For many investors, problem-ridden General Motors ($34.54) has been a hair-raising investment. Not so, though, for one reader, hairdresser Michael Loesser, who is sitting pretty with his shares of GM, one of the major comeback stocks of the year with about a 77% gain.

In an e-mail, he wrote: “Last December, I read that billionaire Kirk Kerkorian had bought a lot of GM stock (nearly 10%, or 56 million shares). I always figured billionaires were pretty smart people, so I took a shot and bought 3,000 shares in the high teens and low 20s.I only wish the Republicans could have done as well. My broker now tells me Merrill Lynch just recommended the stock and he thinks I should buy more. My fortuneteller, Madam Marko, agrees. She says the stock could go to $100. Any thoughts?”

For starters, change brokers. Yours gave you bum information. Merrill is not recommending GM; it is recommending the sale of GM. As for Madam Marko, you’re on your own, but I’d be skeptical because I’m not convinced tarot cards are ready to replace sound fundamental analysis by auto industry analysts.

Not only that. One top Merrill strategist is privately telling some institutional clients he believes once the market grasps that GM is far from out of the woods, down go its shares again, possibly to around their 52-week low of $18.33.

As a result of what it considers light operating results in the third quarter, notably in North America, Merrill recently downgraded GM from a buy to a sale. The giant run in the automaker’s shares from their January low also led the brokerage biggie to determine that the market already recognizes — and is optimistically pricing in — incremental fundamental improvements at GM that are progressing at a slower pace than it had anticipated.

Actually, GM’s reported third-quarter operating earnings of $0.93 a share, which topped Merrill analyst John Murphy’s projection of $0.50 and the consensus forecast of $0.49. However, the GM numbers included discrete tax items of $340 million or $0.60 a share, which means operating results were light.

The current quarter also has a strike against it. Last Tuesday, GM said it would take a fourth-quarter charge of $200 million related to the closure of two plants owned by a former subsidiary.

As a result, Mr. Murphy has scaled back his 2007 earnings estimates from $5.25 to $4.25 a share, which, he notes, may represent a profit peak. One key reason for the cutback: His expectation that operating leverage in North America — which he thought would be re-established as the company worked though its restructuring efforts — though showing a more positive tone, is not recurring at the rate he had expected. In the third quarter, he had viewed the potential upside in the North American pretax profit margin at 1%, but it came in at a disappointing minus 1.8%.

Likewise, he points out, major swing factors from 2006 to 2007,such as buyout and healthcare savings, will not be repeated. It should also be noted that with new accounting treatments by year’s end, GM will take a hit to book equity of between $18 billion and $25 billion.

Although valuation on a P/E basis (8.3) indicates the valuation is not stretched, Mr. Murphy believes the risk-reward is no longer attractive. However, he notes if he were to shave his net cost savings by $1 billion to $2 billion, which he views as the downside, his 2007 earnings estimate would then be scaled back to $1.43 to $2.84 a share, thus implying a P/E of 12.24.

It’s also worth noting that 89-year-old Mr. Kerkorian, who boasts a net worth of $10 billion, clearly is having some second thoughts about his GM holdings. On September 28, he announced in an SEC filing that he was prepared to boost his stake to 12% through the purchase of another 12 million shares. But a little over a week later, Tracinda Corp., Mr. Kerkorian’s investment arm, disclosed he had changed his mind, based on GM’S decision to end its alliance talks with Renault and Nissan.

This action has raised speculation Mr. Kerkorian may choose to lower his GM stake. Some pros say any such indication that this is so could easily batter the automaker’s shares, quickly knocking it down perhaps $5 to $7 a share.

A spokeswoman for Mr. Kerkorian and Tracinda declined to respond to calls seeking comment.

A GM spokesman said the company wouldn’t comment on Merrill’s observations, nor, for that matter, on those by Madam Marko.

Meanwhile, despite the optimism of GM’s top brass, skeptics like Merrill remain numerous. Indicative of this, GM’s short position — a bet the stock price will decline — currently stands at a hefty 63.8 million shares, though that’s down from 77 million shares a few months early.

Money manager Jim Melcher of Balestra Capital was one of those shorts who covered his position, in the process losing some money.”GM still has massive problems, but the market is acting like it’s a growth stock,” he says. In particular, he points to high labor costs, especially pensions and health, further inroads by Toyota and GM’s ongoing inability to excite the driving public with new designs. Noting signs of a consumer slowdown, Mr. Melcher says if those signs become more visible, he may well short GM once again.

My take on it all is that while billionaires are by no means infallible, it’s worth keeping in mind they didn’t become billionaires by making dumb investments.

dandordan@aol.com