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Publisher: Colin Alexander Editor: Ken Wilson (450-691-4617)
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Market Synopsis
Is this the beginning of the end for General Motors, the healthcare company that sells the occasional automobile? Earlier this week, GM stunned financial analysts with the announcement that the first quarter of 2005 would probably end with a loss of $1.50 per share and that full year results would likely result in a profit of $1-2 per share instead of the previously forecasted $4-5 per share. The steep drop in earnings was blamed on poor North American sales of cars and especially trucks, which have in recent years seen sales increases in excess of cars.
The financial condition of GM had already been the target of analysts who questioned the viability of a company whose net debt has doubled over the past four years to $244 billion, has a huge pension liability of $102.4 billion and another liability for post-employment benefits, the infamous healthcare benefit mostly, of $67.5 billion. But it is the relatively small healthcare benefits that threaten to topple the company. According to the Wall St Journal, in 2003 GM forecasted an increase of 8.5% for healthcare costs with diminishing increases leading to a level of 5% in six years time. The company admits now that healthcare is increasing at rates in the double-digits and that a 1% difference in the forecast of these costs represents an additional $7.6 billion liability.
In 2003, GM reported net income of $3.8 billion and with the first three quarters of 2004 producing $3.06 billion in net income, GM will have considerable difficulty to meet last year’s profit figure. Furthermore three-quarters of the profits in 2002-2003 were generated by GMAC, the financing arm of GM, which includes not only automobile financing, but also mortgage financing. With the very strong possibility of higher interest rates hindering sales of homes, the likelihood of greater profits from mortgages is extremely low.
Why then does the company depend so much on its financing arm and not on sales of cars and trucks to generate a profit? The simple reason for this lack of profits is the outrageous $4,000 worth of incentives required to sell a car. And with a dwindling market share of only 25% for the first two months of the year (26.7% for the entire 2004), down from 30% a few years ago, the potential for greater losses from the manufacturing division is highlighted.
If the old motto that, “what’s good for GM is good for America” is true still, then by extension, what’s bad for GM is bad for America is also true. And with its bonds barely clinging to the slimmest of margins above junk status, the red warning lights for a financial disaster grow a little bit brighter each day.
Technically Speaking
Much of the past week was spent in negative territory for all equity indexes and although Friday’s late day action saw a strong rebound in price, which could carry indexes on Monday, there will be considerable pressure on shares by the release of PPI and CPI data, durable goods orders and the important Federal Reserve meeting on interest rates.
The DJ and the SP reached new lows beyond their respective Feb lows however their rebounds carried them to closes that were above. As for Nasdaq, its on-going weakness drove it to test the Jan lows and its 200-day moving average with mixed results. The Nasdaq-100, composed of the 100 largest companies traded on Nasdaq, remained above its Feb lows while the Nasdaq Composite dropped below.
In all three cases though, the trend is negative with the DJ and SP having dropped away from their most recent up trends and developing a downward move that could be expanded. Meanwhile the Nasdaq market, which had already been in a downtrend since the beginning of the year, appears to have failed at the Jan low and would have broken away from the range 2000-2100 in which it was contained for the past three months.
New Buy Recommendations:
None.
New Short Sales
None.
Stock Positions to Sell/Exit:
Ascential Software (ASCL) – IBM offered to buy the company this week and with no reason to expect a better counter offer, the best move then is exit this position now.
Portfolio Comments:
New stops have been added to the list while others have been modified. Those that have blanks, are being carried unstopped for now. Please see our complete list of stops in the table below.
List of Current Stock Recommendations:
Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S
where positions should be retained. S+ and S++ indicate stocks for which there
is a technical case to add to the positions with plusses adding weight similar
to long positions. The maximum number of plus signs is 2.
Please take note that the following clause
is being removed under the assumption that the aforementioned federal budget in
[Stocks marked # are eligible as Canadian content in Canadian RSP funds.
Otherwise there is a 30 percent restriction on foreign stocks held in these
accounts.]
|
Date of Entry |
Name |
Symbol |
Entry Price |
Current Price |
Stop |
Action Rating |
|
|
Air T Inc |
AIRT |
17.63 |
17.00 |
|
H |
|
|
Applix |
APLX |
7.01 |
6.63 |
|
B |
|
|
Ascential Software |
ASCL |
16.00 |
18.34 |
|
SELL |
|
|
Checkfree Corp |
CKFR |
38.43 |
40.78 |
|
H |
|
|
Cleveland-Cliffs |
CLF |
60.41 |
76.06 |
|
B |
|
|
Cryptologic |
CRYP |
23.67 |
33.39 |
|
B+ |
|
|
Immucor |
BLUD |
26.59 |
29.48 |
28.00 |
B |
|
|
Ipsco |
IPS |
51.33 |
57.00 |
|
B+ |
|
|
Meridian Gold |
MDG |
20.12 |
17.26 |
17.00 |
H |
|
|
Transcanada Corp |
TRP |
21.34 |
24.61 |
23.25 |
B |
|
|
Trident Microsys. |
TRID |
18.05 |
18.50 |
16.85 |
SOLD |
|
|
Western Silver Crp |
WTZ |
10.50 |
10.04 |
|
H |
New stops in BOLD
* Stop on a closing basis
** Buy if above entry price