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Monday, December 7, 2009
A Continental sign convertibles are back
The convertible bond market is often branded the "lender of last resort," and nowhere is this more evident than its support of the domestic airline industry. Rare is the airline that does not make use of convertibles. Today it's Continental (CAL), a frequent convertible issuer, coming back to the market with a $200 million deal.
With price talk around a 4.5% coupon, a 25% premium and a five-year maturity, the bonds (at least at the issue price) will be a clearly superior investment to the underlying common. As such, I expect hedge funds, despite their decline in relative importance in the convertible market, to become the primary owners of this deal. I'm going to estimate that 75% of the issue will be in hedge hands before long. I'm also going to estimate that hedgers will sell short about 85% of the underlying stock. Thus I conclude that nearly 65% of the underlying shares in total will be shorted.
Since the deal is for $200 million, pending a $30 million green shoe, with a 25% conversion premium, this means (assuming the shoe is exercised) that about $184 million of stock will be controlled by the bonds. I estimate about $120 million of stock will need to be sold to hedge the deal. This means somewhere in the neighborhood of 7.5 million shares.
With this in mind, it's fair to expect the stock to continue the sell-off that began with the deal's announcement. I wouldn't expect it to settle in much higher than $13.50 or $14.
Minyan Mailbag: GS Upgrades POT
I always appreciate your insight, it's invaluable to us part time traders. The market seems to be at a crossroad where it needs a correction although many money managers are trying to clear out there winners and keep this rally going, only for a down surprise. Goldman Sachs upgraded Potash (POT) today. Is it worth getting into something like that even under these market conditions?
Minyan Ron M.
Remember that many stocks often make highs past the highs of the popular averages themselves, assuming the market is at a turning point. Although 'most' stocks move with the market ebb and flow, the market is not a monolith.
That said POT looks like a double top, but even so swing highs could be tested. It will be interesting to see how much impact Goldman's comments have on POT. The close will count in my opinion.
Remember also, that anything can be done WITH A STOP.
Tuesday, December 8, 2009
Technical View of the SP-500 and the dollar
Here's a short excerpt from market Update 12/6/09.
In August 2009, we reviewed potential upside targets of 1120 in the S&P500. At the time, we postulated that a confluence of the downtrend line stretching back to the market peak in Oct 2007 would potentially coincide with an important Fibonacci retracement level and produce the 1st important resistance in the major averages. Interestingly, the S&P500 reached our target intraday on Friday last week. It will be useful to review how this resistance level is shaping up as of now:
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The market reversal on Friday was accompanied by a significant gain the US dollar. Two weeks ago, we discussed the possibility of a short-term reversal in the dollar's decline (in our market commentary on Minyanville). We mentioned our view that any such reversal would likely create turbulence in the equity and commodity markets. The dollar rallied sharply on Friday, on word that the US job market was improving faster than anticipated. As anticipated, commodity markets got shaken up.
The dollar's weakness has been an important underpinning of this rally, and an abrupt reversal in the downtrend could spook traders. In addition, any expectation of an accelerated timeline of Fed tightening of monetary policy will also weigh on investors' minds. The chart of the dollar certainly shows the first signs of life. The move on Friday was important, and it took the dollar index not only above its 50-day moving average for the 1st time since April, but also took out the mid-November high and in the process, broke the downtrend line in place since early July. With so many people caught leaning the wrong way on the dollar, there is clearly the potential that this can be more than just a one-day wonder.
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Update: The US Dollar
- My firm noted on Friday the breakout that was occurring in the U.S. Dollar Index ($DXY) and presented confirming evidence yesterday in the euro / dollar chart.
- Today I wanted to point out that since the breakout, the DXY has pulled back gently and tested the broken downtrend line – which is now acting as support.
- So far today, the index has rallied off of that support level. The DXY has even managed to trade above yesterday's high of 76.18; if it can get through the next short-term resistance of 76.43, there may be real upside acceleration.
- If the recent relationships hold up (which is no guarantee), a rapidly rising U.S. dollar would not bode well for stocks or commodities in the short-term.
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