Monday, July 13, 2009

PALM or NAPALM?

The trajectory on this stock is plain stupid, they are a 1 product company - a 1 product company that is steps behind the competition in every respect, to think that a financially weak mid-cap company can compete on the R&D scale of large caps without the weak balance sheet is just plain stupid.

If your long PALM I hope your praying each day that their partnership with Sprint.... pause as I chuckle...will actually amount to anything in the long-term. Short-term both companies are positioned poorly, but I'd rather invest in Sprint as a turnaround/buyout story than PALM.

Sprint...if the PRE was so awesome it will be offered by at least one other carrier right now.

Fact is that no one major, profitable, financially-well-to-do carrier really gives two cents about PALM, simply because all the other carriers have already developed working relationships with the larger players that will be sticking around for much longer - Apple, Blackberry, Samsung, Google, HTC, and whoever else is out there. It's just a matter of time they'll realize that PRE was a one-hit, hard-to-follow up product for a financially disastrously positioned company.

Not to mention their $190 mil in goodwill (probably worth what is in my toilet), actually makes their book value at -$600mil. Iphone margins are reportedly at about 20+%, good luck to you palm on beating that #, cuz without it your dead water (their current margins are 20%+). Who wants to bet that the other carriers will only give them a sub 25% cut to protect their working relationships with the larger handset players?

Talk of a buyout offer? Seriously? With all this info what kind of idiot buyer will take on this company? For all its losses and negative book value, a potential acquirer is better off just making an initial investment of their own by stealing the 2-3 employees that probably made the PRE work ($20 bucks Motorola is already on it).

I wonder if its considered insider trading to short $200 million of PALM and offer Jon Rubenstein $50 million 1 yr contract to sit at home...

Tuesday, May 19, 2009

Why Eddie Lampert Likes Acxiom

Conservative Fair Value: $20

Strategy: Sell July strike 10 puts for .55 and/or buy ACXM at $10.50/share or less

Result: approx 5% yield in 2 months via put strategy, potential 100%+ gain on shares within 5 years


Eddie Lampert likes Acxiom for the same reason he invests in any given company: cash flows. Eddie is a notorious cash flow feign/addict, so much so that some have argued that his micro managing in increasing cash flows at Sear's has crippled its long-term merchandising/marketing strategies. Nevertheless, I would say that Acxiom's main order of business is in the "information-technology-marketing-data-processing" field. A business whose most significant customers are in the retail businesses, whether it be clothing, financial services, credit cards, or automobiles. Right off the bat that throws some red flags, since retail isn't exactly the sweet spot in today's macro-environment. Despite the run-up in the retail industry over the past 2 months, consumers are still spread thin between the lack of growth and their over-leveraged pockets. As a result, ACXM revenues have so far fallen about 20%, sub par performance but not completely dismal as the industry it serves.

Despite these concerns - revenues, macro-environment, and a failed buyout, all of which were much more prominent risks at the end of 2008 - hedge fund magnate Eddie Lampert still decided to pick approximately $30+ million stake in the company. Now I'm sure Eddie would've added back the one time charges to his cash flow calculations, but in 2008 if we assumed a 0 in net income, operating cash flows would've still been at about $180 million due to depreciation and amortization. Already that's a great number... look back on Acxiom's discussions on strategy and you will see a shift in an asset heavy company that bought the hardware for customers, to an asset light strategy where they allow their customers to purchase the hardware instead - structuring the company more like an IT consulting type company (think IBM or Accenture). Great, Eddie likes management teams that have the same type of cash flow mindset as his own.

With $180 million in cash flows and an expected $50 million in capital expenditures, free cash flow came in at $130 million. At a price of $8/share, an enterprise value of about $1 billion, the EV/FCF ratio stood at less than 8x. Fantastic, shares look undervalued by about 50% in the worse of scenarios said Eddie to himself..

But it gets better. Recently Acxiom released their 4th Quarter earnings for 2009, and guess what? They're profitable again. With few one time charges on the horizon, it looks like Acxiom should be able to repeat their performance of about $20 million in adjusted earnings throughout fiscal 2010. Furthermore, they signed new customers and now expect revenues to increase!

So lets take that $20 million and annualize it to $80 million (btw if you adjust 2009 earnings, you should get a number in the range of $75-100 million depending how you do this). Let's add our $80 million in income to our free cash flows and we geta total of $210 million. Using a recent share price of $10.5, EV totals about $1.2 billion, giving a EV/FCF ratio of just under 6x. Shares now look like they can be worth at least $20!

Oh but wait, there's more to the story... International growth is where the party is at for consumer spending, read some of their latest 10Q's and press releases in 2008, and you would see that international revenues actually would've grown if it were not for the stronger dollar. On that end, lets factor in some growth. With capex of $50 million (remember the asset light strategy now), I'll assume that most capex is due to new clients and internal expansion needs. Invested Capital totals about $1 billion (see previous articles to see how I calculate this), for a ROIC/CFROI of about 20%. With the same level of capital spending, 20%*$50 million of capex, should yield an additional $10 million in cash flows next year, or growth of 5% of Free Cash Flow (a conservative # by all means). Compound growth of 5% for 5 years and times the result by $210 million and you receive a projection of cash flows close to $270 millon - let's use $260 million to be conservative.

At $260 million in free cash flows, shares look like they can be worth up to $30/share, about 25% return per year. Of course if management sees the ability to make more profitable investments in operations or make better use of their capital now, the $30/share price may also end up being quite conservative.

By the way, one of their other largest shareholders, ValueAct Capital, managed by Jeffrey Ubben, also has the same variation of addiction to cash flows as Eddie Lampert. I wouldn't be surprised for these guys to make another play at the company at around $25/share (LBO it and still make a nice 5x multiple off their original investment if my projections are correct).

Disclosure: Long ACXM

Wednesday, May 13, 2009

Violent Portfolio: Adding PSEC, 1 month update

Well, PSEC will not perform that well for the remainder of their fiscal year. 4Q earnings guidance is .30-.40/share. Nevertheless, the investment thesis remains intact for one of the best managed publicly traded private equity/mezzanine debt firms, with the cushion of rising energy prices on their side. Couple that with $40 million in cash on the books now, our dividend will still be safe.

With the recent market volatility you can lock in June 2009 strike 10 puts at $1.00 (use limit orders and someone is likely to bite), and I would be happy to do that, effectively being priced extremely close to recent insider purchases (effective buy in price is $9).

Updated portfolio - note some options (BCO) will be expiring this week. Also current portfolio is in the positive at $373 using market prices. Net investment is now $4972 and a 7.5% return on net investment. Off the $100k investment, it is a .004% return. Paltry right now, but as we add a greater # of investments we should reach a 1-3% monthly return!

When BCO options expire I will adjust it to a long position with the price of $30, and credit my cash with $320.

strategy security price Units Cost Net
Sell Short BCOQF 1.6 -200 1 319
Buy PBKS 7.95 1000 5 -7955
Sell Short MTB 48.23 -170 5 8194.1
Buy FMCN 7 1000 5 -7005
Sell Short SINA 27.5 -365 5 10032.5
Buy Put FUOVA 1 1000 1 -999
Buy JAVA 9.15 1000 5 -9155
Short Call SUQJB 0.05 -1000 1 49
Short Put SUQVA 0.35 -1000 1 349
Short Put WHRFU 4 -200 1 799
Short Put PQSRB 1 -400 1 399

Monday, May 11, 2009

Prospect Capital: A Relatively Safe 17% Dividend Yield

Conservative Fair Value Estimate: $15

Current Dividend: 17.6% Yield or $1.60/share

Strategy: Buy stock @ $10.25, and sell June 2009 Puts strike 10 for at least .50 for a 5% yield.


Prospect Capital is a private equity, mezzanine debt firm that specializes in investing in the energy/industrial sectors. Occasionally, the firm will also make investments in other industries when the opportunity exists. The company has been beaten down like many other business development and publicly traded private equity firms because of the usual suspects: worries about financing, sustainable dividends, health of the portfolios, excess use of leverage to juice returns, dearth of attractive investment opportunities, etc.

