the country. Oops!

I opposed the bailout because it interfered with creative destruction, something America does better than anyone else, and gives us a huge competitive advantage in the international marketplace. Probably 10% of the listed companies in Japan are zombies that should have been killed off 20 years ago. Without GM a large part of the US car industry would have moved to California and gone hybrid or electric.

When an opportunity arose to spend a few hours with the new CEO, Dan Akerson, I gratefully accepted. After all, he wasn?t responsible for past sins, and I thought I might gain some insights into the new GM. Besides, he was a native of the Golden State and a graduate in nuclear engineering from the Naval Academy at Annapolis and the London School of Economics. How bad could he be?

When I shook hands, I remarked that his lapel pin looked like the hood ornament on my dad?s old car, a Buick Oldsmobile. He noticeably winced. So to give the guy a break, I asked him about the company?s outlook.

Last year was the best in the 104-year history of the company. It is now the world?s largest car company, with the biggest market share. The 40-mpg Chevy Cruze is the number one selling sub compact in the US. GM competed in no less than 117 countries, and was a leader in the fastest growing emerging market, China.

I asked how a private equity guy from the Carlyle Group was fitting in on the GM board. He responded that all of the Big Three Detroit automakers were being run by ?non-car guys? now, and they generated profits for the first time in 20 years. However, it was not without its culture clashes. When he publicly admitted that he believed in global warming, he was severely chastised by other board members. He wasn?t following the official playbook.

When I started carping about the bailout, he cut me right off at the knees. Liquidation would have been a deathblow for the Midwestern economy, killing 1 million jobs, and saddling the government with $23 billion in pension fund obligations. It also would have deprived the Treasury Department of $135 billion in annual tax revenues. It was inevitable that in the last election year the company became a political punching bag. Akerson said that he was still a Republican, but just.

GM?s Chevy Volt is so efficient, running off a 16kWh lithium ion battery charge for the first 25-50 miles, that many are still driving around with the original tank of gas they were delivered with a year ago. Extreme crash testing by the government and the bad press that followed forced a relaunch of the brand. Despite this, I often get emails from readers saying they love the car.

The summer production halt says more about GM?s more efficient inventory management than it does about the hybrid car. GM?s recent investment in California based Envia Systems should succeed in increasing battery energy densities threefold.

However the Volt is just a bridge technology to the Holy Grail, hydrogen fuel cell powered cars, which will start to go mainstream in four years. These cars burn hydrogen, emit water, and cost about $300,000 a unit to produce now. By 2017, GM hopes to make it available as a $30,000 option for the Chevy Aveo.

Another bridge technology will be natural gas powered conventional piston engines. These take advantage of the new glut of this simple molecule and its 80% price discount per BTU compared to gasoline. The company announced a dual gas tank pickup truck that can use either gasoline or compressed gas. Cheap compressors that enable home gas refueling are also on the horizon. Fleet sales will be the initial target.

Massive overcapacity in Europe will continue to be a huge headache for the global industry. There are just too many carmakers there, with Germany, England, Italy, France, and Sweden each carrying multiple manufacturers. Governments would rather bail them out to save jobs and protect entrenched unions than allow market forces to work their magic. GM lost $700 million on its European operations last year, and Akerson doesn?t see that improving now that the continent is clearly moving into recession.

I asked if GM stock was cheap, given the dismal performance since the IPO. It is still just above the $33/share launch price. Now that the government has unloaded its shareholding the way for further appreciation should be clear. Also, the old bondholders still owned substantial numbers of shares and were selling into every rally. That is hardly a ringing endorsement.

Akerson said that a cultural change had been crucial in the revival of the new GM. Last year, the Feds announced an increase in mileage standards from 25 to 55 mpg by 2025. Instead of lawyering up for a prolonged fight to dilute or eliminate the new rules, as it might have done in the past, it is working with the appropriate agencies to meet these targets.

Finally, I asked Akerson what went through his head when the top job at GM was offered him at the height of the crisis. Were they crazy, insane, delusional, or all the above? He confessed that it offered him the management challenge of a generation and that he had to rise to it.

Spoken like a true Annapolis man.

Shifting GM from This?.

To This?.

And This

September 3, 2013/by Mad Hedge Fund Trader

The Problem With GM

Diary, Newsletter

Like a heroin addict who just can?t wean himself off of the good stuff, General Motors is going back into subprime lending to finance new auto sales. Although the much-diminished company has made great strides at reforming its errant ways, they still do not understand their fundamental problem.

My dad was a lifetime GM customer, religiously buying a new Oldsmobile every five years. Once he even flew to Detroit for a factory tour and drove his new prize all the way home to California.

Thirty years ago, I told him he was doing GM no favors buying their cars, and the only way to force them to improve a tragically deteriorating product was to buy better-made German and Japanese vehicles. This was right after the State of California forced automakers to install seatbelts on new cars. Airbags and ABS brake systems were still years away. His response, ?I didn?t fight the Japanese for four years so I could buy their cars? (He was a Marine at Guadalcanal).

GM?s problem is that my Dad passed away 11 years ago. Of the original 17 million WWII veterans, 1,500 a day are dying, and there are less than million left. The majority of those don?t drive anymore.

