Auto stocks surge, as bailout hopes grow
Shares of Ford and General Motors jump on Wednesday as investors wait for news on a potential auto industry bailout.
NEW YORK (CNNMoney.com) -- Shares of major U.S. auto makers surged Wednesday as investors wait for news on an industry bailout.
Shares of Ford (F, Fortune 500) ended the day up nearly 30% at $2.15 and shares of General Motors (GM, Fortune 500) ended the day 35% higher at $4.81 Wednesday. Ford and GM stock has been crushed in the past year. Shares of Ford have plunged 70% from highs touched in May, while GM's stock has tumbled 82% from this time last year.
Chrysler is privately owned and does not trade on Wall Street.
The Detroit automakers have been lobbying for a piece of the $700 billion bailout pie to survive the economic downturn. The auto industry is asking for cash and is offering the government an equity stake in the companies if they get the help.
Analysts are optimistic that the Big Three will get some government help, but it's not clear when.
"It is our sense that the debate has shifted somewhat, and that there is growing concern about the risks (to the U.S. economy) that would be derived from inaction," wrote Deutsche Bank analyst Rod Lache, in a note to clients, released after the market closed Tuesday.
Congress expects a new rescue plan from the automakers by Dec. 2 before they will even consider voting on bailout funds for the Big Three.
"We believe that U.S. automakers will likely present relatively aggressive plans," said Lache. "We believe that any legitimate plan must address both cost and revenue challenges."
The U.S. unemployment rate is already at 6.5%, and the job losses associated with the failure of Ford, GM or Chrysler would damage an already beleaguered economy.
Congressional leaders and auto executives have been stuck in deadlock. Some lawmakers consider Detroit just one more victim of the global credit crisis, and if banks have been bailed out, then so should the auto industry.
Other lawmakers say that the companies have been badly mismanaged and mishandled and deserve to suffer their own consequences.
In the wake of the Citigroup (C, Fortune 500) rescue over the weekend, sentiment has shifted in favor of the automakers.
"The proximity of these bailout hearings to the Citigroup bailout may have also tipped the scales somewhat," noted Lache in his report.
While the increased speculation of an auto industry bailout supported the rise in stock prices Wednesday, Lache said that the surge was largely due to end of the month short-covering.
Short-covering is when investors who have sold stocks short to take advantage of a falling market need to buy the stocks back as they start to rise.
"I am not sure that we said anything that is different from what the rest of the market has said over the past few days," said Lache. "It is a low liquidity day, it is the end of the month, people are closing out short positions and we are heading into next week with some potential news," said Lache. 
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