GM stock rolls back into the shop
Last Modified: Mar 27, 2011 02:22AM
An important rule for anyone who writes for a living is to never quote yourself. So I won’t.
I will paraphrase.
Last November, when General Motors (GM) went public again, I read all the background I could and concluded that investors should steer around it. I wrote that the product line was unpromising, pension obligations still trouble the reorganized company and growing in China remains a puzzle.
There also was a little matter of justice. The stock had been a centerpiece in American portfolios for decades and GM retirees relied on it way too much. Their holdings were worth nothing after the bankruptcy, and any company that commits that sin doesn’t deserve immediate faith in its new version.
The shares went public at $33. They had a tepid reception, then rose to $39 in January. But since then, the stock has been thrown into reverse. Since early March, it has traded at less than the IPO price, closing Friday at $31.51.
A report by Jefferies & Co. analyst H. Peter Nesvold summarizes what’s wrong under GM’s hood. It zeroes in on the company’s announcement of higher customer rebates in January and February, despite management saying that after taking out 40 percent of its production capacity in the United States, it no longer needs sales just for sales’ sake.
Nesvold said skeptics saw the rebates as a sign that GM is a “yo-yo dieter” falling back into bad habits. He’s not ready to agree, but he’s watching.
“To this end, we respectfully believe that GM as an institution needs to earn back investors’ trust,” he wrote in a report to clients. “In our view, the stock is likely to remain a show-me story, unlikely to outperform the overall sector until the company sustainably demonstrates that it truly is a ‘new GM.’ ”
Nesvold initiated his coverage of GM with a “hold” rating and a price target of $34 a share.
Other trends are liable to reduce GM profit margins, whether it’s rising costs for steel or higher gasoline prices that redirect customers toward smaller cars, still the company’s weakness. That $41,000 hybrid Volt? It’s a novelty.
THOUGHTS ON JAPAN: The suffering and loss of life in Japan continues to justify worldwide help and financial aid. It’s no consolation, but at least the earthquakes and tsunami appear to be having less effect on the market than initially feared.
Commodity prices are rising after dropping in the initial period after the disasters. Chris Hurt, agricultural economist at Purdue University, said they should have little overall impact on Japanese or global food consumption.
Diana Joseph, chief investment officer at Barrington Strategic Wealth Management, said most of Japan’s industries are unimpaired, even if some are temporarily shut. “Reconstruction could take years and could be a fruitful investment opportunity,” she said.
BUNGE JUMPING: This is part of an occasional series on devious and wacky ways traders contrive to game the futures markets.
The Commodity Futures Trading Commission settled charges against Bunge Global Markets of White Plains, N.Y., and fined it $550,000 for allegedly trying to gain an illegal edge in the soybean market at the Chicago Board of Trade.
The CFTC said two Bunge traders in March 2009 entered electronic orders that were substantially different from the prevailing bids and offers during pre-opening sessions. The agency said the traders had no intention of executing the contracts and canceled them before trading opened. They just wanted to test the market’s support levels at various prices, the agency said. It amounted to posting bogus prices to tease activity from other traders, the CFTC said.
CRACKING THE CASE: A couple of weeks ago, I spoke to a financial journalism class taught by former Sun-Timesman Mark Skertic at Columbia College Chicago and had a great time. I discussed the futures markets here and assured the students that they shouldn’t feel intimidated about the difficult concepts and terminology for trading. I said every time I think I have those nailed, something comes along to test me.
Such a moment came in the next day’s e-mail. It was an announcement from CME Group (CME), owner of the futures markets here, that it will list “two new Brent crude futures crack spreads.” Now, I know about Brent crude contracts. It’s oil. But “crack spreads?” It sounds like what they make you do at the airport.
Alas, crack spreads involves the simultaneous buying and selling of crude oil contracts and those dealing with its related products, gasoline and heating oil. It’s just another way of playing price differentials among related markets.
Call a broker and say, “Spread ’em,” and see what happens.
CLOSING QUOTE: “Market volatility should come down. If you were optimistic before, looking at the fact that employment’s getting better, manufacturing’s getting better and the stock market is cheaper, I’d be a buyer at the current level.”—Jonathan Golub, chief U.S. equity strategist, UBS, on Bloomberg Television
Copyright © 2011 — Sun-Times Media, LLC
