Financial Watch

Believe it or not, General Motors is up 44% on the year and is one of the Dow Jones best performing stocks so far this year. Shares of GM are being driven by hopes that its restructuring plan will put the company’s financial results back in the black next year. News that the company’s voluntary severance package is on pace to cut its workforce by 30,000 employees over the next year or so is positive news for the company. CEO Rick Wagoner also successfully led efforts to renegotiate GM’s health plan to bring it a little back in line with what is typical today in the automobile industry. The signs we are seeing from General Motors are positive, but this is a company that lost more than $10 billion last year. It still relies upon its huge SUV lineup to generate profits that offset losses in other car segments. A couple weeks back, General Motor’s latest campaign offered to help purchasers of sport utility vehicles to pay part of their gas bill. The latest promotion clearly points at the continuing problems the company faces should oil prices remain where most economists believe they will and not to mention foreign automakers are pushing further into General Motor’s most lucrative markets.

Jim Cramer of CNBC was first to jump on General Motor’s bandwagon. He is someone with one of the best records in this industry, which makes it even more difficult to criticize the company’s stock. Even the best are sometimes wrong. Since Cramer started touting the company’s prospects, Merrill Lynch and more recently Prudential have upgraded GM’s stock to favorable status. At Financial Watch we believe the recent optimism around General Motor’s stock is unwarranted. The company’s sale of its profitable GMAC unit will hurt General Motors down the line. Further, as the economy decelerates in the second half of the year consumers are expected to cut back some of their spending. For most of this decade, General Motors has relied on sales promotions to bring customers into its showrooms. Much of the slowdown later in the year will impact GM’s target market more than it will some of its competitors that serve broader market segments. What it all comes down to is that Financial Watch believes GM is taking some necessary steps to help its business rebound, but we recommend staying away from the company’s stock until we see the impacts of GM’s restructuring in its earnings reports.