Who Let The Dogs Out? (MTLQQ, FNM, FRE, AIG)

As a market participant you're probably dumbfounded by the recent doubles in the stock prices of bailed-out companies Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and AIG (NYSE: AIG). After all, these companies are majority-owned by the government and are on the hook for billions and billions of taxpayer dollars. The equity value of these companies is basically a speculative call option that some-how-some-way there will be something leftover for common shareholders after all is said and done.

Well, if the action in these stocks blows your mind, then this one may put you in the loony bin. So if you don't think you can handle it then please stop reading now.

Okay, so you decided you can handle it. Are you sure? Last chance.

The stock we are talking about is non other than the bankrupt, debt ridden, rotting corpse of a company called Motors Liquidation Company (OTC: MTLQQ). This company is basically the left over junk from the old-General Motors. As we all know, the new GM, which is majority owned by the Federal government, is a totally separate company and not publicly traded at this point.

In the months ahead of GM's emergence from bankruptcy in July, speculators were playing the stock of the old GM, which at that point traded under the symbol "GMGMQ." At first there was a hope that the shareholders of the old GM would get up to 1% of the new company, but this hope faded as bond holders took the last fractions of good or 'new GM' after the U.S and Canadian government and health care trust VEBA took their stakes. Despite the writing on the wall that shares would be worthless, speculators continued to play the stock driving it higher and higher. In fact, on July 1 the management of GM had to make a public statement that the shares of old-GM would be worthless. Surely this would do the trick, right? Wrong - shares continued to trade higher and higher into the news of its emergence from bankruptcy.

As news of GM's emergence from bankruptcy hit the airwaves, investors, hoping to get a piece of the new GM, bought the old-GM "GMGMQ" instead. Shares of GMGMQ traded up 37% on Friday July 10th before being halted by FINRA on the confusion. After being halted for two and a half trading sessions, shares of the 'old GM' now named Motors Liquidation Company re-opened for trading under a new symbol "MTLQQ." With the re-opening, FINRA issued a rare warning on the risk of trading in securities of bankrupt companies. FINRA said, "When a company files for reorganization under the federal bankruptcy laws, investors are often tempted to buy or hold the company's common stock in anticipation that the company that emerges from bankruptcy will be profitable. The reality is, however, that when companies emerge from bankruptcy, the common stock of the "old" company is usually worthless. In most instances, the company's plan of reorganization will cancel the existing equity shares." FINRRA states, Investors should understand that buying common stock of companies in Chapter 11 bankruptcy is extremely risky and can lead to financial loss.

After re-opening under the new symbol, shares of MTLQQ quickly fell 50%, from $1.15 before the halt to $0.55 per share.

MTLQQ meandered around that $0.50/share level until the middle-part of last week, which by-the-way was around the same time that FNM, FRE and AIG started running. MTLQQ gained 21% on 8/6, 21% on 8/7, 27% on 8/10, 15% yesterday and is up another 5% today.

Why the moves? Your guess is as good as mine, but short covering is being seen as a major driver.

While a rising tide does lifts all boats, when the dogs with fleas are best in show there should be some questions about the strength in the broader market rally.

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