Investment Capitalist

30-year Treasury Yields are about to spike along with a dollar rally. I feel this is the catalyst to trigger a sustained pullback in equities, which will reflect our rising unemployment rate and all the stimulus plans that are slowly phasing out.

Equity Long/Short Market Neutral traders will have an edge in this market over Momentum traders waiting for an expansion in the VIX.

For example, convertible bonds are the “paper of last resort,” and the airlines are desperate for cash (when aren’t they?). So it’s not a surprise Continental is in the market to raise some expensive capital and a $200 million deal (if the green shoe is exercised) is nothing serious. But the devil’s in the details.

I think the coupon is going to float around 4.5%, literally a 25% premium on a five-year maturity. The bonds at this issue price are a clear advantage over the common and set up an ideal trade, again at the issue price. I keep emphasizing this because the hedgies will be buying up the offering and shorting the stock to capture the premium so the spread should narrow really fast.

My bet is that most, if not all of this offering is going to the hedge funds. A few back of the napkin calculations, and after the offering, it’s quite possible that up to 60% to 65% of the common will be short.

Since the deal is for $200 million (including the $30 million green shoe), with a 25% conversion premium, this means about $184 million of stock will be controlled by the bonds. Around $120 million of stock will need to be sold short to hedge the deal. This means somewhere in the neighborhood of 7.5 million shares.

With this in mind, the sell-off in the stock should continue. So hit the rallies and hit them hard. The sell-off began with the deal’s announcement but it’s not over. I wouldn’t expect it to settle in much higher than $13.50 or $14. Perhaps even closer to $12 on an overshoot. In fact, if the common does overshoot through $13 and then through $12, look for a dead cat bounce trade of a couple quick points.

I’ll do some research over the weekend and post some more ideas. I know I haven’t updated the blog recently but I think the weather in New York is going to give me an excuse to stay in and write more often than before. It is absolutely, insanely, unbearably cold here.

MW

prop trading, jamie caputo, lighthouse, lighthouse prime, lighthouse securities, lightouse group, formation trading, formationtrading.com, formation trading group, proprietary trading, prop traders, prop, T3 Live, First New York, FNY, Millenium Partners, SMB Capital, discretionary trading, traders, trader, trading seats, Hold Brothers, Hold, Avatar, Avatar Securities, Scott Redler, T3 Partners, T3 Partners LLC, Sean Hendelman, Marc Sperling, Laz, Sperls, Red Dog, RBC, RBC Capital, RBC Professional Traders Group, high volatility, high frequency, high frequency/high volatility, global macro, cash equities, stock trading, leveraged trading, scottrade, ameritrade, Valez Capital, Pristine, chart patterns, technical analysis, protrade, Oliver Velez, Pej, Pej Hamidi, Macro Trader, Macro Trading, marketwizard, eGoose,

pej hamidi, t3live.com, t3capital, global macro, pejman hamidi, Pejman Hamidi, Pej Hamidi, formation trading, formationtrading.com, formation trading group, jamie caputo, Jamie Caputo, Lighthouse, Lighthouse Securities, Lighthouse Group, Lighthouse Investments, Lighthouse Prime Brokerage