So I had a flashback recently. (Not an acid flashback, mind you — never tried the stuff — but a market flashback). It was almost 10 years ago on the nose: August 1998. I was a wet-behind-the-ears college grad, and I’d just flown into Reno/Tahoe for a job interview with Commodity Resource Corp. I’d never seen Tahoe except in pictures (though, of course, I’d heard how amazing the place is).

All I knew is that I really wanted to break into commodities… and I really, really wanted the job.

The day before driving up to the lake for my interview, I holed up in my motel room with a fat stack of flash cards. To take a mental break from interview preparations, I switched on the tube and clicked over to CNBC.

To my horror, the Dow was diving. In fact, it was nearly flat-out crashing. (Sound familiar?) As it turns out, my big job interview came right at the onset of the Russian debt default and the Long-Term Capital Management meltdown.

I was horrified because I had visions of Commodity Resource Corp taking it on the chin. What if they’re getting badly hurt in this crash? I wondered silently. What if their clients are all getting crushed? What if they won’t be able to hire me?

My fears were completely unfounded, of course. Commodities and equities run on very different cycles, something I hadn’t quite grasped at the time. My future boss actually laughed when I hinted at my concern. As it turns out, the firm was loving the extra vol in the index futures. Overall, it was a positive turn of events for them.

As I say, that all happened a decade ago. But with the Dow diving once again, chatting with Cash McDash this week fueled my sense of déjà vu.

Given the nature of this market, you would think an IPO and new issues trader would be getting roughed up pretty good. So I had some natural concerns for my old friend… but as it turns out, the concerns were unfounded like before. Cash is rolling right along, and pretty much making a mint on the short side. (Surprisingly enough, he’s got two strong long ideas this week, too.)

As Chuck Berry once sang, “Goes to show you never can tell.” Even when the market feels like pulp fiction, sharp traders like Cash will find a way to stay ahead of the game.

With that said, let’s check in with the man himself…

JL: It’s getting pretty ugly out there. You know we’ve been anticipating this at Taipan, and you rarely get caught by surprise yourself. But still, the carnage in some of these moves… Ay, caramba! How are you handling things?

CASH: Pretty well, actually. I do feel sorry for some of my contacts, though. It can be a little depressing getting calls from hard-up underwriters, knowing how hard a time they’re having getting anyone to place orders. Life is never easy with management breathing down your neck.

JL: But you’re doing all right, eh?

CASH: Yup, I’m trucking along just fine. The shorts are in high gear and racking up good profits.

JL: So what about your underwriting contacts? If business gets bad enough, are you worried about any of your boys going out of business? What happens to your Rolodex if Wall Street becomes a ghost town?

CASH: Heh. It’s rough out there, but not that rough. My guys will make it through. I’m very careful about who I pick to do business with, so I doubt there will be any washouts. And the investment banking business as a whole is very necessary anyway, whether it’s good times or bad. Even if another firm or two goes belly up, there will always be new entrants to pick up the pieces.

JL: I hear you. It’s amazing how resilient free markets can be, and capital allocation is right at the heart of things. But back to matters at hand… Is your phone pretty quiet these days? The funding must go on, but this market can’t be so hot for getting deals done.

CASH: Actually, I was a little surprised myself on that front. Secondary offerings came out of the woodwork this past week. There were actually nine different deals pricing, and I was fielding phone calls left and right.

JL: Anything juicy?

CASH: Well, I wasn’t about to bet the farm on any one trade in this environment, but it was hilarious to hear the reactions when I placed even a small order. It was like tossing a golden retriever a doggy treat. “Gee, THANKS, Cash! We’ll do our best to get you those 2,000 shares pronto, and we really, REALLY think this one is going to work! You’ll get a call first thing in the morning to confirm!”

JL: Confirm?

CASH: Yeah, usually I give them an indication a day or two before the deal prices.

JL: Indication?

CASH: Sorry, we’re swimming in lingo today. “Indication” just means a verbal on the amount of shares I’m willing to buy. Then they call me the morning of the deal to “confirm” how many shares I actually received. But in this market, I don’t even need the confirmation call.

JL: Why not?

CASH: Because I know I’m going to get whatever I ask for. They’re desperate to find buyers right now, so anything I “indicate” for, I had better expect to show up on my books the next morning.

JL: Like one of those “everything must go” clearance sales. You ask for it, you got it.

CASH: Exactly. But that’s OK by me. If I’m not too keen on a new position, I’ll just put in an order somewhere else to short, say, 5,000 shares near the close. So assume the stock closes at $32 a share and I go short near that level. Then the secondary prices at $30.50 and I get 5,000 shares from three different investment houses. Now I’ve locked in a $1.50 per share profit, and I’m not going to get hurt if the stock trades lower.

