WED. APR. 7 - Suspending Disbelief

Every so often, there is a trade so strange that it takes some degree of time to understand and comprehend. Such was the case on the first trading day this year in share of Alcon (ACL). At 1:28AM on Monday morning on the first trading day of the year, there was a press release on the Dow Jones wire regarding a takeover of ACL. The headline read as such: “Novartis To Acquire Majority Control Of Alcon, A Global Leader In Eye Care, And Proposes Merger For Full Ownership.” In the press release, NVS reiterated its April 2008 proposal in exercising its call option to purchase an additional 52% stake from Nestle for 180/share which averaged its 77% stake to 168 after originally purchasing 25% for 143 in April 2008. With me so far? NVS owned 25% at 143 and want to buy 52% more from Nestle for 180. Then, in a “proposal for subsequent all-share direct merger of Alcon into Novartis to avoid uncertainty and speculation on Alcon's future in interest of all stakeholders, they offered to purchase the remaining 23% stake in the company from people like you and I (aka average shareholders) for “a fixed exchange ratio proposal of 2.80 Novartis shares for each remaining Alcon share, a 12% premium to unaffected Alcon share price of USD 137 implying a “cost for 23% minority stake of USD 11.2 billion, or USD 153 per Alcon share.” If it’s confusing, that’s because, well, it’s confusing until you read it a few times because it seems so outlandish! Despite the ornate language used, what it comes down to is that if you’re a Nestle stake holder in ACL, you get 180 but if you are an ordinary shareholder you get 153. Awesome. Well, early on that Monday morning, the stock was at 169, up 4 1/2. The only rhyme or reason for it was the “how can NVS do this” argument. Sure enough, the stock trickled in the 4 ½ points to unchanged by about 7:45AM on anemic volume. A buyer floated around 164.50 for half an hour and when the entity left, the stock broke almost seven points in 10 minutes. For day traders, the reality was stark. Sometimes one must suspend all sense of disbelief to do this type of trade. The math was there. While it certainly is/was true that NVS may raise its price in time, the fact was that if I was a ACL shareholder and I was being given a gift 12 points or so over prevailing logic, I’d probably sell my shares particularly on the first trading morning of the year. Trading is not about “fairness” or “what is right.” In this specific case, NVS could offer 27 points less to ordinary shareholders than to the Nestle group- this is what they did and eventually the market realized that offer was for real making this play what may have been the best trade of the month.



Markets overnight were higher in Asia with Tokyo up slightly but Hong Kong ahead
1.8%. European markets are down slightly between 0.1% and 0.3%. Oil is off a little with gold flat. But the notable feature again is the weakness of the European currencies with the dollar gaining half a euro and the British pound very weak. Futures are modestly lower, but the weakness is notably broad with commodity stocks, financials, techs, and casinos are all down a bit. Keep an eye on the euro all day; if things remain stable, the market will likely try to rally anew but it seems like the strength will be capped. If the euro move is exacerbated, the weakness can become exacerbated. The pace of trading will likely remain slow on what looks to be an 85 degree sunny day in Manhattan so don’t be quite as aggressive as the last couple of days.


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

CAR- closed near a high

BIDU- closed at a high

OZM- mentioned on “Fast Money” last night

HAIN, SPF, LEN, KBH, TGI- mentioned on “Mad Money” last night

LLEN- closed near a high

FDO- decent earnings

EOG- announced crude oil discoveries and divestiture of some assets

TSCO- boosted earnings guidance

JASO- raised shipment guidance


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

AMB- announced share offering

CLF- reversed in closing near a low

MEE- closed near a low after the horrific accident at one of its mines

ZANE- convertible stock offering

ALGN- closed near a low after being downgraded



Earnings:

WED APR 7 BEFORE

FDO MON

WED APR 7 AFTER

BBBY LWSN MDRX

PBY RT SCHN


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