So let's go over these weaknesses that the market likes to point out...

FINANCIAL HEALTH

With $25mil in cash and $138mil in debt, Prospect has about $113 million in net debt vs. $428mil in equity. In the last quarter interest costs totaled approx $2mil against expected distributable cash flows of $50million for the year. I would say financial health is not of any concern at PSEC. Charges-offs have been minimal and the revenue/interest streams have been stable, even in the rough patches of the end of 2008. NAV for the firm is above $14/share. PSEC also has a total credit line of $200mil (all their debt is via their credit line), and are seeking to expand it.

DIVIDEND

Dividend payout is $1.6/share annually, or $48million total. With $50million in cash flows (adjusted to cancel out asset valuations, one time charges, depreciation), these guys make more than they are paying out. A lot of peer companies have a history of paying out more than they earn in constant interest, mostly because firms like to return a portion of the proceeds from capital gains to investors via dividends as well. However, that is not good fiscal management since it inherently keeps expectations of dividends higher than what can be sustained in a market where asset values are declining.

PORTFOLIO HEALTH

The health of the portfolio is arguably up for debate since we don't have access to information on every company in the portfolio. However, energy and energy related businesses comprise for a large portion of Prospect's investment portfolio. In 2Q (for Prospect that Oct-Dec 2008), oil prices reached their low in the $30's per barrel, MLP/pipeline investments and all other energy-related businesses also reached their lows in that quarter. With oil now at $55+, a lot of those investments have regained ground from their lows last year (or from beginning 2009).

INVESTMENT OPPORTUNITIES

With lower valuations and a tightened credit market, Prospect's services in providing financing are high in demand. Prospect's low debt structure, solid cash flows, and sound dividend policy, Prospect should be able to increase their credit line and make attractive investments for at least the next year or so as their peers hoard cash and fix-up their balance sheets.


All in all, all of these factors have led this stock fall only about 30% in the last year, many other companies in this space did not fare nearly as well, with many dropping 50%+. Take comfort in the fact that management bought in at prices around $8-9/share recently as well - that is why selling the June 2009 strike 10 puts look especially attractive since they will make your buy price be $9.50 should the market get volatile and these shares fall again.

At the end of 5 years, I can see Prospect averaging at minimum $25mil in net investments per year. Earn a little less than 10%, and the total additional distributable income looks to be about $12.5 million. Conservatively, that will make the company worth at least $15 per share and a 50% nominal gain. However you will also be making 17%/year on your dividends, which can give you another 120% in returns. Total net returns can total 170% in 5 years, conservatively. Should oil prices rebound further or more opportunistic investments are made, these return calculations will probably prove to be very conservative.

Disclosure: Planning to go long PSEC by buying stock or selling put options.

Tuesday, May 5, 2009

Violent Portfolio: Making Space for Whirlpool

Whirlpool shares have done well along with the market over the past week, offering us the ability to sell calls at $4 and yielding of almost 8% and a an effective short price of $54/share if puts should land in the money. Solid risks worth taking!

Total net investment equals $5,371 or just over 5% of the total portfolio value. Since I don't want to take too much risk, I'm going to assume that options may end in the money and in that case I have an effective investment of about zero, since WHR options will make my short position worth just over $10,000 and the BCO options will potentially be a long position worth just under $6,000. The net result is a net investment of about $1-2,000.

Keep in mind that you buy options in contract lots of x100. So my -200 position is achieved by selling 2 option contracts!

Updated portfolio, with WHR position in bold:

strategy security price Units Cost Net
Sell Short BCOQF 1.6 -200 1 319
Buy PBKS 7.95 1000 5 -7955
Sell Short MTB 48.23 -170 5 8194.1
Buy FMCN 7 1000 5 -7005
Sell Short SINA 27.5 -365 5 10032.5
Buy Put FUOVA 1 1000 1 -999
Buy JAVA 9.15 1000 5 -9155
Short Call SUQJB 0.05 -1000 1 49
Short Put SUQVA 0.35 -1000 1 349
Short Put WHRFU 4 -200 1 799

Thursday, April 30, 2009

Going in Circles with Whirlpool

Conservative Fair Value Estimate: $40

Strategy: sell June 2009 call strike $50 at around $2.25 or greater

Result: Income yield of about 5% if option stays out the money, net short position at effective price of $52.25 if the options land unprofitable.

