WSJ(7/28) For Short Sellers Of GM, A Trip To The Scrap Heap
(From THE WALL STREET JOURNAL)
By Gregory Zuckerman and Ian McDonald
THE GM BEARS got run over.
Maligned on Wall Street because of its massive benefit costs and poorly selling cars, General Motors Corp. has been a popular trade for short sellers, who bet against a stock by borrowing it, selling it and replacing the loan later when the price has dropped. At the beginning of this year, 17% of GM's outstanding shares were sold short, up from 10% five months earlier.
Large household-name companies rarely see the short-interest percentage in their stocks climb above single digits, but given GM's woes, the shorts felt they had a sure thing in betting against the world's largest auto maker.
That sure thing has turned into a pileup of wrecked trades: GM shares are up 60% over the past few months, making it the top performer among the component companies of an otherwise sideways-moving Dow Jones Industrial Average. A rally in a shorted stock hurts the short seller, who sometimes must pay higher fees on the borrowed stock or, in a worst-case scenario, buy the stock back at its higher price and close out the trade, registering a loss.
"It was a very popular short at the beginning of the year, but since April, it's been working against you," says Joseph Amaturo, an auto analyst at Calyon Securities in New York. "There's a fair amount of pain."
Adds a hedge-fund manager who has lost money betting against GM: "Earlier this year, you couldn't go to a dinner without someone pitching you an idea on shorting GM . . . but there's been a giant sucking sound of hedge funds losing money" in the past few months.
Some shorts have salved their wounds with simultaneous purchases of GM bonds, which have also recovered along with the stock. GM's long-dated bonds have climbed to about 80 cents on the dollar from 70 cents in recent months.
Behind the gains in GM securities: The troubled auto maker has slashed costs and head count faster than expected and shored up its balance sheet. The much-discussed prospect of a partnership with big rivals Nissan Motor Co. and Renault SA has also lifted GM's stocks and bonds. The idea of such a partnership was put on the table by big GM investor Kirk Kerkorian, whose holdings of GM stock have moved into the black recently.
Traders say that a number of short sellers have trimmed or eliminated their bets against GM in recent months by buying the stock. As of midmonth -- the latest period for which data are available from the New York Stock Exchange -- the short interest in GM stock had dropped several percentage points to 14%.
Some large, traditionally buy-and-hold investors like Capital Research & Management Co., Brandes Investment Partners, and Southeastern Asset Management were among the stock's five-biggest holders at the end of the first quarter, according to regulatory filings. All three firms either declined to comment or couldn't be reached for comment.
Still, the stock's run-up is testing the mettle of critics and fans alike. Those who own the stock are trying to decide if they should pocket these hefty gains and move on. Bulls and bears agree that the rally, driven mainly by the company's cost cutting, says little about GM's long-term ability to design cars that people want to buy. And ever-rising oil prices work against an auto maker that continues to focus on gas-guzzling sport-utility vehicles.
"You can cost cut your way to profitability, but you can't cost cut your way to prosperity," says David Kudla, chief investment strategist at Mainstay Capital Management LLC, a Grand Blanc, Mich., financial-advisory firm that manages money for hundreds of current and former GM employees.
Donald Hodges bought GM in the high teens and low 20s early this year for the $523 million Hodges Fund he co-manages in Dallas. But he sold just months later when the stock rose to about $26. "It may keep going, but certainly at this point I think you have as much downside risk as upside risk," Mr. Hodges says.
Seth Tobias, who runs Circle T Partners LP, a $250 million hedge fund in New York, and has made money shorting GM in the past year, says for the time being he is wary about taking on a new short position, explaining that it isn't clear which factor or factors will drive the stock from here.
"There are still tremendous head winds," Mr. Tobias says. "It's hard to say the bankruptcy case in the near term is a valid case, and now it's no longer trading on pure fundamentals, but on the prospects of a possible Nissan-Renault joint venture."
Still, some bears have established new short positions in GM shares in the past few days, noting that the auto maker in an earnings report this week noted that it continues to lose market share.
messages.finance.yahoo.com |
