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Trucker Sees GM Crack-Up

By: Rick Ackerman, Rick's Picks


-- Posted Sunday, 14 May 2006 | Digg This ArticleDigg It! | Source: GoldSeek.com

Rick’s Picks

For investors who’d rather be smart than lucky 

I’ve been dissing General Motors for years, baffled as to why anyone would choose a GM car over a Japanese model unless out of pure patriotism. Lately, the auto manufacturer has been busy rearranging the deck chairs on the Lusitania, preparing for a day when it will have to compete not only against the Japanese, but against a Chinese assembly line capable of cranking out well equipped luxury cars for under $25k. It seems obvious at this point that GM -- and Ford, and Chrysler – will not be able to shrink fast enough to meet the threat head-on, even in bankruptcy. It’s inevitable that they will dump their pension obligations onto some corporate shell owned by the taxpayers, and cut healthcare amenities to the bone, but even that won’t be enough to pare overhead to levels competitive with the exurbs of Shanghai.

With the demise of GM looming in the middle distance, the denizens of Wall Street were doing exactly what we might have expected of them on Friday – i.e., scrambling to cover short positions lest the squeeze begun a month prove financially fatal. They are still on the ropes, as the chart below makes clear, but there is surely no reason for them to take heart in the fact that GM shares held their own on two consecutive days when the Dow Industrials fell more than 100 points.

As it happens, a Rick’s Picks subscriber is well placed within the trucking business to see GM’s problems from up close. Here’s a dispatch from “Driver Dave of London Ontario” that you may find interesting. I received it during Wednesday’s regular Q&A session:

“I am a new month-long subscriber and I look forward to your daily comments and recommendations. I'm hoping you can guide me towards a decision on General Motors put options. I have read your comments from the past regarding them, and I can only wish I had been looking at them when GM was at a much higher price and the leverage much greater.  However, since one can only deal with the here-and-now, here are my reasons for looking at them presently:

‘Lucrative’ Business

“I own and operate what is known in the trucking industry as a ‘mold truck’  (a specially-built flatbed truck equipped with a sliding tarp system and extra lift axles) and for the last five years have been brokering said vehicle out to different mold manufacturers/tool makers to transport their heavy molds and stamping dies to and from the various GM, Ford and Chrysler stamping plants. This has been a very profitable business, even with the periodic slowdowns that the auto industry endures every so often.

The mold manufacturers and tool makers have died. Their Christmas-time lay-offs have now turned from temporary to permanent. To give you an idea how rotten things have been this year, my (truck) income on an annualized basis has dropped by nearly two thirds so far this year. Fortunately, any income lost in the trucking arena has been replaced by a factor of three from within my mining share trading account, and no high diesel fuel prices with which to contend!

Worst Since ‘82

The American (read Big 3) auto manufacturing sector is as moribund as I've seen it since my 1982 debut in the trucking industry. My particular interest in shorting GM thru put options has to do with the situation that GM finds itself in with Delphi and Delphi's current union contracts. I know many GM & Delphi union people in plants all around the U.S. & Canada, and I guarantee they will NOT accept a wage cut from $27/hour to $22/hr and then to $16/hr by September of next year, and while paying an increasing share of their medical benefits to boot. They WILL strike, should the judge in the case throw out the Delphi's union contracts. Court date for Delphi & the UAW is May 10, with the judges' decision expected 30-45 days later, June 10-17.

In anticipation of the damage an overthrow of Delphi's contracts will have on GM's share price, I am considering Sept 06 GM puts. GMUC, GMUT,GMUD and GMUX, at premiums ranging from $.60 to $2.65.  In your opinion, is the risk worth the reward? Would I gain better leverage on longer dated puts – i.e., Dec 06 GMXC, GMXT, GMXD, GMXX, at premiums ranging from $1.25 to $3.60?  I believe that co-incident with the

forthcoming overall stock markets’ ‘gentle’ devaluation, GM could decline to the $15-$17 level without too much prodding. (Yes, even lower than their December 05 low!)

I'm certainly glad I didn't subscribe to "Kirk's [Kerkorian] Picks!. We saw signs of an upcoming GM & Ford slowdown late last fall, a few months after he announced he was buying more GM shares.(at a premium!?).  I thought he was a nutty billionaire then, but I'm just a truck driver, so what do I know?

My response:

Don’t Short Yet

Thanks for your illuminating perspective on GM, Dave. I hope that you will let me share it with my subscribers and readers around the Web. In the meantime, I'm given to hope that my delayed response may have saved you money, since GM still looks to be in the throes of a powerful short-squeeze rally. I would also surmise that the rally still has a ways to go, since the weekly chart is not yet overbought.

The short answer to your question is that put options will be losers for you unless you can time your purchase to coincide precisely with an intermediate top in the underlying stock. That said, I would never recommend that you simply buy puts and hold them till expiration. You'll need to build an edge into the position, which in practice implies legging into calendar spreads or verticals. For instance, having identified a rally target of intermediate degree at, say, 28.12, you might prepare to buy September 25.00 puts for, around 1.70 if and when GM hits your number. If you're right about the target, then weakness will become evident immediately after you’ve bought the puts.

Here’s How

Should GM then decline over the next few weeks to, say, 26.07, you might be able to short some June 25 puts against the August 25 puts you hold for, ballpark, 1.10. You would then be long the Aug 25 - June 25 puts spread for a 0.60 debit. In subsequent months, you would seek to recoup that last 0.60 of risk by rolling into calendar spreads at each expiration. Thus, you would short July 25 puts just as the June 25 puts were expiring, making yourself long the Sep 25 - Jul 25 put spread; you would repeat this drill once again when the short July were ready to expire, shorting the August 25 puts in their place.

Ideally, when August expiration rolls around, GM will be sitting just above $25, you'll have some September 25 puts for free, or possibly even for a net credit. Then, between late August and mid-September, GM will come unglued, plunging into the low $20s.

If the foregoing was difficult to follow, there is a more detailed example given in the “Education” pages at Rick’s Picks.  But before we worry about how to do it – and I will signal when it’s time, providing explicit instructions – let’s first find us a good place to get short. My gut feeling is that a rally such as the one GM has enjoyed in recent weeks is not going to collapse in a day or two. That means there is no rush to jump on the puts.

How's that sound?

***

** NYC Seminar **

A subscriber has offered to produce a Hidden Pivot Seminar in the New York City area for those of you who were unable to attend my course in Colorado a while back. If you’re seriously interested, please contact me by e-mail, ranking your preference for August, September or October.  I am also considering a  West Coast seminar later this year or early next, so if you think you might attend, drop me a line 

***

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com 


-- Posted Sunday, 14 May 2006 | Digg This Article | Source: GoldSeek.com




 



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