For much of 2013, it was our view that auto stocks were a cheaper and less risky way to play a perceived housing recovery. We changed our tune a bit after the August sales data that showed the highest growth since 2007 and record transaction prices that appeared to be diverging with much of the other consumer data and possibly relaying an as good as it gets situation. Since the August data, the U.S. automakers have had a string of monthly sales misses. Both Ford and GM missed Q4 estimates and guided down for Q1. Despite the SPX back within earshot of the previous all time highs, Ford and GM have been weaker, with both stocks down about 14% from the multi-year highs made in Q4.
Back in December, the U.S. government announced that it had divested its stake in GM. Investors got bulled up on the prospect of the company re-instating a dividend and possibly repurchasing stock. High profile investors like Kyle Bass of hedge fund Hayman Capital made very public the bullish thesis for the stock (here), going as far as suggesting that the stock could be up at least 40% over the next 12 to 18 months (the stock was probably about 5-10% higher than current levels at the time).
At the time, we were hard pressed to argue with such a successful investor, but the combination of poor retail sales, weakening jobs data, rising energy costs, poor weather and high interest rates have caused sentiment to be less than stellar for the auto sector.
Taking a look at the two year chart below, the steady rise from the 2012 lows that saw the stock double was a technical beauty, until the stock’s break of the uptrend in mid-January. The stock has now consolidated for a bit at logical support around the $35 level. To say that it needs to hold is an understatement or low $30s could be the next stop.
The next identifiable catalyst for the sector will be February auto sales due on Monday March 3rd. The likelihood that the stocks will move on the data is very high, especially considering the recent relative weakness. With GM settling a bit, implied volatility, or the price of options, has come down substantially since the Q4 earnings report, approaching levels that could make outright purchases of options for directional players quite attractive.
We currently are currently long a March Call Spread that at this point has a very low probability of break-even, but we are strongly considering a bullish roll in the days/weeks to come.