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Dean M. - Executive Principal

Is Colonel Qaddafi Comin’ Back to Englewood?

As the protests in Libya spread throughout the country, one question keeps coming to my mind… Where is the world in Colonel Qaddafi going to live if he is booted from his homeland?  The hated despot may find refuge in another friendly middle eastern country but wait!  In a few weeks there may not be anymore middle eastern countries friendly to the former evil ruler as revolution spreads like wildfire throughout the region.  After giving some thought to the matter, I realized that Qaddafi has some pretty sweet digs just up the road from the Hedgefundlive offices on Palisades Avenue right here in snowy Englewood, NJ.  How great would that be?  To have a Best-In-Class evil despot right up the street.  It would be pretty cool to see him grabbing a double half caf cappucino at the local Starbucks.  I wonder if he is a chatty fellow.  Well… one could only dream.

Colonel Qaddafi's New Digs???

Barron’s Summary Feb 19, 2011

· The king of bonds” - Jeffrey Gundlach is profiled in Barron’s – he is pretty bearish on US equities, calling for the SP500 to hit 500 in the next few years.  He foresees more downside for muni debt and is pretty cautious on the US economy.

· Housing is a lot worse than people think – using numbers by Core Logic, which claims the headline National Association of Realtors existing home sales is inflated, numbers and trends in the market are worse than expected.

· INTC – article notes that Fred Hickey has become positive on INTC, due to a cheap valuation and decent fundamentals.

· Teton Advisors CEO Nick Galluccio – interview – pos. on FNFG, QLGC, GDP, ESIO, WASH, FFIC, HXL, WWD.

· NVDA, ARMH – negative comments – investors are getting way too enthusiastic about tablet growth forecasts; both these stocks are very expensive.

· MSFT, INTC, DELL – pos. comments; all these stocks are pretty cheap and reflecting pretty dire forecasts.

· HPQ – Barron’s says the Vertica purchase by HPQ raises conflict of interest questions as HPQ’s nonexecutive chairman, Ray Lane, owned a piece of the small software firm via his involvement w/VC shop Kleiner Perkins Caufield & Byers.

· Tech firms, inc. AAPL, MSFT, GOOG, CSCO, and INTC, should start paying 3% dividends.  They all have way too much cash, something investors aren’t giving them any credit for.  If INTC, one of the most capital intensive companies in tech, can pay a high dividend, than others should be able to.

· MF – pos. comments; as Corzine transforms the company, its stock price could climb to >$10.

· OMX – positive comments; the stock slumped after its earnings; but valuation is cheap and expectations are low; the results weren’t even that bad and mgmt could be conservative w/the guidance.

· LAB – one shareholder in LAB isn’t happy w/the terms of the deal and thinks the company is worth closer to $6.

· Cotton – the price may be vulnerable to a near-term correction although longer-term fundamentals remain positive.

· BioGaia – the Swedish biotech firm could become a takeover target for the likes of Nestle, DuPont, or Yakult.

· AGU – the stock could have more upside ahead – the shrs could hit prior highs of $115

· CVX – the stock could continue climbing as oil prices rise; the shrs could approach $110

· GIS: General Mills is mentioned positively by Barron’s. The article is positive on the company’s pricing power and R&D/innovation (among other things) and says that the stock could be up ~20% during the next 12 months (while also having a 3% dividend yield).

· NFLX: Netflix is mentioned cautiously by Barron’s. Barron’s had a negative call on NFLX in its Dec. 27th issue, and says, “while we have lost some (OK, a lot of) confidence in our timing, we think those concerns are still valid, and that Netflix, which fetches 53.7 times this year’s estimated earnings, could trade sharply lower in the next 12 months”

Two Words: Money Flow

Why is it always clear in hindsight?  Well, I guess I did see it start to happen a number of months ago but I definitely did underestimate the impact on US equity markets of this phenomenon, that is, massive reallocation of capital from both fixed income investments as well as emerging markets into the US equity market.  This, along with a very accommodative Fed adding nitrous oxide to the fire is what has been unrelentingly driving US stock markets higher.  You see it all over the place including the unrelenting selloff in the entire treasury curve, the selloffs in many emerging markets, and the unrelenting rise during the same period in the US equity markets.  Duh!  I feel like a rookie for not plowing into this trade.  While I have been net long this entire time, I have still given up most of my P&L to my futures hedges.  Will this continue, who knows?  For the time being I believe it will until I see signs that it is not.

It's the money flow stupid!