By all means Whirlpool is not necessarily a bad company, neither do I have anything against management of of the like. This is simply a bad business to be in at this time. With about 1/2 of sales coming from North America, it looks particularly geared to the success of a US recovery. With the run-up in its stock price, almost a 100% gain in a few short months, this may be the best way to participate in a languishing company and an overbought US stock market.

Management expects Income to come in at $3-4/share in 2009, or about $300 million on the high end. With about $475 million in depreciation/amortization, OCF comes in at around $775 million. Capital expenditures are expected to range $400-450 million, so my free cash flow calculation yields about $375 million.

Invested capital, Assets minus (ST liabilities - ST debt + cash), yields approximately $880 million. That's a 4.3% ROIC using free cash flow of $375 million. The company doesn't break down capex into growth reinvestment and expansion capex, and thats ok - let's be optimistic and assume they earn a 4% ROIC on their total capex.

Free cash flow growth at a rate of 4% per year:

2009 375.00
2010 390.00
2011 405.60
2012 421.82
2013 438.70

I guess that's not too bad, in 2010 the company can be trading an enterprise value of 14x FCF. If I be even more optimistic the company can hoard up all cash flow produced and keep capex low, leading to a potential enterprise value of$4.2 billion instead of today's $6.2 billion. Using the former, and we get a EV/FCF multiple of 9.5x. At $50 a share that multiple comes in a hair above 10x.

Briefly looking at some technical indicators also suggest a topping out patter with RSI above average and the MACD trending above its signal line. My best reasoning for this explosive run? Shorts are covering their positions in this short-run bull market. Even if markets continue to trend upward this one looks positioned for a fall with practically 0 potential catalysts to suggest otherwise.

Disclosure: Will be selling call options soon as outlined above

Wednesday, April 29, 2009

Violent Portfolio: Adding a Yield of approx 7.5%

Updating the Violent Portfolio to account for the JAVA investment. Instead of executing prices on the option at .10 for the short call - the were executed at .05, no biggie I'll still take the free money (essentially makes the whole cost of the trade 0).

Here's the updated complete portfolio with a net investment of just over $6,000.

strategy security price Units Cost Net
Sell Short BCOQF 1.6 -2 1 319
Buy PBKS 7.95 1000 5 -7955
Sell Short MTB 48.23 -170 5 8194.1
Buy FMCN 7 1000 5 -7005
Sell Short SINA 27.5 -365 5 10032.5
Buy Put FUOVA 1 10 1 -999
Buy JAVA 9.15 1000 1 -9151
Short Call SUQJB 0.05 -10 1 49
Short Put SUQVA 0.35 -10 1 349

Earn 8% in Less Than 6 months

Oracle is gobbling up Sun for 9.50 in cash. This is as much of a done deal there is in the market. With Oracles cash hoard and history of aggressively closing deals, you can surely put this in the books.

Right now JAVA is trading for 9.15 per share. You can easily buy JAVA and hold on to them to earn that .35/share yield (about 3.7%).

However, the options market seems to believe their may be a chance that JAVA will go for more. Take advantage and sell some call options for .10 (Oct strike 10's) and earn an additional .10 to bump your potential yield to 4.5% or up to 9.8% if an offer should come in bumping JAVA to 10/share or more.

Furthermore, the options market seems to believe even moreso that the deal may fall through. Therefore you can also even sell some put options (Oct strike 9's) for .35/each, which can bump up your yield on the investment an additional 3.5+%.

8-13% yield in 6 less than 6 months? I'm sold!

