Why Wall Street Is Betting Against GM

Why Wall Street Is Betting Against GMShort sellers have significantly increased their bet that GM (GM) shares are going to drop: Short interest in the No.1 U.S. car company jumped 26.5% to 41.5 million shares in the two-week period that ended May 15.

Based on the stock's trend, the market would appear to agree with opinion. GM shares have fallen more than 15% this year, while the DJIA is 7% higher.

GM's first quarter earnings were impressive enough. The quarter's net income attributable to common stockholders of $3.2 billion, or $1.77 per fully-diluted share, marked over a year of steady earnings improvement. Revenue increased $4.7 billion to $36.2 billion, compared with the first quarter of 2010. But investors seem to be more concerned with GM's future than impressed by the strength of its last quarter.

Among the obvious challenges GM faces is a slowdown of domestic sales. Research firms such as J.D. Power report that car sales are faltering in the U.S. Part of the problem is that incentives are lower than they have been. Manufacturers may be attempting to take advantage of reduced production by Japanese firms in the wake of the earthquake there. Without strong competition from Toyota (TM) and Honda (HMC), GM may believe it can increase its profit margins by forcing car buyers to pay closer to sticker price. That approach works -- until buyers turn away in the hopes that better deals will appear when Toyota and Honda return to the market in force and use incentives to claw back market share they'll have lost due to low inventories.

Problem No. 2 for GM, and for the industry in general, is the high price of gas. Consumers have become reluctant to make big-ticket purchases as more and more of their income goes to daily driving costs. Data from Gallup shows that significant numbers of potential customers will start buying fuel-efficient cars if gasoline heads above $5 a gallon. GM's high-gas-mileage cars have been a key part of its sales strength so far this year. But gas drifting back down below $4, and, if Gallup is right, those prices won't be enough to cause a rush to dealer lots.

Another GM challenge is China, where it is generally acknowledged that the U.S. company and VW are the market share leaders. China may be the world's largest car market, but the rapid increase in the growth of sales there has slowed as the Chinese government has dropped tax incentives for auto purchases. Of course, the world's largest car market is bound to draw the world's largest car companies. GM faces more intense competition in China going forward as Japanese, Korean and European automakers increase their efforts there.

The final hurdle for GM is increasingly intense competition in its home market. The imports of Japanese cars may have slowed temporarily, but Hyundai is now the fastest growing car company in the U.S., and its stablemate, Kia, isn't far behind as American buyers turn to its inexpensive, high-gas-mileage cars. Meanwhile, it also faces a resurgent Chrysler. The once-battered auto manufacturer's sales are up 22% through April to more than 404,000 units

GM showed much promise as it exited Chapter 11 not long ago. Now, it's under siege.


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savemycountry911

I hate Government Motors. BUY A FORD

May 26 2011 at 10:13 PM Report abuse -1 rate up rate down Reply
jenyouwino

No mention that GM and Chrysler were both massive beneficiaries of the great taxpayer funded bailout. Both appear to be doing well, but never let creative financing fool you. They still have tentacles buried deep in the taxpayers' pockets. The earthquakes in Japan will only delay the inevitable unless these companies make big changes in both line-up (Chrysler in particular) and business model. Their burden wasn't unsustainable during the best of times, and the taxpayer should not suffer another round of government pampering to make them whole a second time.

And where is Fiat in all of this? I see great things about the Fiat 500, and find out that the Godfather is going to build his diminutive little jewel in Mexico. What - we can't convert a line in the States or Canada to make these vehicles? Perhaps it's time to do the real math and face reality. Fiat probably doesn't want to, nor do they have to.

May 26 2011 at 5:28 PM Report abuse rate up rate down Reply
marine1942

Wall Street AND the people of America are afraid of Government Motors. Everything the gov't touches goes wrong

May 26 2011 at 2:20 PM Report abuse +2 rate up rate down Reply
someoneole

Democrat Kathy Hochul WINS over Republican Jane Corwin in New York's 26th congressional district, which is a traditionally a republican strong hole . Now for the funny part; Paul Ryan says that this is all the Democrat’s scare tactic; what a buffoon; he just can’t understand that is plan is a blunder .

May 26 2011 at 12:00 PM Report abuse rate up rate down Reply
stefanischow

I'm not paying more for crap. American car employees just need to work harder, better or become more efficient because that is what the world demands. I went to car show recently with a friend who could point out all the bad welds on the American cars. Buying American because it's the patriotic thing to do is just throwing good money after bad. I will happily volunteer my time to help those in need. I vote. I work a job with no health benefits whatsoever or pension. I over-tip my waitstaff, but I am NOT buying a crappy car.

May 26 2011 at 11:12 AM Report abuse -2 rate up rate down Reply
sweed7

Osama's Volt gets 25 miles on electric in the winter before it goes to gasoline. Government subsidy is not enough to sell that dog. Osama's government will be the big buyer.

May 26 2011 at 10:10 AM Report abuse -1 rate up rate down Reply
1 reply to sweed7's comment
richard

If the government buys American, then I say go for it!

May 26 2011 at 11:16 AM Report abuse rate up rate down Reply
cobmoosashores

I've bought and leased a ton of GM vehicles over the years using an employee discount. When GM cut that discount down to about 2%, I had to think twice. When a family member on a budget recently needed a small all-wheel drive SUV, I found we could only get $240 off the price of GM's popular Chevy Equinox. A glance in Consumers Reports and a trip to the Subaru dealer, found an all-wheel drive Forester which the dealer discounted almost $2000. So the family member got a vehicle rated at the highest resale value of any car, rated tops in safety in many magazines and with a great record for reliability. When GM employees and family can get a better deal on a better vehicle from a competitor, you have to wonder if they really want and value your business. Loyalty is a two-way street.

May 26 2011 at 10:05 AM Report abuse +1 rate up rate down Reply
richard

Relevant Data, we can see why California is in the shape it`s in--a lot of people like you live there. The Orient of America.

May 26 2011 at 8:34 AM Report abuse +3 rate up rate down Reply
Mike

sounds like anyone could teach you something irrelevant data, doesn't sound like you are hitting on all eight.

May 26 2011 at 8:01 AM Report abuse +1 rate up rate down Reply
gerrybokas

Saw the Chrysler ad last night. It's clear the US automakers haven't learned. In their ads they sell brash image, in Toyota and Honda's, refinement and quality. The buying public are not the fools they might think.

May 26 2011 at 6:14 AM Report abuse -1 rate up rate down Reply