New Trade $GM: Government Generally Motorvated to Sell Down Stake

by Dan September 6, 2013 11:14 am • Commentary

Last Friday, on CNBC’s Options Action, my friend Carter Worth from Oppenheimer made the case why Auto stocks could follow the year to date under-performance of homebuilder stocks, specifically he focused on F, and made a bearish technical case, watch here:


That was his take last week, but earlier this week, automakers the world over reported very impressive Aug sales numbers, which I addressed yesterday in the MacroWrap. With sales reaching levels not seen since late 2007 and record transaction prices, the question is that given the other downbeat consumer/retail data-points from Q2 earnings, is the strength in auto sales in Aug as good as it gets?

Also, in the Chart of the Day yesterday, I took a look at the recent under-performance of home improvement retailer HD, and wonder aloud whether the stock, and possibly the entire sector, was topping out the way the actual homebuilders had prior to rates spiking in late spring, and throughout the summer.

So if you believe that auto sales have been tied to the U.S. housing recovery, and you are also of the belief that the pace of the recovery is slowing and that the effect of rising rates will hurt sectors beyond housing,  then autos could be next to hit a speed bump.

I want to focus on GM here rather then F, for one very important reason, the overhang that exists from the U.S. Govt’s stake that it still owns from the bailout back in the financial crisis.  The govt is the largest shareholder of GM with 189 million shares and my sense would be with the stock up 25% year to date, and their intent to sell down the stake, their selling could possibly be accelerated by year end, as was the case last year with AIG.  The govt last sold 30 million shares in July when the stock was a tad lower. Any accelerated selling could cause weakness, but much like AIG, when the overhang is nearly gone it could present a buying opportunity as it would open the door to share buybacks and dividends.   

IN the meantime, on the heels of the worse than expected Aug Jobs data, and the continued weakness of housing related stocks, I want to make a defined bearish bet that GM will follow suit.

TRADE: GM ($36.44 ) Bought Oct 37 / 33 Put Spread for 1.25

-Bought 1 Oct 37 Put for 1.63

-Sold 1 Oct 33 Put at .38

Break-Even On Oct Expiration:

Profits:  Btwn 35.75 and 33 make up to 2.75, max gain of 2.75 at 33 or below

Losses:  Btwn 35.75 and 37 lose up to 1.25, max loss of 1.25 above 37

Trade Rationale:  It is clearly a tough market to try to short stocks in, this trade structure, that is already in the money offers a favorable risk/reward with a break-even that is about 2% lower, a level where it was trading yesterday.