Trade Idea – $GM: Fade in Detroit

by Dan December 1, 2015 12:45 pm • Commentary

Auto sales have been on fire in 2015, November data reported this morning places this year’s SAAR very near the estimate of 18.2 million, the highest annual total since 2005. Consumers are taking advantage of aggressive promotions, relatively easy credit with the backdrop of lower fuel costs.  There have been no shortage of calls that lower for longer oil prices should keep pricing aggressive, but with the Fed ready to raise short term interest rates for the first time since June 2006, we could have hit peak auto sales for this cycle.

I do not look at the sector close enough, but despite missing estimates, shares of Ford (F) are up today about 1% and General Motors (GM) down about a half a percent.  GM’s recent 25% bounce from late September place the stock up about 3% on the year, and about 8% from its 52 week highs made in late March.  Ford on the other hand, while up about 10% from late September, is down 7% on the year, and down about 12% from its 52 week highs made in late March.  So despite 10 year highs in auto sales, the two U.S, majors find their stocks well off of the multi-year highs, and in GM’s case in a massive downtrend, making a series of lower highs and lower lows since its post financial crisis high of just above $42 in late 2013:

GM 5 year chart from Bloomberg
GM 5 year chart from Bloomberg

We could be a fairly weird spot in our economic recovery as the Fed is about to end their crisis monetary policy in a couple weeks, albeit in a gingerly fashion.  Just this morning, U.S. manufacturing saw its lowest monthly print since mid 2009, not to mention horrid results in China for November.  I am hard pressed to see employment gains past a seasonally strong holiday period, more likely reverting back to its seasonal weakness in Q1.

With GM approaching the upper band of the downtrend (highlighted above), it makes for an interesting short entry, playing for a retest of the low $30s in the coming weeks, especially in the face of the FOMC rate decision.

The company is not expected to report Q4 earnings until early February, so the next identifiable catalyst will be the December monthly print in early January.  Aside from the  potential headline reaction to the Fed’s impending rate liftoff, could cold/wet weather in Dec be the catalyst for the second consecutive miss of expectations after a couple months of unseasonably warm weather in October & November?

So What’s the Trade?

*Trade Idea GM ($36) Buy Jan 36/33/30 Put Butterfly for 67 cents

-Buy to open 1 Jan 36 put for 1.30

-Sell to open 2 Jan 33 puts at .38 each, or .76 total

-Buy to open 1 Jan 30 put for .13

Break-Even on Jan Expiration:

Profits: up to 2.33 between 35.33 and 30.67, with max gain of 2.33 at 33, or the mid point of the 2 month range.

Losses: up to 67 cents between 35.33 and 36 & between 30 and 30.67, with max loss of 67 above 36 and below 30.

Rationale:  Risking less than 2% of the stock price to fade the recent strength, and play for a 50% re-tracement of the two month range.