Deal and Related News Feb 16, 2011

· GENZ/SNY – the deal is formally unveiled this morning – SNY will buy GENZ for $74/shr cash + a CVR.  The deal is expected to close early in Q2:11.  The acquisition is expected to be accretive to sanofi-aventis’ Business Net earnings per share in the first year following closing, and accretive to Business Net earnings per share in the range of euro 0.75 – euro 1.00 by 2013.  CC 8amET (866) 907-5925

· FDO - filing out from Trian Group - in the filing Trian says that it has made an offer to buy FDO for $55-60/shr cash.  FDO Confirmed receipt of Trian Group’s unsolicited conditional proposal to acquire the co for $55-60/share in cash. Board will review the proposal in due course.

· Clariant AG agreed to buy private equity-owned Sued-Chemie AG in a transaction valued at 2 billion euros – Bloomberg

· JOE – Fairholme Capital will move to replace JOE’s board by written consent of the majority of the co’s shareholders.  The deal could be announced as early as Wed.  WSJ

· JOE – has adopted a shareholder rights plan that prevents any shareholder with a more than 10 percent stake in the company from increasing that position without board approval – CNBC

· DELL - CFO tells DJ that it is considering to evaluate M&A candidates, but not chip companies (there was a mention Tues on ZDNet that DELL could consider an acquisition of AMD…DELL pretty much ruling that out); DELL on the call said they have no intention of taking the company private.  On the call says their M&A going forward will look similar to their recent deals.

· MRK – the co said it had been unable to sell its Netherlands-based research unit Organon and will prob. wind up shuttering the business – Reuters

· Sam Zell considering acquisition of Chicago office building; would mark his first office acquisition in years; WSJ

· China M&A – the country’s economic planning agency said on Wed that its new rules for reviewing certain mergers and acquisitions won’t affect the country’s openness or efforts to attract foreign investors – DJ

· TLCR – this hit during trading on Tues – Reuters says that anti-trust regulators may challenge Grifols’ planned buy of TLCR on fears that the combination would reduce supplies and raise prices.  Reuters

· Telecom M&A: Orange and T-Mobile are considering merging their mobile operations in several countries. France Telecom (which owns the Orange network) and Deutsche Telekom (which owns T-Mobile network) and are considering copying the merger of their UK operations, which created “Everything Everywhere” Telegraph

· NDAQ – Barron’s recommends a few options strategies depending on whether NDAQ is either a company buyer or an acquisition target – Barron’s

· CME - on Tuesday sought to quash speculation that it may make a counter bid for NYSE Euronext – Fox Business.

· BGP – the co officially filed bankruptcy this morning – Bloomberg

Deal and Related - News Feb 15, 2011

· NYX/Deutsche Boerse – a formal announcement could come at 8:30-9:30amET today; a news conf is tentatively scheduled for 10amET this morning; the companies will formally unveil a deal to combine.  According to the WSJ, D Boerse will own 60% of the combined company (and will receive a proportional amount of board seats as well).  Duncan Niederauer, the current NYX CEO, is expected to be the CEO of the enlarged company.  WSJ/CNBC

· GE – the co is looking to sell its GE  SeaCo, a container leasing operator that is 50% owned by GE Finance.  The unit could bring in $2.5B in total.  FT

· Louis Dreyfus and rival Olam International of Singapore were in talks to create the world’s third-largest agricultural trading house but those negotiations have collapsed according to a report in the FT.

· NDAQ - announced that Adena Friedman, its CFO, will be leaving the company effective Mar 4 (Friedman to become CFO of Carlyle Group).  Ronald Hassen to become interim CFO.

· BM&FBovespa is on the lookout for opportunities to expand in China and India – Reuters

· AMD – Bloomberg article crossed during trading on Mon – says the co’s mgmt turmoil could make it an acquisition target.  The Bloomberg quotes an analyst who notes that “there is some chatter than the co is for sale”.  Bloomberg

· PE deals – the WSJ discusses how PE firms generally don’t pursue hostile tactics when conducting takeover deals.  However, funds have used “love letters” more frequently of late, which can have the effect of putting a company in play.  WSJ

· Huawei – the co has been told by the US Committee on Foreign Investment that it must divest a small tech firm (3Leaf Systems) purchased back in May or else a recommendation would be made to the White House to have the deal blocked.  Huawei has decided to take its chances w/the president.  WSJ

· MAR: Marriott is spinning off its timeshare business, which includes ~$1.5B in unsold assets and 400,000 owners (as well as 71 properties and 33,000 rooms). The new company will control the management & planning of the timeshare properties, in addition to the unsold and under construction properties.  Marriott’s current shareholder’s will own the new company and get the shares when the timeshare business is spun out (expected to be done by the end of 2011). [WSJ]

