Lately I’ve been playing with cars. Playing in a kind of big boy way. Despite the dismal condition of the entire U.S. auto industry I’ve seen unique short term investment opportunities connected to automotive stocks.
On March 6th GM hit a low of $1.27. It regained some value by the end of the day and closed out at $1.45. I immediately emailed my little brother and told him jokingly that GM stock was entering lottery range. When distressed stocks approach the $1.00 a share value my brother and I refer to them as lottery tickets. The odds may be long that the stock will take a sudden jump but you can buy a large number of shares at a bargain price, set a reasonable stop loss threshold and hold on for a short period of time looking for a bump upward. The next day GM opened at $1.51 and appeared to be heading up, so I bought 1000 shares @ $1.55. I paid cash rather than buying on margin. Short term investments are not day trades. The idea of leveraged bets has left a bad taste in our mouths and should never be used as a matter of course.
The rationale behind my purchase was built on the perception in early March that the administration was against the idea of letting the auto industry suffer bankruptcy, and was willing to prop them up with public monies until they could figure out an acceptable restructuring strategy. The government did impose a definite time table, GM and Chrysler had to present a plan by March 31. This provided a three week window in which to operate. It seemed inevitable that auto stocks would drop before the deadline date, profits would be taken and auto money would go to the sidelines and await an appraisal of the proffered restructuring plans.
GM rose steadily every day. It took a slight dip on March 17 and I almost sold but the dip was small and it was an extremely light trading day so I held overnight. A worrisome evening. The next day it moved in a slightly wider range but closed up 19 points so I returned to my three week strategy. On March 27 GM opened at $3.91, I decided today was the day to sell and but in the order. The transaction went through on a down tick of $3.90, it soon hit $3.94 for a minute, then trended lower for the rest of the day until a close of $3.62. My profit less broker fees was $2336.
I developed this disaster strategy after 9/11. When the market imploded in an irrational manner I immediately figure certain necessary industries would undergo a rapid recovery. Initially, I decided on buying engrained, proven technology stocks like Cisco, Intel, Microsoft, HP and Apple. Some recovered rapidly, others languish a bit but in the short run I was successful. From there I refocused on the hard hit airline industry. I figured airlines to be a necessity and they would be around in one form or another for a very long time. I lucked out when I guessed that Air West Airlines would get a federal bailout loan. I made most of my profits investing in small regional carriers and the only mistakes I made was underestimating the stupidity of the management of the major carriers.
Here’s how I see some upcoming plays in the auto debacle. If GM goes bankrupt Ford will undergo an irrational reactive surge. It looks like the administration is going to have to let GM fail. Congress is not going to cough up any more money for autos or banks at the present time. Banks are claiming profits by using a bag of lame accounting tricks. The auto makers do not have this luxury and will soon face the music playing in bankruptcy court. Chrysler might undergo an irrational surge if the sale to Fiat goes through. I see Chrysler ultimately failing and damaging the foreign investor in it’s sucking wake.
There are ways to make money investing in failure. Bankrupt companies still have common stock, at the end of the process the stock will be worthless but during the period of restructuring before the company emerges from the bankruptcy process the temporary stock has value and may be traded. Good news during the rebuilding process can cause these temporary certificates of ownership to take significant and very profitable bumps.
During GM’s projected bankruptcy the company will bring the electric car, the Volt, to market. I believe the administration will build in a substantial tax credit that favors purchase of the Volt. At any rate, the hype and excitement of having a purely electric car in the marketplace will cause a wild in-bankruptcy surge of GM stock.
If you listen to what I say, believe in it and do as I instruct, you will probably not make money. Even if you are sitting right next to me at the Toshiba I am certain you will reach over and push the wrong button or you will push the right key at the wrong time. Everything human gets in the way. I am sure you will get nervous, cocky, greedy, afraid, uncertain and lazy. You’ll forget to pay attention, become distracted and fail to remember why you are staring at this computer screen. I know this is true because I have done it all myself.
Some of the most successful investors are robotic. Brilliant men write perfect algorithms and simply let the numbers play through unattended by any human influence. Humans write these beautiful formulas and therefore they too fail. Most recently our most gifted mathematical geniuses forgot to calculate things as big as China and India, failed to account for frailties as obvious as greed and stupidity. Men played casino games at 300 times the acceptable limit and government let them do so without the benefit of oversight or a requirement of adequate collateral.
My stock tips are just as veritable as Cramer’s though less bombastic and in long sleeves.