Wednesday, January 31, 2007

PW Eagle Inc. Three possible outcomes.

PW Eagle Inc (Nasdaq: PWEI) is a publicly traded company that makes pvc piping in various grades and dimension. They won't be for much longer. Publicly traded that is. I'm sure they'll still be making pipes because apparently they are pretty good at it.

On January 15 PWEI announced that they had agreed to be taken over by J-M Manufacturing, for $33.50 per share, and the way things have proceeded since then I am convinced that there is little to stop this takeover from happening. There have been no lawsuits from minority shareholders. There have been no objections from any regulatory agency. And just as importantly, there have been no wild swings in the price of PWEI shares that might indicate the presence of, or even the rumor of, a second interested bidder. I'll talk more about that last point in a moment.

In this Reuters report, it states, "PW Eagle makes pipes and fittings and operates 12 manufacturing facilities across the United States. J-M operates 14 manufacturing plants in the U.S., producing pipes for water, sewer, electrical conduits and other uses." It seems like a good fit for both companies and I'm sure there will be substantial cost savings in the combined company.

In the normal course of events J-M Manufacturing would bring in a market specialist to slowly acquire the outstanding shares of PWEI, pending a shareholder vote on the matter. Given that just five or six institutional holders own a majority of PWEI the results of the vote are pretty much a given. If the institutional holders wanted to fight this deal, we would have heard about it before now. In fact, the specialists are already hard at work picking up the outstanding shares at a slight discount to the agreed price of $33.50. The company will be delisted shortly after the closing of the deal. That would be the normal, and first possible outcome, and the most likely in my opinion.

The second possible outcome is that this agreement fails for whatever reason. J-M can't arrange financing (seriously unlikely, imo), PWEI shareholders turn down the agreement (again, seriously unlikely), or fraudulent circumstances come to light (again...).

The third possible outcome is that a second interested bidder could make an offer. If there were a hint of that in the markets we would see chart action similar to Harrah's Entertainment (NYSE: HET), this week. The specialist here has been doing a yeoman's job of accumulating the stock at a slight discount. Until that is, this week. Nothing more than a rumor hit the market and it's a long time frame on the HET takeover. This sort of action could occur repeatedly while time drags by. Any party interested in PWEI is going to have to move quickly and I just don't see it happening. The one major shareholder has agreed to vote for the proposal and that is tough to fight.

I mentioned Harrah's about a week ago as a "comparable situation" just on the basis of the chart action. Someone pointed out that the situation among the PWEI short sellers is not comparable at all to the short selling in HET, which is minimal. I would contend that now, two weeks after the PWEI takeover announcement, the two situations are now comparable. Any short seller with half a brain has closed his position and moved on because they can also see that the second possible outcome is just not likely, and that would be the only way to profit from an on-going short position.

And while I'm talking about short sellers, let me just add a bit that I think far too many people forget, certainly among the posters on the yahoo boards. Short sellers, whether selling naked or not, do not operate in a vacuum. Even a major hedge fund will clear their trades through a larger tier-1 firm such as Goldman Sachs, or Bear Stearns, etc. You need to put up a significant amount of capital to get the attention of such an organization, particularly if you intend to trade a high-risk trading strategy. These traders are responsible for their position because their broker will not take a loss for them.

On the other side of a short selling transaction is a buyer, and those tier-1 firms and below are also responsible to their buy-side clientele. Even if my account has not actually been credited with the shares of a company that I purchase, my account will be credited with an entitlement that my broker creates. And that's important. My broker is responsible for having created that entitlement. My broker will automatically issue a "Forced Buy In Notice" to the seller in order to offset risk.

In a situation such as we are in with PWEI today, I, as a buy-side client will want my $33.50 for my shares. I can sell the shares that I think exist in my account, but if in fact I only have an entitlement and no shares are available to my broker to effect the trade on a cost-free, risk-free basis, my broker will use that "Forced Buy In Notice" and the short seller will ultimately lose. In todays situation, the former short sellers are clearing out just as fast as they can given the limitations of volume of trading in PWEI shares. Why should they face a forced buy in for $33.50 (or higher) in a few months when they can get out now at $33 or so?

Ok. Enough from me. I hope that was informative and helped somebody.