(Options are trading very thinly so you'll probably need to be patient for the options dealer to find a buyer)

Disclosure: Long JAVA, orders outstanding for JAVA puts/calls

Monday, April 27, 2009

Investing in Michael Dell

Conservative Fair Value: $14

Strategy: Sell June 2009 puts with strike $10 for $.50

Result: Yield about 5% in 2 months, or buy DELL at an effective price of $9.50

Micheal Dell is back. His nitpicking, operations-heavy style is cleaning up the house that he built. Last time Dell tried to do a makeover they attempted a run on ancillary products like mp3 players, printers, and the like - in an semi-failed attempt to match innovators like Apple (iPod) and HP (printers). Unfortunately those are all low margin businesses and while some divisions have have developed scale today, they are still generally better suited for companies better-focused on those products. With start up costs high for these divisions, margins crumbled, and the stock got battered once demand for PCs started to show its cracks. Dell learned a valuable lesson: higher margin businesses are tough to replicate.

Today Dell is going through its 2nd and 3rd strategic directions in only a few short years. The 1st part is being undertaken right now as Michael Dell cut costs to improve profitability to more historic levels. Demand has fallen off the map, but Michael Dell has trying to keep pace by cutting SGA/COGS and plans of reductions of up to $4 billion in 2011. The profitability/cash flow picture will be more detailed below.

The 3rd strategic direction is yet to be seen - but is extremely important nonetheless. Dell has apparently reached some sort of critical mass in the computer hardware business. IBM faced it by expanding into services, HP faced it by expanding into services... and its only natural that Dell now do the same. The only questions will be is how?

With $6.8 billion in net cash, some talk has been in the market that they may make a play for a company like Accenture or even develop their own in-house services division. However, I'm going to go the off-the-wall route and bet Dell is going to take full advantage of the "open-source" trend, pushing for better equipped open source systems that meet specific needs of business users. Remember, Dell has always been a supporter of Linux-based systems - the story goes that back in the day big, bad Microsoft squashed any plans Dell had to market Linux PCs.

If I were Michael Dell, I would love the opportunity to take it to big Softy and enjoy it! Now that Linux has reached some level of acceptance as most major PC manufacturers have offered a Ubuntu Linux system pre-installed, now is the time for Linux to be picked up by a major outfit to push it to the next level. Let's not forget some benefits of Linux right off the map - lower power consumption, less security threats, open source architecture,and best of all, its cheaper since it's free!

Dell is in pristine financial shape. With $6.8 billion in net cash, Michael can decide to pursue almost any path he wishes - in house development of a services division, a buyout of a tech consulting business like Accenture, or purchase a Linux development business like Red Hat. Regardless, the $6.8 billion in net cash translates to a enterprise value of about $15 billion.

In 4th Q, Dell made $350 million in net income. I won't bother with previous quarters' income, since margins have contracted considerably since. With $4 billion in planned cuts in costs, I think the $350 million in income per quarter will be a steady one. Annualizing the $350 million and adding back depreciation/amortization of $800 million gets me to OCF of $2.2 billion.

Capex was about $450 million in 2008, and I think $500 million will be a good number for my model. PC manufacturing is extremely competitive and therefore all capex (growth and maintenance) should really be taken out of cash flows. The resulting Free Cash Flow is $2200 - $500 = $1.7 billion, or a EV to FCF ratio of less than 9x. This number should be closer to 12, giving credit to Dell's brand name and a low debt/high cash flow business model that focuses on cut-throat operations.

This business is not without some serious threats. First of all, demand can fall further. Secondly, is the push for netbooks made by Acer and Asus, which can potentially be even more lower margin products. Third, is HP's jump on the Linux OS market since they have already made their own customized consumer version of Ubuntu, called MIE - it puts them one leg up on Dell right off the bat. HP's margins come in around 7%, IBM's are at 10%, its only natural that Dell try to close the gap on their puny 2.5% margin! A margin of 5%, will make income hit $2.8 billion, and shares can be undervalued by more than 100%. Like I said earlier, higher margin businesses are tough to replicate so here's to Dell to becoming an innovator.

