In a classic "buy the rumor, sell the news" trade, GM fell 6.2% after the automaker announced late Monday that 35,000 hourly workers have agreed to early retirement or contract buyouts. The stock had rallied dramatically in anticipation of the announcement.
GM's slide helped send the Dow down 1.09% to 10,924.74 Tuesday. The
slumped 0.9% to 1239.21, and the
tumbled 1.6% to 2100.25.
was another notable loser, down 15% after announcing plans to purchase
communications and application-processor arm for $600 million.
Trading volume was up from Monday's session and tilted to the sell side. Of the the 1.8 billion shares traded on the Nasdaq, 86% were lower; 78% of the 2.2 billion traded on the
But Can They Sell Cars?
GM's stock was a complete loser Tuesday, but for the year, it is still up 37.6%. Indeed, for General Motors and investors in the struggling automaker's securities, many of its comparisons to last year are tricky at best.
GM's chief market analyst Paul Ballew said Tuesday that its auto sales for 2006 are likely to come in low, and that comparisons to last year's sales will be particularly dismal due to the discounting and incentives the company offered consumers in 2005 to boost its sales.
Nonetheless, GM's earnings are expected to show growth in the second half of the year, according to Thomson Financial, but that compares with two of its most dismal earnings quarters in 2005.
In terms of its restructuring, GM's hourly employee costs may be tempered by the success of its buyout offer to its employees, but those costs may show up as increases in retiree benefit payments, as those workers roll into a different pool of costs, writes Glenn Reynolds, analyst at CreditSights, an independent research firm.
"That brutal financial trap also will keep the pressure on GM to try to make even more changes to future retirees' benefits in the coming labor round," writes Reynolds. GM renegotiates its labor contract with the United Autoworkers Union in 2007.
GM's stock fell sharply on news of the weak sales expectations, while its bonds spent most of the day moving in the opposite direction. Bonds were rallying through most of the day on the buyout news -- another step on GM's path to reaching its cost-savings goals and avoiding Chapter 11 bankruptcy protection. Bonds ended off their gains for the day, but they did not decline.
Another reason for the inverse correlation of stock and bond markets in volatile, news-sensitive securities such as GM is the popular hedge fund strategy known as capital-structure arbitrage. In this case, such funds might buy GM's bonds hoping for a payout when GM finally completes the sale of its finance unit GMAC, while shorting the stock, betting that its near-40% climb this year can't go much farther.
GM's long-term 8.375% bonds due 2033 had gained about 1 point, or 1 cent on the dollar, to 76 through the morning, but ended flat, according to MarketAxess, an electronic trading platform for corporate bonds. GM's shorter-duration bonds remained in the green by the afternoon. Its 7.2% bonds due 2011 were up 3/8 of a point at day's end.
"News about the employee buyouts in terms of the long term for GM and in terms of it becoming more cash-flow positive is really good news," says Eric Misenheimer, managing director of J&W Seligman & Co., where he has $450 million of high-yield assets under management. "The longer-term question is, 'Can GM sell cars?' ... Today people probably realized they're not done losing market share."
GM announced plans to offer zero-percent financing on many of its 2006 models to get cars off the dealers' lots. And amid the flurry of news, Standard & Poor's announcement that the company may yet be downgraded again got lost in the shuffle.
S&P's auto analyst Robert Schulz noted Tuesday that the company still has to deliver on other cost-cutting plans, such as plant closures, and it has yet to iron out its plan for reducing its exposure to bankrupt auto-parts supplier
and its workers. Delphi was a spinoff of GM, and GM has legacy costs associated with its workers. S&P rates GM single-B.
No M&A Boost
The Treasuries market saw a minor rally Tuesday. The 10-year-note yield dropped three basis points to 5.20%, while the 2-year note yield dropped about 1.7 basis points to 5.24% amid a $22 billion auction of 2-year notes.
shares fell 2.62% on news that French telecom company
sold a 1.8% stake in the company.
In other corporate news,
stock gained 6.15% after it finally agreed to sell to a group of private equity investors.
shares climbed 18.26% on news the company will be acquired by
, which fell 8.8%.
While many suggested that the heavy doses of M&A volume Monday buoyed stocks, Tuesday's deal-making had no such broad effect (real or perceived). Perhaps the deluge of big M&A deals and the
heavy slate of initial public offerings on tap was seen as overkill.
The bears took the reins Tuesday as another round of round of stronger-than-expected economic news was taken as a sign of more rate hikes to come. Existing-home sales reportedly fell 1.2% to 6.67 million in May, but that was less than the 1.8% fall that economists expected. The report comes a day after new-home sales showed a 4.6% gain in May. Also Tuesday, the Conference Board's index of consumer confidence read 105.7 for June, higher than the 103.1 expected reading.
The bond and equities markets may, in part, be reflecting uncertainty about the
two-day meeting this week, which begins Wednesday. Market participants from all sides are talking about the possibility of a 50-basis-point rate hike. But invariably, the following sentence is always: "But that isn't going to happen."
We'll see. It is probably more likely than a 40% rally in GM's stock would have seemed in January when investors were on bankruptcy watch.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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