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.