GM’s Piple Dream

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GM (GM) CEO Rick Wagoner says that the big car company is OK despite the tough stock market and problems in the mortgage sector. According to Reuters, "GM’s exposure to the subprime mortgage market is mainly through ResCap, the home lending unit of its former finance arm GMAC." The company says that the division is doing fine right now.

But, GM’s exposure, at least over the rest of this year and into next, is in sales of its cars in the US. Wagoner says that he has no evidence from this past week that vehicle sales are being hurt, but it is too early to tell.

The number of mortgages that will reset to higher fixed rates will increase as the year goes on.

The markets can be very perceptive. GM’s shares are down over 15% during the last month. That is about the same drop that Bear Stearns (BSC) has suffered. As odd as it may seem, the market’s concerns for the companies is not entirely unrelated.

The default rate for mortgages will continue to rise. And, if pessimists are be to believed, it will become an economic bloodbath. GM cannot afford sharper drops in its US sales.

But, sharper drops are almost certainly on the way.

Douglas A. McIntyre