Tracinda Hits the GM Brakes

Shares sink after Kirk Kerkorian cuts his stake in the automaker.
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Updated from 1:21 p.m. EST

Look out

General Motors

(GM) - Get Report

, Kirk Kerkorian is juggling his portfolio.

Shares of the world's largest automaker recently were down $1.73, or 5.3%, to $30.88 after its largest individual shareholder, Kerkorian's Tracinda Corp., revealed that it cut its stake in the company.

Kerkorian recently lowered his stake in GM to 7.4% from 9.9%, according to a

Securities and Exchange Commission

filing. The move follows disagreements with GM's management over the direction of the company. It also confirmed rampant speculation on Wall Street that Kerkorian is backing off his bet on the U.S.-based auto industry, which has pushed shares of GM down about 13% this week.

After a disastrous 2005, GM shares are up 67% for the year, leading the

Dow Jones Industrial Average

. The rally picked up steam in February when Tracinda installed its representative, Jerry York, on GM's board of directors after launching a flurry of public criticism against the company's management.

York, however, stepped down from the board last month. With his resignation and Kerkorian is backing off his stake, investors are worried that a momentum shift back to the downside could be at hand.

"It may be that the short-term move up in the stock is over for now," says Robert Toomey, analyst with E.K. Riley Advisors. "I'd rather see Kerkorian with more of a stake in there. That's been part of the reason why I've been recommending the stock, but my impression is that GM's management is still very motivated to execute this turnaround that they've started."

York resigned from his board seat after GM broke off talks with

Renault-Nissan

about a global partnership that Kerkorian had publicly supported. Shortly before the partnership talks broke down, the Vegas mogul indicated he would take the legal steps necessary to boost his stake over the 10% threshold. Afterward, he reversed course.

His latest move suggests that Kerkorian may not press his case at GM in the form of a proxy battle against management, as many investors had speculated after York's resignation relegated Tracinda back to outsider status at the automaker.

"This lessens the likelihood of that to some degree," says Toomey, who owns shares of GM and holds a buy rating on the stock.

Meanwhile, news of the lowered GM stake comes just after the Vegas tycoon's investment firm disclosed that it's boosting his investment in casino operator

MGM Mirage

(MGM) - Get Report

.

"This may just mean that Kerkorian wanted to beef up his position elsewhere," says Toomey.

It may also reflect recent concerns about upcoming labor negotiations at GM and its bankrupt supplier and former subsidiary,

Delphi

. Both companies are struggling to cut costs under pressure from foreign-based manufacturers, and the heavy burdens posed by their pension and health care obligations to unionized workers are widely viewed as the logical place to lower the hatchet.

"Kerkorian bought GM because he liked the fundamentals, and he still owns a big stake in the company because he likes the fundamentals," says David Healy, analyst with Burnham Securities who also owns the stock and recommends it to clients. "Before investors let this news scare them off, they should look at the dramatic turnaround in operating earnings that has taken place and GM this year and realize that it's going to continue."