Why It Might Be Smart To Sell The Recent Rally In Ford And GM

Includes: F, GM, VLKPY
by: Trade In Mexico

The markets have risen sharply from the lows made in June, and that could be offering investors a chance to sell on the rally. The gains in the stock market might be more of a "sugar" high rather than anything that is truly sustainable. For example, many investors in the United States are expecting the Federal Reserve to act with some new measures in order to boost the recent slowdown in the economy. The jobs data has been very weak, and for some investors that means more stimulus is a sure thing. The problem is that rates are already extremely low, plus the market has already rallied significantly. This means that any further action from the "Fed" might already be baked into the stock market. In fact, it's possible that the markets could selloff in a "buy the rumor, sell the news" type of event.

The market has also benefited from recent promises in Europe to keep the Eurozone together. However, while bond buying programs and bank recapitalizations might help to avoid a massive financial crisis, it does little to create growth. Unemployment in countries like Spain and Greece is over 20%, and it could spread and get worse in other areas. Europe has been a real challenge for many automakers and even top-selling automakers like Volkswagen (OTCPK:VLKPY) are reportedly considering cutbacks. One recent Reuters article summarizes what might be a deteriorating environment for automakers in Europe, and it states:

"On Sunday, Volkswagen had denied a German magazine report that it was bracing for a slump in the economy and had told suppliers it was considering cutting production by 10 percent in the European autumn. A spokesman said at the time that the situation in some markets was "tense" and the coming months would be "significantly more difficult and demanding".

If the slowdown is starting to hit automakers like Volkswagen, which have traditionally been very profitable in Europe, there is a good chance that U.S. automakers like General Motors (NYSE:GM) and Ford (NYSE:F) could post even bigger losses in the coming quarters. General Motors recently warned that it expects "substantial" losses in Europe for the second half of 2012, and that it might have to take a non-cash charge on the value of its European assets. Both GM and Ford have been able to offset European losses because of strong sales in North America, but that could be changing in the coming quarters, thanks to the "Fiscal Cliff". Investors should be worried about the upcoming combination of tax increases and mandated cuts in government spending which are coming around January, 2013. Investors in the U.S. don't seem to be taking this concern seriously, but countries that cut government spending and raised taxes ended up with economies that went down the drain like Spain, Greece, Italy, etc. If the U.S. economy is this fragile now, just imagine what it will feel like when the U.S. government is not spending borrowed money to try to keep the economy going. Plus, consumers will probably feel like spending a lot less when taxes go up. For some investors, it might make sense to use the recent rally in the auto stocks as an opportunity to sell. With China also slowing, major problems still unresolved in Europe, and a fiscal cliff looming in the U.S., there is a good chance these stocks could be heading back towards recent 52-week lows.

Key Data Points For Ford From Yahoo Finance:
Current Share Price: $10.11
52-Week Range: $8.82 to $13.05
Dividend: 20 cents per share which yields 2%
2012 Earnings Estimate: $1.26 per share
2013 Earnings Estimate: $1.49 per share
P/E Ratio: about 7 times earnings

Key Data Points For General Motors From Yahoo Finance:
Current Share Price: $22.98
52-Week Range: $18.72 to $27.68
Dividend: none
2012 Earnings Estimate: $3.15 per share
2013 Earnings Estimate: $3.96 per share
P/E Ratio: about 7 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.