I was reading The Kingsland Report yesterday, as I do everyday, when he got me thinking about these recent private equity deals as possible shorts. I know it sounds crazy but the market is beginning to doubt the future of these buyouts with the target's stock prices falling well below the buyout price. Now many in the arbitration world see this as a boon for them, they buy the stock and get the difference when the deal goes through. And I assume they incur little risk by hedging themselves to be safe (with puts). As the credit market has become crowded with debt to be sold for these deals the appetite for debt/risk has fallen dramatically. This goes back to the worries many had months ago about the housing market woes and sub-prime problems spilling over into other areas of the economy. Well they did, in a big way. It has become increasingly possible that these deals may fall apart altogether which, in and of its self, would crash this market, among other reasons why the market may crash on Monday. Now for a few charts.
Diamler Chrysler recently announced they would have to postpone the sale of their Chrysler unit to Cerberus Capital because banks were having trouble financing their 10B$ portion of the 12B$ deal. Honestly I don't know exactly what this means for the DCX stock, but I do see a perfect head and shoulders top on the chart with an 80$ price objective. The August 85$ puts are trading for only $1.50 so if the stock does go to 80$ they will have a cash value of 5$, this gives the trade a nice risk to reward ratio in my view (possible 233% profit).
I thought the TXU deal, the biggest LBO in history, was done months ago. But as it turns out some greedy investors think that they can get more for their company and the banks must be praying that they get their way. This deal must be facing a number of hurdles in getting it financed and on Friday someone bought 10,000 January 2008 TXU 65$ puts for 2$. Thats a 2M$ bet that TXU will be below 63$ by January 2008 and the deal was priced at 69.25$. If 65.10$ breaks I can see TXU heading to its next support area around 62.50$ or maybe its 200 dma (61.50$) in no time.
Another one I noticed some heavy put buying in was HET. This deal must be a shoe in for the arbitration investors since HET is such a profitable fast growing company as opposed to TXU or Chrysler. But for whatever reason (which could be part of an arb hedge), investors bought 15,174 August 80$ puts around .40 Friday. Take a look at the HET chart, it is trading well below the 90$ offer and recently began to slip further. If even one of these deals falls apart you can bet the stock will crater and the other LBO stocks will probably tank in sympathy, keep an eye on the headlines.
I'll try and post more ideas later tonight. CREE continues to be a slow motion train wreck towards 20$. AHM has completely fallen apart and canceled their dividend, expect bankruptcy soon. CCRT, well I hope you got some puts in that one. IMB same story. I'm thinking Sprint (S) 20$ puts might be a good trade on Monday also. Also, Indigo had the great idea of doing polls each week to encourage feedback so please vote in the poll on the right. We are very curious what our readers think about this current market action. Good luck tomorrow, and please be safe (honor your stops!!!).
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