· WMT - Massmart said the South African competition commission recommended approval of Wal-Mart’s proposed $2.4 billion offer to buy a controlling stake in the company – WSJ

· Singapore Exchange Ltd. and ASX Ltd. said Tuesday in a joint statement they have agreed to make changes to the governance arrangements of a proposed merged entity – WSJ

· DISH: Following EchoStar’s $2.1B to acquire Hughes Communications, the NY Post says that Charlie Ergen’s EchoStar, “is also in the midst of two other deals that could make him a satellite spectrum king, with enough muscle to rival Sprint or T-Mobile.” NY Post

· Zygna – the online social gaming company is in talks to raise funds from T Rowe Price and Fidelity that would place a valuation on the company at ~$10B – Bloomberg

· Kirin Holdings will sell its entire 25 percent stake in Dalian Daxue Brewery to Anheuser-Busch InBev for an undisclosed amount – Reuters

· SBUX and GMCR are in partnership talks according to a report on Reuters (the headline hit late in trading on Mon) – Reuters

· Foster’s Group said Tuesday that it would proceed with the separation of its wine and beer businesses – NYT

· EQIX and Riverwood Capital, a technology-focused private equity firm, today announced that they have entered into a definitive agreement to acquire approximately 90 percent of ALOG Data Centers of Brazil S.A. in an all cash transaction valued at approximately $127 million.

· PG – Beiersdorf shares rallied 3% on market speculation that PG may bid for the company (on Reuters; Der Aktionar noted recent speculation that the Herz family may sell its stake in Beiersdorf at EU50-shr.); Beierdorf majority shareholder Maxingvest said that “rumors about a sale are unfounded.” Reuters

· JCG – Note that Paulson this morning filed a 9.4% stake this morning (13G filing not a 13F); Recall that Mason (6.5% stake) on Friday sent a letter JCG’s Board saying that it would not vote in favor of a deal at the current price.

Deal and Related News Feb 14, 2011

· SATS/HUGH: EchoStar Corporation announced an agreement to acquire all of the outstanding equity of Hughes Communication a transaction valued at approximately $2 billion.  Under the terms of the transaction, which has been approved by the Boards of Directors of both companies, Hughes’ shareholders will receive $60.70/share.  The transaction is expected to close later this year.

· GENZ – SNY has wrapped up its due diligence but still needs some more time to hammer out certain details before consummating a deal w/GENZ; the companies hope to have something wrapped up by this week.  SNY didn’t find anything in its due diligence that would prevent the talks from moving forward, although could be looking to adjust its offer based on what it learned about GENZ.  WSJ

· SNY - Sanofi-Aventis SA plans to spend 1 billion euros over the next three years on acquisitions in ophthalmology, Les Echos reported.  The company is currently studying “closely” four potential purchases, three of which are in the U.S. and the other in Israel – Bloomberg

· DYN – Icahn announced that on February 10, 2011, FERC approval for the Icahn tender offer for Dynegy shares was received. The only significant remaining condition to the tender offer is the Minimum Condition, which requires that at least approximately 35% of the shares outstanding are tendered.  Icahn extends the offer again (through Feb 18).

· Zynga valuation tops $7B in latest funding round – the co is talking to investors to raise $250MM in a deal that would value the firm at $7-9B; back in Apr Zynga raised capital at a $4B valuation.  WSJ

· Siemens – in a radical move for the company, Siemens is now considering several large acquisitions in its power networks and plant automation businesses; the co has a cash pile north of $20B and insiders say its deal book is “filled to the brim” w/acquisition candidates.  FT

· GE - General Electric Co. has agreed to buy the well-support division of John Wood Group PLC for $2.8 billion in cash.  GE beat out companies inc. HAL for the business – WSJ

· AIG – the US government is trying to drum up interest for its AIG common share stake among the world’s largest SWFs.  FT

· Whitehaven Coal – a Korean consortium has made an initial offer to buy Whitehaven Coal for $3.5B.  WSJ

· MMI – the co has agreed to buy a small software company, 3LM, making a product that boosts the security of mobile devices powered by Android.  The price is said to be worth tens of millions of dollars.  WSJ

· EMS - is near an agreement to be acquired by private-equity firm Clayton Dubilier & Rice LLC in a leveraged buyout valued at about $3.1 billion.  Clayton Dubilier may pay about $70 a share – Bloomberg

· NYX/Deutsche Boerse – the boards of the companies are meeting in the coming days (NYX on Sun and D Boerse on Tues) to sign off on the transaction; an announcement could come on Tues.  WSJ

· Chi-X Europe and BATS have extended their takeover talks and continue to pursue a deal whereby BATS could wind up buying Chi-X Europe.  Sources say the talks are progressing well.  WSJ

