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Morning Update

GM’s shares have been on a tear since July but sold off more than 4% yesterday as investors digested the company’s potentially weaker earnings outlook in 2013. In 2012 US new car and truck sales reached a five-year high of 14.5 million and expectations are for 15.5 million in 2013. The reason for these high expectations out of the US auto industry is that credit is becoming easier to get, interest rates are low, and the average age of a car on US roads is about 11 years old.

However the company said Tuesday night that they could see lower profits and margins in the first half of 2013. This had one option trader turn bearish and buy 5,000 March 29 puts for $1.32 while the stock was at 29.01. The breakeven for this trade is 27.68, or 4.5% lower.

Yesterday European car sales were released and most markets showed sales decrease of 10 to 15%. This puts demand for new cars at the lowest level since 1995 as the recession takes its toll on consumer spending. GM is fighting to keep losses in Europe contained so that it can focus on more profitable markets like the US and Asia. However Europe will certainly be a drag on the company’s margins in the first half of 2013. In addition to this, the US Treasury has announced that it will sell $200 million worth of GM shares at $27.50 back to the auto maker. This could put pressure on the stock and cause a retracement back to the 27.50 level. For investors looking to protect their stock position from a potential market sell-off around the debt ceiling debates or because of poorer than expected earnings from GM, buying the March 29 puts will be effective. The breakeven price of the puts is at a key level for GM’s stock because it coincides with the Treasury’s sale price as well as the upper end of the stock’s gap up on 12/19. If the stock tries to fill this gap it could get ugly for shareholders who will be happy they bought some protection via puts.


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