Disclosure: I own Dell

Violent Portfolio: Brink's to Handle My Cash

I'm updating the Violent Portfolio to include a position in Brink's Company. I will sell 2 puts May 2009 with exercise price of $30, for $1.60 each and a net cash position of +$320. This can potentially give me a buy in price of below $29/share. BCO is a classic value play and its shares in a dyslexic market can make shares volatile.

strategy security price Units Cost Net
Sell Short BCOQF 1.6 2 1 319

Thursday, April 23, 2009

Brinks Co: Riding Shotgun with the Cash

Fair Value Estimate: $55
Strategy: Sell June 2009 puts strike $30 for $2
Result: Puts end in the money, receive BCO shares at net cost of $28/share. Not in the money you receive $2 in cash.

Brink's is a staple name in the cash transportation business a generates cash flow with as much security as it does transporting it. With over $3 billion in revenues, it leads the pack of its competition - the next nearest competitor has revenues of about less than $500 million. That's a 6x advantage folks and is one of the few times you'll see a niche market structured so. Leveraging their brand name, Brink's is expanding internationally with solid success. Look for increased cash flows as operations abroad gain scale due to growing international economy, the greater need for secure transport for valuables, and expanding brand recognition.

About 2/3 of revenues comes from international operations vs. about 1/3 from the United States. Barriers to entry are significant as this business requires training personnel and having a solid back office system to track and secure the goods they are transporting. Operating profit in 2008 for their USA business has dropped - perhaps as a result of the billions of dollars that has evaporated out of the US financial system. Regardless this business will really depend on international growth as margins for those operations have held up pretty well and accounting for over 75% of operating profit.

Brink's is in solid financial condition with a only a $20 million dollar net debt position on its balance sheet. At $30 a share, Brink's market cap is equal to about $1.4 billion. It earned in net income (NI) of about $180 million. That's a Enterprise Value to NI ratio of less than 10x.

Now keep in mind that revenues were hugely impacted by a stronger dollar - to the tune of about $60 million which would have likely been passed down to the income statement at around $50 million. It would be safe to assume that $25 million of these currency losses will be recouped going forward and that adjusted NI should actually be $280 million!

However, I prefer to look at cash flows. Considering that Brink's is a growing organization and should naturally have increasing working capital, I prefer to just add back depreciation and amortization to get Operating Cash Flows. I'll adjust NI down to $250 million and D&A looks pretty stable at $120 million going forward. Operationg cash flow = 250+120 = $370 million.

Next up is Capital Expenditures (Capex). Capex is a tricky little number since often times it includes expenditures made for ongoing operations as well as growth operations. If you're going to calculate growth somehow in your model - it will probably be appropriate to include the whole Capex number. For my sake, I just want to know what is spent in maintenance capex. That number comes in around $120 million (4thQ conference call 2009, 70% of capex for maintenance). This is fantastic fiscal management and please allow me to explain. If maintenance capex is what you need to maintain your level of operations, depreciation is the lost value of your operating assets. A solid business should not have to invest more capex into the declining value of operating assets to maintain its level of business! Ideally we would like maintenance capex below depreciation, but for a more capital intensive business like Brink's (need a strong fleet of armored trucks) this is solid.

Free cash flow is now projected to be at $370 - $120 = $250 million! Enterprise Value to FCF is only about 5.5x, excluding any projections of growth! This number should really be around 10x which would value BCO shares at $55.

Going one step further you can calculate ROIC. You can find Invested Capital by adding cash and short term liabilities (I usually subtract out short-term debt), followed by subtracting the result from total assets. My Invested Capital comes in to be around $1.65 billion. Dividing $250 by $1650, and my resulting ROIC is 15%.

Furthermore, if you wanted to project out a complete growth model, I'd take the 30% in expansion capex times the ROIC, which equals a growth rate of 4.5%. Compounding growth for 5 years, my model estimates a potential price of $70/share for a compounded return of 18.5% a year. Remember these numbers are conservative! An increase in capex can substantially increase growth and fair value!

Wednesday, April 22, 2009

Citigroup Equity is Worth Nothing and Management Knows It!!!

Credit to the information on Citigroup convertibles goes to Andrew Bary of Barron's.

