GM Could Be One of the Best Shorts Ever

The hype over General Motors's (GM) initial public offering just reached a boil with the automaker deciding to raise its estimate of the offering price to $32 to $33 from $26 to $29. The question is whether these prices make GM stock look more like a short than a long position.

The risk is that lots of buyers of the new GM will try to capitalize quickly, aware how abruptly momentum can reverse in the automobile industry. Today's hero can turn into a bum overnight. Just ask Toyota (NYSE: TM).

In GM's case, the dangers to the stock are many. First of all, competition. Toyota will be back with a vengeance. Hyundai is a rising force in the U.S. Volkswagen has more or less announced a blitzkrieg policy for world domination. Conflict among these automakers, which drives up unit sales, forces down pricing. Strong vehicle prices, achieved with admirable production discipline, has been a key reason GM has done well since the bankruptcy.

Another risk for GM is the economy. The Fed's quantitative easing is a policy erected against the danger of deflation. QE2 might work, it might not. In any event the odds of a double dip recession isn't close to zero.

Finally, GM is still GM. For all the government's financial medicine, the automaker has to change its culture, to move faster and learn to be more commercial and less bureaucratic. At least that's what its own top executives say.

From General Motor's perspective, raising the estimate on the share price makes sense in light of a $2 billion profit in the third quarter and the likelihood of a major GM stake being purchased by SAIC (NYSE: SAI), its partner in China. Another reason to expect strong near-term earnings includes the fact that GM, which has little debt, won't pay much in federal tax for years due to a loophole that allowed tax-losses to be carried forward from the bankrupt predecessor.

Don't be surprised to see lots of volatility in GM shares for the next few weeks, if not months. Smart money will keep one eye on the exit.