Sunday, January 28, 2007

IOTN wakes

I normally don't follow stocks that are as cheap and have disappointed so much as IOTN, but it is like an old friend that I grew apart from and like to check up on from time to time. This company seemed to be a home run a year ago as it reached almost $15 on major short-squeeze/technology-of-the-future mojo. Then slowly the truth about a "momentary" $100M+ production contract for its anti-IED system became known. Mainly that the system wasn't unacceptable to the military for various reasons and a contract was no where near. But tonight I don't want to get into the story or the fundamentals behind this once popular stock other than to say that "before the end of the month" (this week) government tests are scheduled for its new/upgraded anti-IED system. I used to follow it closely and now I just check the chart every week to make sure it still looks like crap, well when I looked this week I saw something I hadn't seen in a long time (it didn't look like crap).
IOTN broke out of a 9 month long downtrend that began with a 50% haircut over two weeks last May. Volume has been strong along with price gains and other positive technical indications. The rounded base IOTN formed on it's weekly below should provide a solid launch pad to it's 200 dma currently at $6.33 (50 dma) and $6.00 (200 dma). Support in the 5$ area looks like a great place to jump in for a quick ride and from way back the $6.5-8 area has been support and should now serve as resistance on this move. So I would target 7$ then wait and watch for news before re-entering. Generally speaking I like defense right now with all the talk of additional troops going to Iraq and a global arms race as the Mideast heats up.
Disclosure: I have March IOTN Calls but I wouldn't like to hold them that long if I don't have to.

Wednesday, January 24, 2007

The power of candle charting....

I've been studying Japanese Candlestick Charts for a while now and to be honest I hate the use of the Japanese names and/or their short form English names like "doji", or "evening star", or "hanging man", and the list of those names goes on, and on. They don't have any intuitive meaning to me.

For me, it's easier to actually look at an image and describe it, and here is where I'm going to give a huge plug to my favourite charting site

That is, without a doubt the best free charting site that I have ever found. I'm told that if you pay for membership you can get real-time charting. But that would not be the point of this post. I want to highlight a "japanese candle" that I don't see very often, but I recognize it as a "low reversal candle" because of its distinctive "unfilled red border color".

This candle shows that the stock opened below the previous close. That is why it is red in color. Because the stock closed above the open the candle remained "open, or unfilled". It is a rare candle and it is a sign of support in the market. It is a reversal signal, but like all candlesticks it requires a supporting candlestick.

Today, one day later we can see a "bullish rebound" candle in the NYSE Group stock. There will be no silly japanese names here. I call them as I see them!

Monday, January 22, 2007

Failed Breakouts in AAPL, DLB & NTGR

These three stocks all had decent breakouts over the last few weeks before selling off back below their breakout point. Now they each precariously lie just above their 50 day moving averages. They may prove to be decent shorts (or put plays) on a break of the 50 day. NTGR actually pierced it's 50 dma last Friday which can be a kiss of death even if the stock recovers it by days end. I would place my stop at the breakout price in each case.

Tuesday, January 16, 2007

Fuwei Films (FFHL) looks ready to resume

There weren't too many charts that jumped out at me over this long holiday weekend. Many stocks look like they are in the middle of moves which isn't really the best place to enter a position. ICE for example is certainly looking for a top now that it moved up out of the channel it had been in and looks parabolic (typical of climactic moves). However one decent looking company that just did an ipo about a month ago has a solid chart. There are no options traded on FFHL, but this fast moving Chinese film (materials) technology company looks ready to resume it's uptrend. Of course there is little history to make technical trade decisions based on, however the strength in volume and price following the ipo and the well formed flag consolidation are enough to bring FFHL to new highs in my humble opinion.

As far as their fundamentals, I couldn't find much. From yahoo:
"Fuwei Films (Holdings) Co., Ltd. and its subsidiaries principally engage in the development, production, and distribution of biaxially oriented polyethylene terephthalate (BOPET) films. Its BOPET films are high quality plastic films used in consumer based packaging, such as food, pharmaceutical, cosmetics, tobacco, and alcohol industries; imaging, such as masking films, printing plates, and microfilms; electronics and electrical industries, such as wire and cable wraps, capacitors, and motor insulations; and in magnetic products, such as audio and video tapes. The company’s principal products include printing base films; stamping foil base films; metallization or aluminum plating base films; laser holographic base films; matte films; and high-gloss films. It sells BOPET film products to customers and distributors in the flexible packaging industry. The company markets and sells its products in the People’s Republic of China, the United States, Japan, and southeast Asia. Fuwei Films (Holdings) Co. was founded in 2003 and is headquartered in Weifang City, the People’s Republic of China."

Ps. I have been working on software to interact with the Interactive Brokers API (program interface). If any readers use the IB TWS API or write code to assist in trading on other platforms, I would love to exchange ideas with you about your software.

Sunday, January 07, 2007

Short-term (ICE), long-term (TIE) and naked shorts (CREE)

I'm gonna let the charts do the talking this week, first a short-term (daily chart) short: ICEA long-term (weekly chart) short: TIE
A naked short (short em even if you can't borrow them): CREE
And a new years bonus short!!: MOS
Happy New Years from Stock Geometry!!!