The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Thursday, May 10, 2007
Email – #373
** Look Out Below
If General Motors (NYSE: GM) breaks $29, look out below. GM has strong support at the $29 level going back several months. If it breaks that price, it could trade down to the mid $20s very quickly. The news coming out of Detroit is not getting better.
As I explained last time, GM is not just a badly managed car company, it’s also a badly managed consumer lending company. Errors of the past four years are coming home to roost. Of course, there is a possibility that someone will come out tomorrow with a rumor of an LBO, or private equity deal.
Speaking of PE, the amount of chatter regarding private equity and hedge funds buying just about every company on the planet is bordering on the absurd. It reminds me of the dot.com days when everyday there was a new analyst talking up another “deal made in heaven.” No one is calling “private equity’s” bluff quite yet – why should they?
As rumors swirl, and the occasional deal happens, the market continues to have a floor under it, as investors are scared to short just about anything for the fear of a buyout. The market cycles, and this cycle will end as others have. Using LEAPS, we are trying to make decisions using a low entry price and with time on our side.
Other news: Freeport Copper and Gold (NYSE: FCX) just hit new highs (if you blinked, you missed it.) Our spread is doing quite well, up over 50% in a few months. We will ride this one for a while longer and wait for the premium to begin decaying on our spread before we take profits.
Coeur d’Alene Mines (NYSE: CDE) is experiencing a major downward hiccup. Scant days after our recommendation, the company announced a merger that would create the world’s largest silver producer, with low cost at that. But, it is paying for the deal in shares, which means dilution and a short-term haircut. Still, this is why we own the 2009 LEAPS – we are betting on silver with this one, and if that pans out, we should be off to the races.
Chesapeake Energy (NYSE: CHK) is truly a conundrum. I want to sell the position, but it makes little sense to do so just as hurricane season is beginning. Already, we have seen an early season storm off the East coast, one of the earliest in recent memory – that could bode very ill for the rest of the season. If we get one or two threatening storms by the middle of August, natural gas spot prices could go to the moon.
Already, futures for natural gas are moving higher for 2008 delivery. CHK is an excellent vehicle to benefit from any spike in natural gas. I must say, though, I like the company less and less after each conference call.
Last week, Chesapeake came out and said that it would not be issuing any more stock to raise funds (its history has been to buy a company and then issue scads of shares to pay for the purchase.) Nothing wrong with this, but it has had the effect of depressing the share price on many occasions.
Just last week, shares reached a new 52-week high, and now they are retreating. And just the other day, the company announced a new convertible offering. While this is not a straight stock offering, it still has future dilution potential. We’ll see on this one – it is a pure weather play at this point, supported by extremely strong earnings and cash flow.
Good Trading,
Karim
