Tuesday, June 02, 2009

Can anyone offer any rational explanation for the action yesterday in GM stock?

Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, and who "covers the world of finance and economics" asked the question: Can anyone offer any rational explanation for the action today in G.M. stock? I'll bite. Yes, there is at least one very rational explanation: Short covering. Not all "buying" is to invest in new long positions. Some buying is simply to close out short positions. Now that "old" GM's fate is sealed, some shorts may simply wanted to get out of the game and move to some more promising trade. Granted, old GM stock is "headed for zero", but that little bit of icing on the cake may not be as significant as finding a new and more promising target company to short.

So, the stock goes up as speculators buy to "cover their shorts." Then, with all that shortable stock once more available, those "bought" shares could be borrowed again and "sold" to open short positions, taking the stock price back to where it started.

There, was that so hard to understand.

Granted, there may also have been a lot of other trading and speculation transactions going on, but at a minimum there is at least one plausible rational explanation.

Nobody ever knows exactly why any stock trades in any specific pattern, but it is inexcusable to assert that there is no possible rational explanation when a plausible explanation is readily at hand.

Now, can anyone give me a clue as to why Mr. Norris is so clueless on this matter and why he refused to enlighten readers as I just did above?

-- Jack Krupansky


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