Monday, October 25, 2010

QXM/XING merger

The merger arb on QXM is still ripe.  QXM filed a Form 13E-3 over the weekend in order to move the planned merger forward.  With XING priced over 1.80/sh at the time of this post, each QXM shareholder will receive over $4.2/sh in cash and XING stock if the deal goes through, which is still a big premium to current prices.  I'm voting my shares in favor of the deal.    I'm still waiting to consider shorting XING against my QXM long since the charts for both are still quite bullish given the recent bull raid in chinese mining stocks.

Wednesday, October 20, 2010

Volatility arb still ripe

As discussed earlier at Uptrending Equity: Volatility arb, volatility futures are still trading at a steep contango.  Since the monthly incremental contango in the VIX futures term structure is almost just as steep going forward several months, rather than tapering off less steeply as you go deeper into the term structure (which would be more normal and expected), I reached out to short the Jan VIX futures and bought Nov SPY puts with IVs of 16% to hedge, rather than shorting VXX, which is currently holding mostly Nov VIX futures.  I'll roll the puts over once we approach expiration more so that I'm not bleeding too much time value.  

Shorter term merger arb

I usually don't post my short-term trades on here, but with tons of volume coming into the chinese mining stocks lately (CHGS, SHZ, CNAM, CPSL, XING, QXM), the latter 4 stocks are still early in their moves.  With the bigger move up in XING, being at $1.85/sh as I write this, the buyout price for its subsidiary QXM, which the parent owns most of, is now $4.3/sh.  Currently priced on the market at 3.6, this is a steep discount for a stock whose deal is likely to go through given that the parent, which owns most of QXM, wants the deal to go through.  I'm long a lot of QXM from the 3.50s.  I expect XING could move a lot higher in the coming days, as well.

Friday, October 15, 2010

Wheat contango

Contango is blowing open in wheat, which is a strong bearish indicator.  Short a longer-term future when the front-month breaks a recent low, risk a small amount, and you have a good chance of a nice winner if you hold it a month or 2.

ABK is getting a bit whippy each day but I'm still long from .61.  Still long PMI as well.  With this mortgage fraud stuff PMI has the 2nd best upside besides ABK.

Wednesday, October 13, 2010

Refining margins been ripping higher for weeks now

Refining stocks finally starting to catch up.  My favorite fundamentally is VLO, but you don't really want to lay into the long until it gets above $22.  VLO could easily go to $40.  Priced under book despite continually making a nice profit even without the recent improved margins.

Wednesday, October 6, 2010

The Lunatics are Running the Asylum

Just came across this trade put on by the hedge fund Pershing Square during the height of the BP panic this summer: short equity puts and long CDSs.

If you recall, this is almost the opposite of the trade I had recommended in, when I recommended buying bonds and shorting equity.  While selling volatility during a panic is a legit strategy, they were absolutely on the wrong side of the trade as far as the capital structure arb goes.  Pershing took enormous tail risk had the stock dropped further to near bankruptcy or bankruptcy-in-fact levels w/o a credit event bringing value to the CDSs, which was  a very real threat.  In constrast, if Pershing was trying to pick bottoms in a panic, the more appropriate strategy would have been to just buy bonds or short CDSs.  My suggestion to short equity in addition to buying bonds would have brought about profit in every circumstance, allowing it to be levered to the hilt, especially considering how much size you could take in the bonds and equity of such a high-volume large cap.  If you noticed, bonds have rebounded pretty much completely (nearly 100% gain), while the stock has bounced back only 15-35%, depending on where you would have managed to close out the capital structure arb.

Wow, and I'm the guy trading my own peanuts worth of cash to scrape by in the markets?  I'll take the Yalies' money any day.


Been absolutely killing it lately.  Haven't had a negative day for weeks.  As of today, I'm looking for further strength out of my ABK and PMI longs (ABK is more likely to squeeze more quickly) while I'm short MBI.  Last time I checked, the CDSs on PMI were cheaper than on MBI, so credit guys think PMI is lower risk than MBI, yet MBI has been the only strong one the last few months.

Refining margins are taking off, so VLO is the best of breed as seeming very inexpensive fundamentally, but I'd like to see it above 22 before I really lay into the long.  Could be a good entry above 17.50-17.60 area, too, if you want to risk a lot less to get in earlier.