Anatomy of a Double Play
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Last week was a thing of beauty for the bears. The major indexes were all hit hard, with the Dow and the S&P looking ready to explore new depths. The Dow also closed below 12,000 on Friday, an area of psychological importance.It’s tough out there for the bulls (except perhaps energy, commodity and inflation bulls). But the good news is, there’s money to be made in both directions. As Jesse Livermore once said, “There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”
Today we catch up with Cash McDash once again, and he reminds us how important the Livermore mindset is in markets like these. Rather than serve up a new trade this week, Cash follows up on two winning short ideas that were highlighted right here, shared in the pages of Taipan Daily, and gives details on how they worked out. Stay tuned and stay flexible.
Warm Regards,
JL
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JL: Last week, when we signed off, you had some enthusiasm brewing over your winning open positions. But then the market took a beating all week. You still want to go over one or two of those plays, or is the picture different now?
CASH: Hey, you know I’m no Mary Poppins about this market. I’ve been as bearish as anyone… so this week did nothing but make those positions even more profitable.
JL: Good to hear. I know you can flip your viewpoint from long to short pretty quickly — so I was hoping you didn’t zig when you should have zagged.
CASH: I’m hurt! But, no, actually I didn’t get hurt. I’ve been holding my own. Anyway, the deals I wanted to tell you about actually stem from a couple of freebies I gave several weeks back. Remember when you twisted my arm into sharing some choice morsels?
JL: Sure. I know you let a few slide in there. It looks like we’re close now to setting up a cleaner way for you to share these picks… but anyway, give us the recap on which names you’re referring to.
CASH: Well, the first one was back in April I believe — National Cinemedia Inc. (NCMI). That one was an IPO from 2007 that I expected to give up the fight.
JL: National Cinemedia… Weren’t those the guys running advertisements in all of the movie theaters? I think we talked about how difficult the advertising business was getting, not to mention that big-screen audiences could be down in a tough economic environment.
CASH: That’s the one. And I think I mentioned how the lower cost of home theater equipment was influencing consumers to wait for Blu-ray (or whatever the new standard is), because the experience at home is catching up. Anyway… shortly before we talked last week, the company warned that its second-quarter revenue wouldn’t meet expectations.
JL: Sounds like they pretty much met your expectations.
CASH: Yep. Definitely didn’t catch me off guard. The stock dropped from a close around $18.50 to $14 the next day. It finished the week out at $12.59. Not a bad percentage gain for those who stuck around and held their short position.
| Previously in the Cash McDash series:
This High-Tech Darling Could Crash and Burn Short This High Flyer for Educational Trading Gains Peeking Behind the Curtain With Cash McDash The Beginning: Introducing Cash McDash |
JL: Indeed. Patience is key in this business, but that one really didn’t take long to pay off. The stock was trading at the low end of its range even before the announcement came out.
CASH: Yep, this is the kind of trade that makes me a bit edgy and at the same time pretty happy. Moving on, do you remember us talking about Verso Paper?
JL: Of course. The IPO was coming out and you said “DON’T BUY IT!” Then, after it priced and traded lower, you broke a general privacy rule and told us how this was one of the niche short ideas that tend to make you a lot of money. It was another one of your giveaways.
CASH: I was feeling pretty generous there, wasn’t I? Once again, the trading pattern didn’t lie with Verso. No one wanted the IPO, and it gapped lower as it expected. Then, three weeks later, there were still no takers… and so we got another 20% haircut.
JL: Hold on a second. You speak as if there was a second event, but you’re basically saying the same thing, yes? You’re telling us twice that no one wanted the stock. They didn’t want it on the IPO, and then they still didn’t want it. What’s the difference between the initial gap down and the “three weeks later” scenario?
CASH: You’re very observant.
JL: I try.
CASH: What we saw during the first three weeks (when Verso (VRS) was trading around $10) was institutional support.
JL: But I thought you said the institutions didn’t want it?
CASH: That’s correct. But imagine the embarrassment if you are, say, Goldman Sachs (GS), and you bring this deal to market with your name on it — your reputation on the line — and then it immediately trades to zero.
JL: Ouch, right. Not a happy place.
CASH: No it isn’t. And a deal gone to pot like that would make it hard for Goldman to find buyers for its next IPO, too, because they would all be gun-shy from getting their clocks cleaned on the Verso Paper deal.
JL: I think I see where you’re going with this. So Goldman Sachs may step in and absorb some of the liquidation, meaning they buy stock, in order to prop up the price for a time. This might let their clients get out of their positions… or at least remind clients later there was a chance to cut losses quickly.
CASH: You got it. It’s a trade-off. Outfits like Goldman need to be supportive of their IPOs, but they aren’t going to keep buying a lousy stock forever. And they certainly aren’t going to publicize their actions. In fact, I never really said Goldman supported the stock price. I simply implied that it may have bought stock. I don’t want any of this coming back to me. This kind of thing is more implication than hard proof… and some of my “friends” over there wouldn’t be too happy with my sharing this information, as you know.
JL: Don’t worry, I’ve got your back.
CASH: Sure — as we both run for the back door! But seriously, this is a pretty well-known phenomenon in the institutional circles. It’s just not explained to regular investors very often, because once the secret is out, the propping-up efforts just aren’t nearly as effective.
JL: So what happened when the underwriters quit supporting VRS?
CASH: It dropped another two handles in about four days.
JL: Handles?
CASH: Trader-speak for points — dollars, in this case.
JL: Gotcha. I heard the phrase a lot in my commodity broker days, mostly referring to S&P futures. Haven’t heard it so much in relation to stocks. Trying to impress someone with a little lingo there?
CASH: Nah, I’ve just been talking to too many Jersey and Manhattan boys this week. There are only a handful of deals in play right now, but everyone feels the need to call me three or four times on each one. You know, to give me a chance to increase the size of my orders.
JL: How kind of them.
CASH: Yeah, no kidding. “Hey Cash ol’ buddy ol’ pal… don’t you want to get taken out behind the woodshed a little MORE on this latest issue?
JL: Ha ha. Well hang in there. I’m sure you’re holding your own as usual. Maybe you can tell us a little more about the new deals next week.
CASH: Sure thing. And don’t worry about me. I handle these markets well. There’s good money to be made on the downside as well as the up.
JL: No questions there. Talk to you again soon.
Source: Anatomy of a Double Play
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Tags: GS, Justice Litle, NCMI, VRSAbout the Author
Justice Litle, Executive Editor for the Taipan Publishing Group and of the Free E-letter, Taipan Daily, has a unique background that has served him well in the markets. Originally pursuing a PhD and a life in academia, his career path changed forever after discovering The Investment Biker, Jim Rogers chronicle of macro investing by way of motorcycle.
Taipan Daily is your free resource for late-breaking investment opportunities to help you beat Wall Street to the profits. Filled with investment analysis and insight from every sector. Taipan Daily delivers just the right blend of safe opportunities with the fast-moving plays, so you have an insider's edge over Wall Street and other investors.