GM Files for Bankruptcy: Its Bonds and Shares Rise

Now, no one will be surprised by the fact that General Motors (GM) was finally pushed into bankruptcy, most of us have seen this coming for the better part of a year. However, how can this filing lead to the stock rising on the very same day, more than 10% in afternoon trading. According to the Wall Street Journal, even the companies bonds are trading higher today. It begs the question, why would anyone buy a company on the day it declares bankruptcy? Even more confusing, how are their more buyers than sellers? The simple answer it seems to me is that there is speculation taking the forefront on GM shares.

“One thing I will say about GM, I would be a huge seller of that stock. If it were up to me, GM should have been liquidated. I think we would have seen a much better response or reaction created by letting this thing dissolve and letting the American spirit live on by breaking it up into better companies. Anyway, stay away from GM. I would definitely be looking at Ford. Ford is really cheap…It’s going to zero. I’m telling you, as far as General Motors, they buy you drinks in Vegas to take a chump this is a chump bet. If you’re buying General Motors, go to Vegas, fly out there. They’ll probably buy your drink and hotel room and [GM’s] not a good bet right now.” CNBC’s Power Lunch 6/1/2009

There has certainly been a lot of news surrounding GM shares recently as the company has negotiated the sale of its German unit, reworked labor contracts, and even pacified the bond holders to some extent. However, equity holders very often are wiped out in bankruptcy proceedings, apparently there is a crowd of traders that believes that this bankruptcy will somehow be different. Its not like there is insignificant volume as just past midpoint in the trading day volume is 5 times its average daily volume in the last 3 months, according to Yahoo finance. Sure there may be some people out there that think that it is possible to make money in bankrupt stocks, but with the $172 billion worth of liabilities GM claims then logic just does not seem to support that notion. So, could this be explained as all the institutional short sellers covering their positions? Possibly, it seems to be the most reasonable explanation. One thing is clear, any retail investor looking to ride this wave to a quick payout probably has better odds actually heading out to Vegas and seeing where the chips fall.

GM Files Chapter 11: Its Bonds and Shares Rise

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.


*