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Chips, Homies and Underwear

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If losses fall in the midst of the private equity forest, away from the flickering ticks, do they really exist?

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So here we are, a whopping four weeks away from the certainty of impending doom, only to find ourselves "knock knock knocking on heaven's doors." Clearly, the Iron Horse's playbook of a debt-induced M&A frenzy is staring us right in the face, with 30%-50% buy-out premiums becoming the order of the day. What I can't tell you is what type of return hurdles these deals are shooting for. If they are anywhere close to the assumptions in commercial real estate deals, the "People" in "Other People's Money" might end up sorely disappointed.

I can anecdotally tell you that two fairly well tied-in private equity / M&A lawyers believe that after "asset management fees," "business / property management fees," "passive co-management fees," and "transaction fees," earned by the private equity managers for the luxury of making stupid investments, investors are left with . . . well, stupid investments.

Of course this matters not right now because these headline grabbers have not yet had an opportunity to reveal their true value. And as far as the Minx is concerned, the stupid private deals will only and always be seen as yet another feather in Hoofy's cap, "in-your-face" evidence of how cheap public equities are. If losses fall in the midst of the private equity forest, away from the flickering ticks, do they really exist?

Enough macro-pontificating, especially since Boo's data points seem only to get in the way of making money.

I did receive a few e-mails last week asking what was going on with Cypress Semi (CY) post SunPower (SPWR) spin-off, and with Beazer Homes (BZH), which picked up $7 bones in two days.

On the former, my sense is that more than a casual player is going long SPWR while hedging it out by shorting CY. I have no hard evidence for this aside from what can be divined from tape reading. I also don't particularly understand the reasoning behind the play if one considers that at Friday's prices CY has $8.50/share in net cash and SPWR stock, which means paying $7.50 for .43 of '06 EPS. FWIW, I think that a) the EPS guestimates are light, b) the guestimates do not discount any income that will start flowing from SPWR to CY toward the end of next year, and c) the valuation totally ignores the potential cash flow benefits of CY's $194M NOL carry-forward (thanks to one of our Minyans for pointing this out), which CY is reserving in full pending some "accounting uncertainties." Not as sexy an analysis as "XYZ was up $23 today," but so be it.

Regarding BZH, during Thursday's ramp I "guessed" to a couple of Minyans that the company was in the market buying its own shares. On Friday we were told that BZH was in fact buying up its own stock, and would continue to do so.

Being bluntly cynical (shocking I know), at the end of its EPS pumping exercise (to mask what will likely be the slide in net income), I'll be curious to know how many shares BZH will have re-purchased in the open market, and how many through "privately negotiated transactions," the latter being an elegant exit strategy for large "squeaky wheel" holders who could otherwise put the hurt on the stock price. Yes Minyans, size does matter.

Lastly, keep an eye on Friday's IPO "play of the day" a/k/a Under Armour (UARM). I have a secret life away from the Minx - I can't tell you what it is or most of you would want to kill me - but in the sports under-wear world UARM is eating Nike's (NKE) shorts, figuratively if not literally.

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Positions in BZH, CY, SPWR
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