From Moneynews

Warren Buffett’s Berkshire Hathaway Inc. cut its stake in General Motors Co. in the first quarter and some hedge funds including Greenlight Capital Inc. exited completely as the carmaker recalled a record number of vehicles.

Berkshire reduced its GM holdings by 25 percent during the three-month period to 30 million shares, the Omaha, Nebraska- based company said in a regulatory filing. Greenlight, run by David Einhorn, liquidated about 17 million shares worth about $697 million as of March 31, according to a filing.

GM recalled 2.7 million cars Thursday for issues including potentially faulty brake lights, lifting its total for vehicles called back in the U.S. this year to 11.2 million. Chief Executive Officer Mary Barra has reorganized GM’s engineering department and introduced a program to spur employees to flag safety concerns amid investigations of the company’s handling of a defective ignition switch linked to 13 deaths.

“While a number of factors have pushed GM stock downward recently, the controversy around the ignition switch recall appears to have had a chilling effect, and has underscored the idea that despite attractive valuation, GM might perpetually be a value trap,” Brian Johnson, a Chicago-based analyst at Barclays Plc who rates GM the equivalent of a buy, wrote in a May 14 report.

Berkshire first bought a stake in GM, the largest U.S. automaker, in the first quarter of 2012. The purchase led Adam Jonas, an auto analyst at Morgan Stanley, to publish a report titled “Buffett Motors.”

Praising Barra

Buffett, 83, said this month at Berkshire’s annual meeting that he had lunch with Barra about a week earlier and called her “terrific” in an interview with CNBC. He said he didn’t hold GM shares personally and that Berkshire’s decisions related to its stake in the carmaker would be made by deputy investment manager Ted Weschler.

Einhorn’s Greenlight is best known for wagering on a decline in Lehman Brothers Holdings Inc. before the bank collapsed in 2008. GM was Greenlight’s third-biggest position by market value as of the end of last year.

Eton Park Capital Management LP, run by former Goldman Sachs Group Inc. partner Eric Mindich, sold out of 2.74 million GM shares worth about $112 million as of March 31, according to a filing. Omega Advisors Inc., the hedge fund run by former Goldman Sachs Group Inc. analyst Leon Cooperman, also liquidated about 1.05 million GM shares worth about $43 million.

Stake Increases

Other hedge funds boosted their stakes in GM during the first three months of the year, including David Tepper’s Appaloosa Management LP, which raised its holdings to about 7.9 million shares worth $271.4 million.

Kyle Bass’s Hayman Capital Management LP increased its position in GM by 54 percent to about 7.1 million shares worth $243.9 million, according to a filing. Bass, known for his bet against subprime home mortgages before the financial crisis, disclosed that it took a stake in GM late last year.

Overall, institutional investors increased their stakes in GM by about 17 million shares during the quarter, while the market value of their holdings fell about $3.3 billion, according to data compiled by Bloomberg from 13F filings.

GM shares dropped 1.7 percent to $34.36 Thursday. The stock declined 16 percent in the first quarter, compared with a 1.3 percent gain for the S&P 500 Index.

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IMAGE: www.clickondetroit.com

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The automotive industry is in a major crisis and it’s only getting worse

THE ECONOMIST From Business Insider

Tax hikes, devaluation, rising interest rates and lower demand in foreign markets have combined to push the automotive industry into a deep crisis. The decline of production, exports and sales has accelerated in recent months, and is having a serious knock-on impact on employment and economic activity.

The woes of the automotive industry reflect a combination of factors. Domestically, these have included a rise in taxes on luxury models implemented in November 2013, which pushed the tax rate on the most expensive models (which are imported) up to 50%, in an effort to bolster the dwindling trade surplus. January’s 15% peso devaluation has also boosted automotive prices (as many cars are imported from Brazil, and the use of imported inputs in the industry is prevalent). The sharp interest-rate hike that followed January’s devaluation has also reduced supply of and demand for credit and had a major dampening effect on sales, which had been boosted in recent years by easy access to credit. Externally, persistently weak growth of the economy in Brazil, the main destination of Argentina’s car exports, has hit the industry’s sales abroad.

Production, sales and exports are all down

As a result, production, exports and domestic-sales indicators fell dramatically in the first four months of the year. Local automotive production dropped by 18% year on year in January-April, to 206,581 units. Car production, which accounts for just under two-thirds of the total, fell by 23%, while production of passenger-transport vehicles fell by 43% and that of SUVs was down by 7%. Production of freight vehicles actually rose by 6%, but they represent just 3% of total output. The unsold stock of cars is now 200,000 units, equivalent to three months of sales. This is only around 10% higher than the year-earlier period, but the relatively modest increase in unsold cars reflects the frequent stoppages at car-assembly plants in recent months.

Sales in the domestic market fell by 30%, to 202,652 units. Sales of locally assembled vehicles were down by 26%, but sales of imported vehicles fell by more than twice that figure (59%), reflecting the substantial impact of devaluation and the recent tax hike on (imported) luxury models. Suggesting the outlook for consumers is, if anything, worsening, the decline in sales has actually accelerated during the course of January-April, to reach 40% in April.

Exports, meanwhile, contracted by 19% in January-April, to 106,827 units. Exports are highly dependent on the Brazilian market, which accounts for more than 80% of total exports. This dependence has been cemented by agreements under the framework of the Mercado Común del Sur (Mercosur, the Southern Cone customs union), which has led to an increasingly integrated production and sales network. In this context, synchronous economic downturns have exacerbated weaknesses in the automotive industries in both countries. Talks are currently under way between the two countries to attempt to agree a new trade strategy, following the expiry last year of the automotive complementarity agreement governing tariffs between the two countries, and, more broadly, to help promote recovery in the industry via a joint external-promotion strategy.

Knock-on effects

The slump in production and sales will lead to job losses. According to union estimates, around 12,000 workers (out of a total of 100,000 in the industry) are at risk of redundancy, and some workers have already been dismissed. Labour troubles are more serious in the auto-parts segment: for small auto-parts companies, labour costs represent 30-35% of production costs, and these companies are unable to sustain employment during downturns. Labour troubles are also affecting cars distributors (of which there are around 800), as well as those in the logistics and transportation sectors.

Given the industry’s typical spillover effects (it has been estimated that each new job in the car industry generates 3.7 additional jobs elsewhere), the slump will soon also be reflected in other industries, such as metallurgy, aluminium, chemicals, plastics and glass. It is unclear as yet how the government intends to respond. Some months ago, there were rumours that the government would rescind or reduce the recent automotive-tax increase, but this has been denied by government representatives. Cheaper directed credits may well be attempted instead, but, amid extremely weak consumer and business confidence, this is likely to have only a relatively muted impact, at least in the short term, and a quick recovery does not appear to be on the cards.

PHOTO: Jens Schlueter/Getty Images

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