So Hayes Lemmerz
Did sales collapse? Did DaimlerChrysler
Take a step back. Breathe.
Well, let's think about this logically. Listen, I'm no Wall Street guru. No hedge fund honcho. And I cannot speak authoritatively on what is happening. But at The Motley Fool, we don't believe you need a Wharton degree and a CFA to figure out how the market works. A bit of common sense should suffice to give us a workable theory on what is happening. Let's start with what we know:
• Last month, Hayes Lemmerz announced a rights offering, through which it would permit existing shareholders to purchase newly issued shares at $3.25 per share.
• A few moments before this announcement came out, Hayes shares were changing hands for $4.80 per stub.
• Through close of trading Wednesday, those same shares had rocketed 61% in price before bouncing off an $8 ceiling. (And we can make an educated guess that this rise arose in part because investors rushed to buy the stock at one price, in order to claim the right to buy more shares at a much lower price.)
• The record date on the rights offering is Tuesday, April 10. That means that if you own the shares by that date at any price, you get the right to buy the newly issued shares at $3.25 a pop.
• If all goes as planned, once the rights offering is completed on April 18, Hayes will have approximately 93.7 million shares outstanding -- 55.4 million of which cost their owners $3.25 each, and 38.3 million of which may have cost a lot more.
It's only logical that once the market gets flooded with the 55.4 million "cheap" shares two weeks from now, no one's going to be willing to buy investors' shares for $7 and up. Savvy traders, therefore, can be fairly certain that the share price of HAYZ stubs will plummet in the very near future. What to do? Sell shares short at $7 and up, in anticipation of buying them back (and pocketing the difference) once they settle at their post-recapitalization market price of $4 or $5.
That, in a nutshell, is what I think happened on Thursday. Strategic investors helped push the share price up in order to acquire "cheap" shares. Traders -- who may also be these same strategic investors -- are shorting shares in order to profit from the materialization of those cheap shares. Simple as that.
How's the rest of the wheel-making world turning? Find out in: