June 2006 Archives

As everyone who follows General Motors Corporation (GM) knows Kirk Kerkorian's Tracinda Corp. wrote two letters, one to Wagoner of GM and one to Ghosn of the Renault-Nissan alliance, urging GM to form an alliance.

This move certainly does change the game, and the market price of GM has reflected that change with today's price up nearly 8.6 percent to $29.79. But this alliance is far from a done deal. Ghosn has the luxury of time to drive a hard bargain. While GM has made many and substantial improvements, it still faces a tough road ahead trying to sell trucks and SUVs into a cooling economy with prevailing high gas prices. And the incentive wars have begun as well, further making GM's problems more challenging.

Obviously, I wish I had covered my GM short earlier. That said, I am now going to let this play out a bit further. I do not believe that the alliance will form overnight. I expect there to be many ebbs and flows. I will be watching GM's news closely. And if the alliance appears to be going well on acceptable terms, I will cover my short. I had expected GM to continue with its difficulties and drift lower as the sales stagnated or worse. But now, all bets are off.

If an alliance were to form, I think York's earlier prescription of slashing brands among other tactical and strategic moves might be forced upon GM sooner rather than later.

Terry Kosdrosky wrote a good article for the Wall Street Journal Kerkorian Presses GM to Join Alliance of Renault and Nissan (subscription) that deserves reading.

Whether GM wants such an alliance is another question. Mr. Wagoner has delivered on many of his promises and is in a stronger position than he was late last year, Smith said. Some analysts also expressed doubt Friday regarding a broader partnership including GM.

"We have reason to believe that this idea is currently very conceptual, contradicts comments Renault's CEO has made regarding having more brands (amongst other things) and does not seem necessary for Nissan," Banc of America analyst Ronald Tadross said in a research note Friday.

Putting together such an alliance could also be messy and not pay dividends, said Michael Tyndall, an analyst at Nomura Securities in London, pointing to GM's costly relationship with Fiat and DiamlerChryler's relationship with Mitsubishi. But he said Nissan and Renault's alliance is an example that they can pay off.

"There are great economies of scale from doing all the stuff behind the scenes as one," he said, from gaining leverage with suppliers to selling engines or gearboxes to each other.

Others see positives for GM and Renault-Nissan in such an arrangement. David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said both companies could "fill in empty spaces" in each other's businesses.

While I am still maintaining my short position of GM stock, I am watching closely. Should an alliance on favorable terms start looking more likely, I will cover. Should this current discussion be much ado about nothing, then, obviously, I am likely to leave the short position intact.

Terry Kosdrosky wrote a Wall Street Journal article GM Expects Its Sales To Slide for June and July (subscription required) that outlines General Motors continuing problems.

Still, in a sign of how difficult it can be for auto makers to shore up pricing, GM plans to continue with a limited incentive program that expires July 5.

GM's forecast, given at the company's quarterly sales-and-marketing update for analysts and the media, underscored the challenge the company still faces in attracting customers in an era of high gasoline prices, even as the buyouts and early retirements of about 35,000 hourly workers announced Monday show some progress in its efforts to reduce costs. Demand in particular has waned for some of the larger models of pickup trucks and sport-utility vehicles, which carry hefty profit margins for Detroit's auto makers.

Goldman Sachs Group Inc. analyst Robert Barry said GM's continuing market-share losses and excess capacity "all highlight that GM fundamentals remain under severe pressure," adding that the personnel reduction and planned plant closings can be seen "more as offsets to such pressure than as indications a turnaround is underway."

I have not written much about GM recently, although I still maintain my short position. The stock has certainly done well, bouncing from the high teens to nearly $26 per share today. And GM has made tremendous progress by reducing its headcount by 37,000 people. It has made gains in other areas as well.

That said, I remain bearish. Although GM did exceedingly well with its employee reduction, I am somewhat concerned that nearly one-third of the employees decided to walk. Surely, the morale cannot be good at GM. And that will translate into production costs in one form or another. Moreover, much of GM's lineup is still gas guzzling SUVs and trucks. With higher oil prices, I expect more pressure on this segment. I believe that the housing sector has been very strong for a few years and is now weakening. Many people will be faced with higher mortgages and higher gas bills. I expect their desire to drive more economical vehicles to increase. And as the housing sector weakens, so might the overall economy. If this year's stock market returns are poor, then that is simply more pressure for GMs pension and healthcare plans. Many of those taking the retirement package will maintain their pension, so the pension is still important. And if that was not enough, DaimlerChrysler is expected to announce another employee pricing sales program and, although GM is only planning a more modest sales program over the long weekend, I would not be surprised that it is forced to join DaimlerChrysler with its own employee sales program, further damping profits.

