UAW Strike Raises Ford,GM,Stellantis Stock Prices?

I could not believe my eyes when I came across the news article with the contentious title (see below).

This is especially so in view that the strike is into its 10th day since it commenced on 15 Sep 2023.

Before jumping into the subject proper, I thought it is fitting to have a summary of events leading up to the strike.

• The strike did not just happen out of the blue, truth be told.

• It dated back to year 2008 where the economic recession took its toll on the auto industry.

• The labour union supported the auto industry heads by signing away some of the concessions with the understanding that they would be reinstated when the industry recovers.

• The promise remained unfulfilled until 14 Sep 2023 when the contract expires. {Is it naive to expect corporate America to do the right thing? LOL!}

• On the run up to contract expiry, despite several negotiations it was a stalemate between the labour union and the the Heads of the 3 automotives namely, $Ford(F)$ , $General Motors(GM)$ and $Stellantis NV(STLA)$.

Demands in brief:

1. Pay adjustments.

2. 4-day workweek & more time off with family.

3. Right to strike over plant closings.

4. Reinstate the traditional pension payment plans.

5. Limited use of temp workers.

Let's jump back into subject proper

• In light of the on-going strike by UAW, speculators are betting against the Big 3 car makers. Stellantis.

• According to S3 Partners (a research firm that tracks bearish bets on Wall Street), as of 18 Sep 2023, the Big 3 are among the Top 10 most shorted auto stocks.

• Ford is the 3rd most shorted auto stock. GM is 7th and Stellantis is 10th.

• As the strike extends and the scale enlarges, these 2 conditions will become the driving force behind a possible increased short selling of the Big 3.

Is a bet against the Big 3 a strategy that could backfire like an old truck engine?

• Shorting a stock means speculators borrow stocks they do not have and sell them.

• With the hope of purchasing the “loan” stocks at a lower price, before returning them to the lender.

• The profits a speculator pockets will be the difference between the price he initially shorted the stock at and the price he bought back the shares to cover the position.

• In the event that a shorted stock’s price rises, the short seller risks losing money if the borrowed stock keeps going up before they return the shares.

• This is known as a short squeeze.

• To mitigate, short sellers often have to quickly scoop up (buy) the stock they shorted before their losses mount.

• This “cover the base” buying pushes the stock price even higher.

• Another possible catalyst for a short squeeze would be an eventual resolution to the UAW strike.

• S3 analyst has added “once the strike is settled, should expect a flood of buy-to-covers as auto\truck production returns to normal level “.

• In 2023 alone, short sellers have lost a chunk of money betting against the Big 3.

• S3 said that Ford shorts are sitting on a -10% loss so far.

• With Stellantis short position is -22% in the red.

• Lastly, GM short trade has gained less than +1% this year.

• Interestingly, short sellers have been piling into auto stocks in general this year…and not just because of Detroit’s labor woes.

Speculators blindsided by 4 factors?

Possible That Short Sellers Have Miscalculated?

1. The strike could boost consumer loyalty and brand image, as customers may appreciate the quality and reliability of American-made cars and support the workers' fight for better wages and benefits.

2. Realistically, the strike could help the automakers reduce their inventory levels that have been inflated by the semiconductor chip shortage, the pandemic and improve their profit margins.

3. The strike highlighted that the demand for cars (both ICE & EV) is strong. Automakers have bargaining power over the union, which could lead to more favorable labor contracts in the future. Still remember the unfulfilled promise mentioned in above paragraph?

4. The strike could accelerate the transition to electric vehicles (EVs), which are more profitable and less labour-intensive than traditional cars and give the automakers an edge over the labour union.

• In general, betting against the auto industry right now may just be a lemon of an idea.

• As I have commented in one of Tiger’s post, it is “justifiable” to ask for a better pay package, in lieu of the “missed” income for the past 13 years of compromised income.

• Demanding for pension scheme reinstatement is “ridiculous”. Pension or pension-like schemes were a thing of the past when lives were simpler then.

• The union should at least force Management’s to agree to their wages-freeze for X-years, so that there are more profits (money) to be shared with the working class.

• Do not discount that after this round of negotiation, the Big 3 might just shift EV production to outside of US eg. to Vietnam where (a) it has a young population, (b) it is growing at an accelerating rate, (d) it knows how to build EV.

• $VinFast Auto(VFS)$ looks like an incredible partner to help American’s car makers realize their electrification dream, be it in the States or outside.

• Do you think it is risky to invest in the 3 Big car makers now before stock rebound?

• Do you think the strike will end next week or persists into October?

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