Dow rides high on GM upswing

Wednesday, May 10, 2006


Brian J. O'Connor:

Dow rides high on GM upswing

Stocks rise almost 10 percent to close at $25.80



So who says accounting is boring?

Certainly not the folks at General Motors Corp., who saw Wall Street traders move more than 25 million shares of GM stock Tuesday, sending the price up almost 10 percent to close at $25.80, a gain of $2.25 a share.

Detroit's largest automaker took the Dow Jones average for a ride, too, carrying the blue-chip index to 11,639.77, a mere 83 off its all-time high.

All of this thanks mostly to one change in how GM accounted for a health care agreement with the United Auto Workers. That change meant GM earned $445 million in the first quarter instead of a previously reported $323 million loss.

Suddenly, the wobbling car company was in the black for the first time since 2004.

That doesn't necessarily change the company's fundamentals, but it did catch the attention of Deutsche Bank auto analyst Rod Lache, who upgraded GM stock from "sell" to "hold."

Lache noted that the prospects of a Delphi strike seem diminished, echoing comments Tuesday from GM CEO Rick Wagoner that he expects to reach a settlement with Delphi. The analyst also pointed out that GM has significant cash from its recent asset sales, and that sales are up, too, hitting a record for the last quarter.

Other analysts see progress in GM's restructuring, as well. Six of 15 analysts surveyed by Thomson Financial have raised their second-quarter earnings estimates on GM since April.

But that doesn't mean we can reset the "check engine" light on the carmaker's stock quite yet.

Yes, GM shares are up 38 percent since the start of the year, but it's the least the General can do for the Dow. Last year, GM stock dropped a whopping 52 percent, dragging the Dow down with it. Of all the dogs on the Dow for 2005, GM howled the longest and loudest.

And while the Dow index is back near its all-time high, GM is far away from its impressive share price back in the heady days of January 2000. On the day the Dow hit its record of 11,722.98, GM stock closed at $82.25.

Finally, not everyone on Wall Street is ready to put GM in gear. Seven analysts rate GM stock as a "sell," including Citigroup, which reaffirmed that sentiment Tuesday.

Still, the pop in GM shares shows that investors want to see the Oldsmobile of auto stocks back on track. It reflects a few other changes in the financial markets since the waning days of the millennial bull market.

First, it's the Dow nearing its record, not the Nasdaq. That tech-heavy index still wanders the street, muttering about the good old days. It lost 6.74 percent Tuesday, and at 2,338.25, is down more than half from its March 2000 record high of 5,048.62.

Instead of lining up for Pets.com and other Internet darlings, investors have been looking for the quality and stability of blue-chip stocks, such as the 30 companies that comprise the Dow Jones Industrial Average. These are well-established firms that pay regular dividends (GM still sends shareholders 25 cents each quarter) in key industries. Think Johnson & Johnson, 3M and Procter & Gamble. All told, 19 of the 30 stocks in the Dow average had an up day Tuesday.

Besides the resurgence of the blue chips, other factors in the economy are quite different from the bygone go-go days. Employment is up, but not at the record pace from the turn of the century. And, surprisingly, interest rates still are lower than in January 2000; the key Federal Funds rate was at 6.50 percent then, still 1.5 points higher than what the Fed is expected to set today.

Notes Nicholas Hopwood, a financial planner with Park Avenue Financial in Livonia: "We've really been through a lot since 2000 -- a full interest-rate cycle, a recession and right now the economy has been growing."

Other factors reflected in the market include the belief that the Federal Reserve is close to ending the latest cycle of interest-rate hikes, and the steady growth of the economy, which is showing amazing resilience to the catastrophic hurricanes of last year and the relentless hike in oil prices that have pushed crude to more than $70 a barrel.

So even though the Dow would be doing quite nicely, thank you, without GM's contribution Tuesday, and even though the company still has a lot of work to do, it's nothing but good that the firm almost universally introduced with the prelude "troubled automaker" stopped to pick up the blue chips and carry them further along the high road. GM is, after all, one of the original Dow 30, dating back to 1928.

And if you made money on those GM shares Tuesday? I say put aside a couple of bucks and take an accountant to lunch.

You can reach Brian J. O'Connor at (313) 222-2145 or boconnor@detnews.com.