What's Bad for GM Is Bad for the Market

GM's stock fell sharply on news of the weak sales expectations, while its bonds spent most of the day moving in the opposite direction. Bonds were rallying through most of the day on the buyout news -- another step on GM's path to reaching its cost-savings goals and avoiding Chapter 11 bankruptcy protection. Bonds ended off their gains for the day, but they did not decline.

Another reason for the inverse correlation of stock and bond markets in volatile, news-sensitive securities such as GM is the popular hedge fund strategy known as capital-structure arbitrage. In this case, such funds might buy GM's bonds hoping for a payout when GM finally completes the sale of its finance unit GMAC, while shorting the stock, betting that its near-40% climb this year can't go much farther.

GM's long-term 8.375% bonds due 2033 had gained about 1 point, or 1 cent on the dollar, to 76 through the morning, but ended flat, according to MarketAxess, an electronic trading platform for corporate bonds. GM's shorter-duration bonds remained in the green by the afternoon. Its 7.2% bonds due 2011 were up 3/8 of a point at day's end.

"News about the employee buyouts in terms of the long term for GM and in terms of it becoming more cash-flow positive is really good news," says Eric Misenheimer, managing director of J&W Seligman & Co., where he has $450 million of high-yield assets under management. "The longer-term question is, 'Can GM sell cars?' ... Today people probably realized they're not done losing market share."

GM announced plans to offer zero-percent financing on many of its 2006 models to get cars off the dealers' lots. And amid the flurry of news, Standard & Poor's announcement that the company may yet be downgraded again got lost in the shuffle.

S&P's auto analyst Robert Schulz noted Tuesday that the company still has to deliver on other cost-cutting plans, such as plant closures, and it has yet to iron out its plan for reducing its exposure to bankrupt auto-parts supplier Delphi and its workers. Delphi was a spinoff of GM, and GM has legacy costs associated with its workers. S&P rates GM single-B.