Kerkorian News May Have Squeezed GM Short Sellers

Value-oriented investors may have piggybacked on Kirk Kerkorian’s surprise interest in General Motors Corp. stock Wednesday, but some analysts said another group of buyers also helped fuel the stock’s 18% surge: “short sellers” who had been expecting that the price would continue to plunge.

The number of shorted GM shares -- stock that had been borrowed and sold in a bet that its price would drop -- totaled 78.3 million as of mid-April, up 46% from 53.7 million in mid-March, according to New York Stock Exchange data.

In a short sale, a trader who expects a stock to slide borrows the shares from another investor and sells them in the open market. If the stock in fact falls, the trader profits by eventually repaying the loan with shares bought at a lower price. The profit is the difference between the sale and repurchase prices.

If, however, the stock’s market price soars, a short seller faces the prospect of buying back shares for more than his sale price. So a sudden reversal in a falling stock can cause a scramble by short sellers to buy shares and close out their bets before their losses deepen. That’s called a “short squeeze.”

As GM shares jumped Wednesday, finishing up $5.03 at $32.80, the talk on Wall Street was that short sellers were bailing out. Joseph Amaturo, an analyst at Calyon Securities in New York, told clients in a research note that he expected “a major short squeeze” in the stock.

One reason traders may have been emboldened to heavily short GM shares was the rumor that the automaker might be forced to file for bankruptcy protection to slash certain costs, such as worker benefits.

Kerkorian’s disclosure that he owned nearly 4% of GM shares, and wanted to raise his stake to 8.8%, suggested that the veteran investor did not believe that GM was in danger of bankruptcy. Often in bankruptcy filings, common stockholders lose all or much of their investments -- and short sellers earn huge returns.

“You wouldn’t think he’d be loading up on GM equity if he thought bankruptcy was likely,” said John Buckingham, head of Al Frank Asset Management in Laguna Beach and a GM shareholder.

Reuters was used in compiling this report.