MON. DEC. 14- Using Information

Earlier this month, I wrote a piece on share offerings:
http://epiphanytrading.blogspot.com/search?q=shares+offerings+and+common+sense

Occasionally, there is another strange phenomenon in this realm of share offerings- desperation. In what has been a metric throughout time, most companies would rather take on a bit more debt than issue a share offering. Even though the debt has to be financed at X%, the thinking is that the Y return will be better than the X. The main point, however, is that the share price would not be diluted. If a company has a market capitalization of $50 with five million shares outstanding, its stock price will be 10. If they issue another five million shares outstanding, this gives them 10 million shares floating out there so with a market capitalization of $50 million, the price is now 5 all else equal. So, companies tend to go to banks first for the most part. The second choice is to issue equity, but only in strong markets. For instance, HGSI was able to throw out their share offering in the midst of a strong rise in its own stock price with the stock not losing much ground whatsoever; the same was true for the BAC share offering last week when that company floated a tremendous amount of stock. But occasionally, that ‘desperation’ concept comes in. If a company cannot borrow funds on favorable terms and they really need the money, they go to the equity market and raise it however possible. The best example in recent memory happens to be Protalix (PLX) which closed at 36.06 on October 24, 2007. They needed $60 million so what did they do? Oh, they issued 10 million shares at 6. Awesome. And yes, the stock did trade down 30 points the next day. I bring this up specifically because of the action in DEER and KAR on Friday. DEER closed at 15.84 on Thursday yet was forced to do a share offering at 11 to raise monies. It was trading well above 13 in the pre-hours. So, for those early-birds among us, there was quite the opportunity as traders trickled into work and sold the stock off. In another example of ‘desperation,’ shares of KAR was supposed to debut at 15-17 yet the underwriters only got the thing off at 12. And it opened at 11.40 on the NYSE! Well, the underwriters cannot go back to their clients and tell them they are underwater so “mysteriously” the stock bounced back to the offering price of 12. Because the underwriters of the IPO could not show a loss, they presumably were the entity buying KAR and it set for another decent idea. The general take from all of this is this: besides being as informed as possible at all times, you must use the information correctly and trade these types of opportunities at all times. Buying and selling 500 shares of some random stock at some random time will get you less than nowhere; being aware of the logic of a situation and trading as aggressively as possible on that information is what can make your week financially.

Markets in Asia were generally higher overnight with prices up 0.8% n Hong Kong. Markets were higher as well throughout Europe with the major bourses up ¾% or so on average. Oil is down slightly, gold is up a bit, and the dollar is a tinge weaker. Newsflow is positive with C closer to coming out of TARP (seemingly unthinkable this time last year), Abu Dhabi’s government threw $10 billion at the crisis over there, and XOM is making a major acquisition. Futures are up across the board. Look for the strength to hold. The trades today will be in the energy sector and the relative strength plays. Trading opportunities will likely be few and far between and with conditions illiquid so be careful.

Watch list:
12142009Eriklist.zip

Reiterating-
If the whole story is not there -If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified- Good- The following stocks have good news and/or a strong technical pattern

DAL, UAUA- closed near highs in a strong airline sector

LUNA- settled litigation with HNSN

V, MJN- announced on Friday afternoon they’d be added to the S&P 500 on December 18 at the close

DAL- late Friday, a code sharing agreement for air travel was reached in principle between the governments of Japan and the U.S.

BBY, ADBE, JOYG- mentioned positively on “Mad Money” on Friday

HPJ- closed near a high

ERJ- closed near a high after receiving financing from the Chinese government for a series of projects it wishes to embark upon

CLDX- presented positive phase II study results of its anti-body drug CDX-011 at a breast cancer symposium

JAVA- EU regulators reportedly see satisfactory result for Oracle acquisition of the company

XTO- being acquired by XOM for .7098 shares of XOM stock; APC, CHK, DVN, EOG may move with it


Bad-The following stocks have bad news and/or a weak technical pattern

SIGA- a day after pricing a share offering, closes near a low after the government made changes to a request to a smallpox antiviral proposal

DEER- closed near a low after announcing a share offering

FSYS- continued to trend lower in closing near the day’s low

SPCHB- continued to implode despite a positive mention in “Investor’s Business Daily” last week

CCM- closed near a low on its IPO debut

RCI- closed near a low as the Canadian government opened up competition in RCI’s industry on Friday

AMZN- featured negatively in “Barron’s” over the weekend

TRA- rejected CF’s latest buyout offer (unchanged is 35.30 by the way after a $7.50 cash dividend)




Earnings:

MON DEC 14 BEFORE

none

MON DEC 14 AFTER

PAY TTWO


Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner