The DCX Commotion (DCX)

The U.S. automotive sector has always been susceptible to news and events that terrified investors one week then emboldened them the next.

So, not surprisingly, shares of the Big Three U.S. automakers -- DamilerChrysler (NYSE: DCX), General Motors (NYSE: GM) and Ford (NYSE: F) -- often show a great deal of movement. Recently, investor attention has been riveted to DCX.

Rumored Sale
Since the beginning of the year, DamilerChrysler shares have skyrocketed, going up 33%. Daimler's rumored sale of its North-American division Chrysler is the reason for this jump. The sale has been looming for awhile now, and holders of Daimler finally lost their nerve.

Daimler paid $36 billion for Chrysler in 1998. However, hopes that the company pinned on the purchase have not proved to be justified. The company is considering selling Chryslerto the investment company Tracinda Corp., owned by Kirk Kerkorian, for $4.5 billion. This information has caused investors to begin snapping up the company's shares.

Fueled by the rumors, speculative sentiment around DCX shares is growing. This is connected with the possibility of an increased selling price.

Paradoxical Growth
An interesting situation can be observed: Things are going sour for American automakers (sales are plummeting, marketing policy leaves much to be desired, Japanese competition is ousting them from the market), yet DCX shares keep going up.

Adding to the problems of U.S. automakers are tensions around Iraq and Iran that prevent oil prices from going down. Additionally, you have the housing-market slump and a relatively high US interest rate. The U.S. Fed Funds Rate constitutes 5.25%, whereas in Japan, America's premier competitor on the car market, the discount rate equals 0.75%. The difference is more than considerable. (For related reading, see Using Consumer Spending As A Market Indicator.)

Some support could be provided by the weakening of the U.S. dollar against the Yen. However, one can hardly hope for any serious move in this direction in the foreseeable future. In fact, a tendency toward the gradual strengthening of the Dollar can be seen of late.

However, despite the bleak state of the matters, DCX share prices continue to grow. Some of the investors purchase DCX shares hoping that the value of the deal will grow, thus causing the price of the shares to grow too. Therefore, we see a situation where the rate of the shares is growing, not because of the company's performance indicators, but because of information on a possible sale and speculative sentiment among the investors.

One should bear in mind that, as a rule, this kind of rapid growth is exhausted sooner or later and is usually followed by a drastic slump. This happens when the first disappointed investors start closing their long positions.

Conclusion
The potential for growth in the North American automotive sector maybe petering out, and it can only be restored by an increase in the value of the DCX deal. That is why one should take into consideration all the related risk and be very careful buying both DCX shares and those of the other U.S. automakers.


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