I continue to remain rather cautious on this sector. While I think GM's management has done a remarkable job to date in reducing costs and steering around the various obstacles, GM is still not in control of its destiny. Higher oil prices and the economy in general are driving GM's fate. So I continue to remain bearish.

As a matter of disclosure, I remain short GM shares.

Kudos to blogmaster Adam Warner of the Daily Options Report.

In this weekend's edition of Barron's, Kathy Yakal in No Investor Left Behind (subscription required) recommends Adam's blog.

Some consider trading options -- derivative securities that are usually more complex than simple stocks -- a kind of graduate course for equity investors. Blogmaster Adam Warner of Daily Options Report (adamsoptions.blogspot.com) has been a professional options trader since he became a member of the American Stock Exchange in 1988 (he's now trading off the floor). His site's goals: to teach investors about the product and to dispel some of the misconceptions surrounding options.

This is the kind of blog we like best: numerous daily postings, links to external content, and commentary and charts. And it doesn't offer a lot of specific picks. (We prefer this approach since it doesn't ask readers to make a leap of faith -- or expose them to possible financial losses.) We were puzzled by the artwork Warner drops in, including a movie poster of Action Jackson and a photo of an unidentified Kiss band member. (We're sure there's some rationale that we're not getting.) But Warner's regularly updated posts are clearly written and insightful, educational and sometimes entertaining. Recent entries included musings on volatility, stock buybacks and backdating, comments on indexes, links to articles and comments from pundits like CNBC's Jim Cramer and occasional sports editorials. We haven't run across many good options blogs. This is one to bookmark and enjoy.

I am extremely pleased for Adam. I thoroughly enjoy reading and learning from his blog. I completely concur with Kathy's comment ...posts are clearly written and insightful, educational and sometimes entertaining.

Congratulations Adam!

The markets have been more volatile recently, but I have not seen anything to make me either more bearish or bullish. When the market rises substantially, as it did today, I do not get more enthusiastic. And when it falls, I do not get more anxious. To be honest, I was hoping for another couple of down days to redeploy some capital. So now that the market has bounced back up, I am going to wait until either it goes back down or the outlook becomes clearer.

On Friday, June 23rd, the Durable Goods Orders will be released. On Monday, June 26th, New Home Sales will be released. On Tuesday, June 27th both Consumer Confidence and Existing Home Sales will be released. On June 28th and 29th, the EIA Petroleum Status and Natural Gas Reserves will be released. And on the 29th, the GDP data will be released.

The FOMC meeting is on June 28th and 29th, with the statement to be released at 2:15 pm on the 29th. While everyone expects the Fed to raise rates, the larger concern is the language surrounding the rate increase. What I am most curious about is the market reaction to what the Fed does on the 29th.

There is going to be a lot of noise during the next ten days or so. Thus, I am inclined to sit on the sidelines and watch. I hope that by the end of June or early July, I will have a stronger opinion. But right now, I am content to simply sit and watch.

As an aside, I find Adam Warner's discussion on options and volatility to be very worthwhile reading. If you do not already read Adam's Daily Options Report weblog, then I urge you to do so.

After reading Paul Kedrosky's weblog Infectious Greed article The Skilling Diet: Caterpillars and Grub Worms, I read the Wall Journal Online article In New Interview, Skilling Says He Hurt Case by Speaking Up (subscription required).

A star student at the Harvard Business School, Mr. Skilling had a successful career at the consulting powerhouse of McKinsey & Co. before joining Enron in 1990. He helped turn a relatively staid natural-gas-pipeline company into an energy-trading giant while making the company as well as himself favorites of Wall Street. Even before becoming CEO in 2001, Mr. Skilling effectively ran Enron in the years when the jury found that he illegally hid the company's growing problems through financial maneuverings and by lying to the public.

To prepare for the rigors of the trial, Mr. Skilling said he wandered through the Utah wilderness for two weeks, hiking up to 30 miles a day, as part of a survival-training program. He slept on the ground, had no food for the first three days and then dined largely on whatever he could find, including insects. (He recommends caterpillars and grub worms, which "are basically pure fat.")

He believes that he can survive prison, if it comes to that. "A lot better people than I am have been in prison for a long time," said Mr. Skilling. "Give me something to work on, give me something to accomplish." Plus, he added with one more laugh, "At some point, people will ask what really happened [at Enron]. It would be good if they had someone there who could tell them."

What a sad dénouement for one who held so much promise.