ZAY Blog

Today was obviously an interesting day to see on GM and F and the not-listed Chrysler.

The news started to unfold at 9am, when President Bush announced the bailout plan for the Big Three (Big Two rather, since Ford is not asking for money), and the market reacted extremely positive at pre-market, when share price went up as high as 4.80 at one point of time.

Then market opened and within minutes, the share price fell back like free fall before coming back to 4.20 and stayed there for pretty much the rest of the day, and shot up to 4.47 right before the end of the day.

The day was particularly interesting as today is the expire date of all stock options expiring in December, and the market is definitely more volatile than usual despite the fact that it was trading at positive territory for the whole day.

First, my condolence to those owner of the put options, or those who wrote calls. The 3- and 4-dollar strike puts were virtually worthless, if the announcement were made a couple of days ago, there was still a chance of profiting from those puts, but unfortunately Bush just happened to announce it on the exercise day.

What surprised me, in this case, is all those shorters? Don’t they need to cover their positions ASAP? And why the stock is not shooting up as the short interests was almost 50% of the market cap?

Look at Citigroup, their shares were traded at 4 region, but went up to as high as 8.5 after the bailout. Why not GM and F?

My only guess is that the shorters have either shorted early enough to get a really good price, or they simply do not want to realize the loss and hope the price would bounce back a little or hold the short position till March and see if GM and Ford could turn in a reasonable rescue plan to restructure themselves.

However, today’s trading was by no means a good indicator of the perception of investors, since lots of options were exercised right before the market was closed (look at the last five minutes), the real reaction from the market to the bailout package would be in on Monday, when the regular trading resumes.

By then, hopefully the market will react more rationally to the news.

For the past two days, we’ve witnessed one of what I would personally considered as the most hilarious jokes of the year unfolded on Wall Street.

Quick quiz to those of you who are reading this:

1. If a company that has not lost a single cent ever since it went public in 1999, and was labelled the most profitable firm in Wall Street, has reported a quarterly loss, how should the market react?

2. If the average of the analysts’ estimate of the loss is $3.73 per share, and the company ended up lost $4.97 per share, how should the market react (based on either the Arbitrage Price Theory that I am sure every single finance student would know, or simply your guts feeling?)

I guess the most common answer would be the decline in share price.

And that happened to Goldman Sachs yesterday.

And GS rallied 15% yesterday.

It was interesting to see how the helpless financial news reporters say about this. The editors in Bloomberg, after scratching their heads for hours, came up with the excuse that the performance was better than the most pessimistic estimate from an analyst in UBS AG, who was predicting $5.50 per share loss (I bet all those shorters want to beat the hell out of that guy now). (http://www.bloomberg.com/apps/news?pid=20670001&refer=&sid=a6ku8xZK62X0) New York Times, being more political, simply said that it was “in line” with analysts’ estimates (OK, perhaps my English is really bad, but do English-speaking community generally consider miss by 33% from average as “in-line”?)

And the story did not end here.

This morning, Morgan Stanley reported its quarterly loss.

And this time, the average from analysts was 34 cents per share loss, with no estimate more than $1.15, according to Bloomberg.(http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=MS%3AUS&sid=aKpeqFFx_giU)

The results was $2.24 per share loss.

Interesting enough, the share of MS rallied as much as 9.14% at one point of time before closing at 2.3% rise.

Now the most interesting part came, as both Bloomberg and New York Times found themselves in a awkward position that they could no longer explain the reason for such spike.

And their strategy was simple: based on facts. They simply reported the loss with no analysis/explanations.