Sunday, December 2, 2012

Market Anomaly

In my previous post, I mentioned the institutional owners of Suntech who own stock in a company with bonds yielding 500-1000% to maturity. What is wrong with them? Why on earth wouldn't you trade up in the capital structure?

Similarly, GMX Resources is apparently unable to borrow unsecured, as evidenced by its recent secured borrowing and the fact that its unsecured debt yields 40 percent. How can you justify owning the equity?

I just saw an important paper on our worthless stock inefficiency concept: Dead Stocks Walking: Investor Irrationality in Worthless Stocks,

"This study documents clear evidence of investor irrationality using a sample of bankrupt firm stocks that were canceled without any payoff under the confirmed reorganization plan. Although the intrinsic value of these stocks is zero after the plan confirmation, some of them have sizable dollar trading volume. Prices are higher for more heavily traded or popular stocks, which are more likely to attract uninformed investors. We also document irrational price responses of the worthless stocks to news events. Short-covering cannot account for the price and trading volume observed for worthless stocks."
STP and GMXR aren't worthless yet, but the bond prices imply that they are well on their way to being there.


eahilf said...

Why on earth wouldn't you trade up in the capital structure?

Because to do so they'd have to realize a huge loss? And might be throwing good money after bad?

A better question: Why have anything at all to do with a Chinese company? Like there hasn't been enough fraud to scare all but the most recklessly imprudent investors away?

I won't have anything to do with them. No exceptions. The Chinese cannot be trusted (and that includes the government/rule of law generally). That goes for the bonds as well as equity.

CP said...

So you're saying that if security A is better than security B, they shouldn't swap because of... sunk costs?