Tuesday, February 27, 2007

Calls of Note Part 1

- Bear Stearns is negative on General Motors (NYSE:GM) saying they believe GM equity is increasingly complacent about four dynamics: 1) subprime mortgage exposure; 2) a Goodyear-type buyout; 3) the benefits of any potential GM/Chrysler merger; and 4) GM's inventories and risk of additional production cuts. Firm would take trading profits today ahead of subprime disclosure and February auto sales later this week.

Near-term, their biggest concern on the equity side is whether GM stock sufficiently discounts ResCap's subprime exposure. GM faces deadlines this week for its 10K filing and GMAC's Final Balance Sheet. Firm believes both force heightened scrutiny of the adequacy of ResCap's loan loss provisions. In addition to any true-up, on the equity side, they directionally believe ongoing subprime concerns may pose headwinds for GMAC. This is important because GM's 49% equity stake represents all of Bear's 2007-08 EPS estimates.

In Bear's view, a Chrysler merger would increase GM's exposure to the U.S. auto market (consumers, brands, dealers, suppliers, unions, daily rental fleet sales), and would potentially require divestiture of some of Chrysler's light truck assets for market concentration reasons.

Also, firm estimates GM dealers are carrying over 150 days of T-900 inventories. A production cut seems inevitable. Maintains Peer Perform.

Notablecalls: Not actionable but good to know category. Where were you guys 10 days ago?

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