Citigroup is offering a plan in which they can convert expensive preferred/convertible noteholders into common equity at a discount to market price. The idea is simple, it lowers interest costs, boosts capital ratios, and lets some preferred/convertible security holders to convert their depressed prices in those securities into equity at a higher price.

However, at market value, convertibles are being valued as if Citigroup was worth 2.46 a share Vs. the 3.20 a share value the market is currently giving! Before we go ahead and trade on these to earn a 30% return in the matter of a month or so lets put out some risk factors:

1-conversion was suppose to happen in April and is now being scheduled for May
2-a lot of noise seems to be coming from the "stress-test" results coming on or around May 4th
3-potential of plan not going through is high if Citigroup fails "stress test"
4-the pretentiousness of the exchange offer if it does not pass is amazing

To clarify on #4, check the end of this document: http://www.citigroup.com/citi/press/2009/090227a.pdf This means that if this exchange offer is not passed, holders of these securities will be rewarded by increased interest payments and participation in a dilutive process that will create almost 15% more shares outstanding. Why would you do that unless you expected bankruptcy?

I feel like this is Citigroup trying to show it has a last ace up its sleeve as well as muscle their own shareholders.... but all it really means is that Citigroup is simply a goner without anymore help. Furthermore, should the vote not pass, it allocates even MORE capital to preferred/convertible holders. Somebody fire the management team for not looking out for shareholder interests!

Sharholders being strong armed by management? What kind of violent capitalism is this!

Anyways, should they pass the stress test and get a vote of confidence from the Treasury, it can be said with certainty that this exchange offer will be passed in its current form. At that time we will revisit the arbitrage opportunity.

Tuesday, April 21, 2009

Violent Portfolio: Adding another Merger Arb

So the market has gotten a little worried and I want to lock in some 4% gains in less than 2 months by arbitraging the prices of PBKS and MTB. Remember the beauty of Merger Arbitrage is that the net cash outlay is positive (meaning you should have a positive cash position after executing the trade). Because they have, in a way, 0 net investment, these strategies are usually leveragable. Most merger arbitrage funds use significant leverage!

Disclaimer: I am long PBKS, short MTB

Here it is:

strategy security price units cost Net
Buy PBKS 7.95 1000 5 -7955
Sell Short MTB 48.23 -170 5 8194.1

Friday, April 17, 2009

Violent Trade: M&T Provident Transaction Offers 4%+ Return in 2 Months

Buy: PBKS @ $9.30 or less
Sell: 0.171625 MTB shares per PBKS share @ $56.82 or more

M&T Banks is one of the solid banks in America. One of its investors is Warren Buffet. M&T has a strong presence in the northeast region of America. Their headquarters is in Buffalo, with operations from there down to Baltimore.

PBKS is a Baltimore-area bank. MTB has already outline plans to integrate PBKS which include laying off employees, providing a severance package, and giving preference to laid off employees to apply for job openings at MTB.

This transaction is actually much less complex than the FMCN transaction, since PBKS is a relatively small acquisition. Shareholders have already aproved the deal and all that remains is regulatory approval which should be a cinch.

Your net gain on this position will be at about 4%, not a great trade, but its worth exploring. Both shares are volatile and it may be possible to get a better yield of 6% in less 2 months.

Thursday, April 16, 2009

Elizabeth Warren: Top Financial COP?

Who knows why this woman has first showed up on my radar via Comedy Central's Daily Show of all places???? She is one of the leaders of the Congressional Oversight Panel, one of the few that is actually behind clearing up the TARP mess, is looking out for the citizen's $700 billion dollar investment, and seems to have the right state of mind to clear us out of this mess!

Part 1

The Daily Show With Jon StewartM - Th 11p / 10c
Elizabeth Warren Pt. 1
thedailyshow.com
Daily Show
Full Episodes
Economic CrisisPolitical Humor



Part 2


The Daily Show With Jon StewartM - Th 11p / 10c
Elizabeth Warren Pt. 2
thedailyshow.com
Daily Show
Full Episodes
Economic CrisisPolitical Humor