On Monday mornings in bull markets like the one we’ve had for the last two years or so, there are oftentimes a number of deals announced. The mergers tend to take place more frequently on Monday than any other day of the week because companies and the entities providing the financing have time on the weekends to work on structuring the deals. As a day trader, I never know which deals which prove to be great and which ones won’t as I’m not an analyst in any one sector. There are a few key things to look at. First, is the deal cash or stock? This is important to me because a stock with a cash deal tends not to be as volatile as one with a stock component. Second, how much time is there until it closes? Usually, the lesser the time, the closer the price of the stock to the takeout price. The reason for this is the inflation/time value of money component in that a dollar today is worth more than a dollar tomorrow. By that, I mean that the cost of the “Wall Street Journal” is much higher today than it was, say, 50 years ago for the same newspaper. Thus today all else equal, a stock with a cash deal closing at 100 in a year would likely trade lower than a stock with a cash deal closing at 100 in three months. Third, I look for the sector. Utility stocks tend to trade in a less volatile manner than say technology stocks. Within these parameters, there are two distinct trades I like to do. The first one is the ‘buy thru takeout price.’ The hypothesis behind this one is that if a deal is priced at enough away from the prevailing market price before said deal was announced, the stock shouldn’t trade above the takeout price. For instance, yesterday, Isilon Systems (ISLN) received a $33.95/share cash takeover bid from EMC (EMC) which was about a 30% premium from Friday’s close. I did not know ISLN’s core business but I knew on a 30% sudden pop, it likely wouldn’t go higher. Thus, when it traded 33.95 refreshing bid around 8:09AM yesterday morning, I felt a few shorts may rush for cover in wondering if there was another bid coming. The stock rallied about 20 cents in three minutes. I am not looking to short the stock at 33.80 at 10AM if the high happens to be 33.90 with a 33.80 low because I have no idea how it should be priced yet this is when most traders tend to look at the situation for the first time without even knowing the parameters of the deal. The other type of play I look for is when the stock of an acquirer opens lower because of fear of things like dilution of earnings due to trying to seamlessly absorb a smaller entity. Well, yesterday, Caterpillar (CAT) announced a $7.6 billion takeover bid for BUCY (BUCY)- the biggest in CAT’s history. CAT initially opened lower on the NYSE, but once it got thru unchanged (81.04), the stock mushroomed higher over the next few minutes. It’s the same type of thinking- if investors/funds are worried about the prospects for an acquirer, the fear turns to greed as scared shorts panic if the acquirer’s stock got positive after opening down. All of this requires split second precision and some basic homework. One has to know the terms of the deal, the exits if wrong, the type of industry within which the deal is taking place, and the number of competitors in the sector of the stock being acquired as the fewer the better due to lack of available options. So, make the mini-merger mania work for you as a day trader- but on common sense terms rather than looking for mysterious patterns or trying to figure out the macro outlook for a sector rather than the immediate-term situation at hand.
Stocks were hit hard overnight following a rise in the seven-day repo rate in South Korea, concern in China regarding things like price controls due to inflationary pressures, and rumblings out of Ireland that they are weighing EU bank measures. Tokyo was down 0.3%, South Korea 0.8%, Hong Kong 1.4% and Shanghai over 4%. Markets are sharply lower in Europe as well with Frankfurt down 0.9% and London off 1.4%. The dollar is quiet, bonds are slightly higher, gold down ¾%, and oil down over 1%. Futures are down significantly as well as of this writing although off of their lows on WMT’s numbers. PPI (0.8% and core PPI (0.1%) are due out at 8:30AM, Industrial Production (0.3%) and Capacity Utilization (74.9%) at 9:15AM, and the NAHB Market Housing Index (15.0) at 10AM. The battle this morning is between the overseas pressures and falling commodities versus pretty good retail earnings this morning with the likes of WMT, DKS, and HD trading higher. This battle will likely continue all day with stocks very choppy. Focus on the aforementioned retailers and commodity plays, relative strength plays, selected small cap biotechs in the news (MELA for instance), and the fertilizer sector.
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
YONG- good earnings
SKBI- good earnings
ZOOM- decent earnings
URBN- decent earnings
PWRD- decent earnings
BK- Warren Buffett raised his stake in the company
TSTC- closed near a high after issuing good earnings
HGSI- closed near a high
STS- closed near a high
HHC- closed near a high
BEZ, COH- featured on “Mad Money” last night
DKS- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
MCP- poor earnings
JWN- poor earnings
EPB- share offering
PAA- share offering
LLNW- closed near a low and doing a share offering
PMI- share offering
AMZN- closed near a low
NFLX- closed near a low
RINO- closed near a low after disclosing terrible earnings
ONP- closed near a low
RIMM- closed near a low
TRIT- closed near a low after disclosing terrible earnings
WG- closed near a low
POT- closed near a low after BHP withdrew its takeover offer
MOS- closed near a low
MMYT- closed near a low after disclosing terrible earnings
THOR- closed near a low after HTWR debuted its own competing product
TORM- closed near a low
IDSA- closed near a low
LPH- bad earnings
JEC- poor earnings
MELA- FDA indicated that MELA’s skin device “may do more harm than good”
Earnings:
TUES NOV 16 BEFORE
ANF ARM DKS
HD JEC NM
SKS TJX WMT
TUES NOV 16 AFTER
SINA
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
No comments:
Post a Comment