JL: What a game. You make it sound like falling off a log.

CASH: Well, it’s not always that easy, of course. On average, this type of strategy works well in a bear market. But every now and then, a secondary offering throws a curve ball and behaves differently than you might expect.

JL: Got an example?

CASH: But of course. Ever heard of Central European Distribution Corp (CEDC:NASDAQ) ?

JL: I think so… Aren’t those the guys with all the different beverage brands?

CASH: You got it. They’re one of the largest vodka producers, and they distribute 700 different alcoholic brands in Poland. The company is in the middle of a big Russia acquisition, and needed to raise capital to use for the purchase and pay down debt.

JL: So they did a secondary? How big?

CASH: $230 million — not chicken feed.

JL: Man, they picked a heck of a time to raise that much capital. I’d hate to be selling that many shares on the open market when the Dow is getting sucker punched.

CASH: I hear you… but I don’t think anyone was too upset about this particular deal. Pull up a chart of CEDC.

JL: Yowza. So OK, the stock has been working its way higher all year. I guess that makes sense, given the defensive nature of the alcoholic beverage industry and the strength of the euro.

CASH: Yeah, not to mention that this market is driving a lot of folks to drink.

JL: Hardy har har.

CASH: But seriously, the company is making a killing. It’s extremely profitable, and margins continue to be strong. Management also has a great track record of acquiring new brands and working them seamlessly into their suite of offerings. I have a lot of confidence that CEDC will continue to trade well.

JL: Sounds like a name to watch… We’ll have to keep an eye on it for Taipan readers. And speaking of keeping an eye on things, what about downside moves? I know there have been some decent moves in names we’ve talked about here…

CASH: No kidding. Did you see VMware (VMW:NYSE) this week? We talked about VMware just a few weeks ago. I believe I explained how it was a red-hot IPO that was destined to fall back to earth. I added that any bad news could take a serious bite out of its lofty multiple.

JL: And how right you were. On June 10 you said, “I really want to see the stock close below $65… It could be a doozy of a trade.” The stock has been hammered since you called out that warning. If I recall correctly, the news was Microsoft wading into the fray with a competitive product offering.

CASH: That was the gist of it, yes. Mister Softee coming to eat their lunch. That kind of threat should strike fear into the heart of most any tech company. I don’t think we’ve seen the worst of the VMW break, either… Not that I’m thrilled over the idea of investors getting hurt. It’s just that this break could have been anticipated if people had just paid more attention.

JL: But that’s the beauty of the market, isn’t it? Paying attention and doing your homework can pay off in spades — on both the upside and the downside.

CASH: Yes indeed.

JL: So before we run out of time, anything good coming up this week? I know the calendar is thin, but figured I’d ask anyway.

CASH: Believe it or not, there’s an IPO in the works with the potential to trade pretty well.

JL: Wow — that’s surprising. I wasn’t really expecting you to be bullish with this backdrop. What is this mystery company that gets your endorsement?

CASH: It’s called Energy Recovery Inc. The ticker symbol is set to be ERII. These guys have the distinction of operating in two of the very few constructive segments of the market.

JL: Let’s see… Energy has to be one, right? No Sherlock Holmes points for that one. I give up, what’s their other segment?

CASH: Water.

JL: Ah, nice. Energy and water definitely have the spotlight these days.

CASH: Yep, these guys should turn some heads. The process of taking seawater and turning it into usable freshwater is highly energy-intensive. Energy Recovery helps “recapture” some of that expended energy through harnessing the water flow. The details are a tad too complicated for my taste, but the bottom line is that the company is already profitable, and its products are in high demand.

JL: Sometimes that’s all you need to know right?

CASH: Yep. So that’s what I’m dialed in on this week. There’s another IPO on the calendar called Galiot Capital, but that one’s not worth our time. It’s another mortgage-backed securities (MBS) shop. The IPO is the initial round of capital raising, and then they go out and buy the securities later.

JL: Sounds familiar.

CASH: Yeah, this is about the third or fourth IPO to draw from the same well. I’m not opposed to the business strategy, as there could be some genuine value in mortgage land for a talented team to uncover. But I’d rather let the stock trade a few weeks minimum before eyeballing it. Odds are good it’ll trade a bit lower to start with.

JL: Gotcha. So we’ll keep an eye on CEDC and ERII from the long side this week.

CASH: Yep. Sounds a little different to be picking up long names, but these two have very strong prospects.

JL: As do many of the other short plays you’ve mentioned in these pages. Keep racking up those gains!

CASH: Aye aye, Cap’n. We’ll talk again soon.

Source: Two Strong Buys in a Tough Market