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Dr. Duru, One-Twenty Two (112 clicks)
Long/short equity, event-driven, homebuilders, currencies
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This morning (October 12), I sold my shares in AMR Corporation (AMR), owner of American Airlines. As I explained October 4, AMR was a trade on bankruptcy panic where sellers dump shares first and ask questions later. I was slow on the trade and “only” managed a 12% gain on the trade. From the bottom to my selling point, AMR gained 57%. I will be faster and more aggressive on similar bankruptcy fear plays in the future. The chart below shows that at the time of writing AMR recovered almost all its losses from October 3rd. However, buying volume is also waning.

AMR has recovered most of its losses from its day of bankruptcy panic
(Click to enlarge)

AMR has recovered most of its losses from its day of bankruptcy panic
Source: freestockcharts.com

I still believe that AMR holds the potential for tremendous upside if it avoids bankruptcy, but an article I read in SmarterTravel reminded me that bankruptcy could still be a viable business option for AMR. In “American: Bankruptcy … Then Merger?“, author Ed Perkins makes the following claims:

“American will likely do what all of its big “legacy” competitors have done, some more than once: File for Chapter 11 bankruptcy, “clean up” its balance sheet, eliminate many potential losses, and continue flying with an improved cost structure. In such a planned or “pre-packaged” bankruptcy, the company and its advisers get all the big financial stakeholders on board the plan in advance, and the process goes ahead with no surprises …

… In the long-term future, many airline mavens expect American to acquire or merge with some other good-sized U.S.-based line. Once number one in the domestic skies, American is now dwarfed by the recently merged Continental-United and Delta-Northwest combinations. Merger hasn’t been practical in the past, however, because bringing another line into American’s high cost structure made no sense.”

If such a deal happens, I will definitely be a buyer on the other side of the bankruptcy process.

Be careful out there!

Source: The AMR 'Bankruptcy Trade' Has Run Its Course For Now