All of them loved Detroit because it built great Jeeps, Sherman tanks, and halftracks that brought them home from harm?s way. Their kids prefer German, Japanese, Italian, Korean, and soon, Chinese and Indian vehicles. It is no coincidence that GM?s problems really accelerated with the passing of the ?Greatest Generation.?

During the last 35 years, when Japan?s share of the US car market climbed from 1% to 40%, I begged GM to mend their ways and build a quality, price competitive product that Americans wanted to buy. They answer was always the same: ?Nobody can tell GM how to build cars.? A more inbred culture you could not imagine. Whenever you see management constantly agreeing with each other on everything, run a mile. Maybe someone should have told them.

Today, the company?s only real hope is that young, upwardly mobile Chinese continue to buy their low end cars in large numbers. Over the last decade, GM has boosted the number of dealerships in the capital city from seven to 27, while closing hundreds of rural dealerships in the US. The problem is that the next time you need a tune up for you Caddy, you may have to drive to Beijing to get it, and the owners manual will be in Mandarin.

June 21, 2013/by Mad Hedge Fund Trader

Tesla Takes Off the Gloves

Diary, Newsletter

Tesla (TSLA) CEO, Elon Musk, has taken off the gloves and is offering an innovative new hybrid lease that promises to bring in thousands of new buyers of his revolutionary, all electric S-1 sedan.

The package eliminates the downside risk that concerned prospective customers about the resale value of their cars down the road. Under the program, Tesla will buy back your car at 50% of the purchase price after 36-39 months. This equates to a rate of depreciation that is on par with other premium, high-end vehicles, like Mercedes, Porsche, and Jaguar.

Assuming that you buy the 85 kWh, 270 miles range S-1 for $79,900, this works out to a monthly payment of $1,025, also in line with the market. Tesla people tell me that since the plan was announced, 90% of the buyers have opted for the lease option. Many are actual cash buyers who are placing the maximum $50,000 down with the intention to pay off the $30,000 balance in six months, just to get the free put option on the vehicle.

Tesla is also moving full steam ahead with its national supercharger network, which will enable electric car owners to drive coast to coast. Only 45 minutes is required to obtain a full charge. Just last night, my S-1 upgraded itself online and I was presented with new superchargers in Gilroy and Bakersfield, California. I can now make it down to San Diego.

Elon has promised to take his family on such an expedition as soon as the infrastructure is in place some time next year. I am considering my own trip from San Francisco to Chicago, which according to MapQuest, I could do in 30 hours. After all, it will be free, less the investment of my own time at the wheel, and the wear and tear on the tires.

When I was a teenager during the 1960?s, I hitchhiked from the West to the East coast more than 30 times. I used to race my younger brother from Los Angeles to New York, who finally won with a record time of 49 hours. I met a lot of strange people in those days. Once, I was picked up in Texas by a nervous, chain-smoking woman driving a souped up Dodge Dart fleeing a violent husband, seeking refuge in California. She drove like a bat out of hell the entire way, and we made the Golden State in record time. It?s funny, the things you remember.

A drive across the Great American Desert can have a cleansing, almost rejuvenating effect, as long as you don?t mind the country western music on the radio. The last time I did this was during the eighties, when I drove my ?sister to graduate school at Texas A&M. That little foray found me line dancing with a bunch of drunken Aggies in a College Station bar. How is it that everything surreal that happens to me always occurs in Texas?

But I digress. Tesla has quit making the 40 kWh, 130-mile range version of the S-1, as virtually all demand was for the long range model. The waiting list is now down to two months, which is why they took the next step on the marketing front. The four-wheel drive Model X is still on schedule for 2014, and I am number 645 on the waiting list for that vehicle. I have already wired my Lake Take house for 220 volt recharging. Who cares what the price is!

When I stop at traffic lights in the city, I still get applause and thumbs up from cheering groups of pedestrians. And then there are those little notes tucked under the windshield wipers from admiring young women asking for rides. That, alone, is worth the $100k. The State of California has already sent me my $2,500 Clean Vehicle Rebate, and I plan to claim my $7,500 Qualified Plug-in Electric Drive Motor Vehicle Credit (form 8936) on my federal tax return this year.

I have received a lot of emails about the weekend Barron?s article panning Tesla. Elon says he can drop the cost of his batteries from $400 to $200 in five years, making his planned mass market $40,000, 200 mile range ?Gen III? Tesla profitable. General Motors (GM) says he can?t. Given the recent track record of the two companies, I am more inclined to back Elon.

Let me tell you what is really going on here. The automobile establishment absolutely hates Tesla, because Musk has proven everything they said was impossible. Tesla doesn?t advertise, as its innovative, low cost business model sells all of its cars online. This is why they are banned in Texas, which hasn?t the slightest interest in seeing non-oil forms of transportation succeed.

Tesla also doesn?t advertise. Open the pages of Barron?s, and you will find ads extolling the virtues of General Motors, Ford, (F), and Chrysler, but not one from the disruptive Tesla. It?s the same with the financial industry. Barron?s often publishes damning expos?s on tiny companies you have never heard of, but extolls the great wisdom and foresight of PIMCO, Fidelity, and Morgan Stanley, their largest advertisers. That is the free market, capitalist world we live in.