· NDAQ – has become the latest exchange operator to consider a deal – the co is said to be considering its options amid a wave of consolidation.  London Telegraph

· NYX – pos. comments; the deal will prob. wind up going through and shouldn’t face any fatal anti-trust opposition; the NYX shrs now are pricing in most of the transaction’s upside although there is still some left.  Barron’s

· NYX – NY Senator Schumer said he would reserve judgment on whether to back the NYX/D Boerse deal until an official announcement is made.  Schumer said that the NYSE name should be retained.  WSJ

· Exchange M&A – the article speculates that CME could look to buy NDAQ; the article also postulates that NDAQ may look to buy CBOE.  Barron’s

· CLX – Icahn buys a 9% stake in the company – the stake is mostly via stock options; Icahn said in a filing the stock is undervalued and that he may seek discussions w/mgmt.  WSJ

· Seahawk Drilling, one of the largest shallow water rig operators in the GOM, said it was seeking bankruptcy protection and would be selling off its assets to a competitor.  HERO will buy Seahawk’s assets for $100MM ($25MM in cash + 22.3MM shrs).  WSJ

· ANR – positive comments; the MEE deal is a good one and fundamentals in met coal are strong; the stock could easily top $60 in 12 months.  Barron’s

· BGP – Borders Group is in the final stages of preparing a Chapt 11 bankruptcy filing after failing to strike a deal w/its publishers and creditors.  The co could file for protection on Mon or Tues.  BGP could wind up closing 1/3 of its stores.  Some bankers are doubtful whether BGP can be restructured as a standalone company and think it may have to seek liquidation.  WSJ

· Biogen Idec Inc. (BIIB) reported a passive 8.1% stake in drug developer Aveo Pharmaceuticals Inc. (AVEO) – DJ

· SAIC Motor – the state parent of SAIC Motor Corp plans to inject additional assets into its listed subsidiaries as it finalizes its move to float all of its auto-related operations – Reuters

· China to ramp up M&A reviews - China will launch a state-level investment review body to ensure merger and acquisition deals struck by foreign firms in the country do not endanger national security – Shanghai Daily.

· LLY to embark on innovative drug funding method – will seed 3 development funds w/~$50MM each w/the goal of raising ~$750MM in total, the balance coming from outside investors.  These funds would in turn shepherd drugs through their development and testing phase before reaching the market.  LLY would be surrendering some of the upside in exchange for bearing less of the development costs of these drugs.  FT

· CHK – the WSJ says Carl Icahn, who owns a large stake in CHK, may be influencing some of the energy company’s recent asset sales.  WSJ

· “mega buy-out” LBO deals struck during the run-up to the financial crisis have performed sig. better than previously thought, outpacing returns generated by stocks during the same period.  FT

· BJ - Former CFO (Frank Forward) has agreed to no longer serve as a consultant to the company (they had made this agreement on Jan 5th); no more payments will be made to Forward. “Effective February 8, 2011, Frank D. Forward and BJ’s Wholesale Club, Inc. (the “Company”) have agreed that Mr. Forward will no longer serve as a consultant to the Company pursuant to the Consulting Agreement between the parties dated January 5, 2011. The agreement has been terminated and no payments were or will be made to Mr. Forward under the agreement with respect to periods after February 6, 2011.”

· JCG - Mason Capital (6.5% shareholder) delivered a letter to JCG’s Board urging the Board to increase the price for the deal & advised the Board that Mason would oppose the JCG deal at the current price.

Barron’s Summary - Sat Feb 12, 2011

  • The World’s Most Respected Companies – new Barron’s survey – Apple is #1, followed by AMZN and Berkshire. 
  • Pharma – companies like ABT, PFE and MDT should start shedding non-core businesses – the stocks could jump 30% or more if the companies broke themselves up.  PFE is already moving ahead w/a plan to restructure.  ABT could have the most upside if it decided to break apart.
  • InterContinental (IHG) – positive comments; the Holiday Inn revamp is almost done while the overall lodging industry is seeing rising profits and revs.  The stock may have near-term downside if an upcoming earnings report is anything but stellar.
  • Egypt – some stocks there could rally as a result of the Mubarak resignation – pos. on the broader Egyptian market as well as Orascom Construction Industries, Orascom Telecom, and Maridive & Oil Services.  Also pos. on ElSwedy Electric and Misr Duty Free.
  • Crude – a leading analyst, Charles Maxwell of Weeden, thinks crude will hit $300 by ’20.  Says nat gas prices have hit a bottom.  Bullish on oil sands companies SU and CVE.
  • Pamela Rosenau – the CIO of Rosenau/Paul – positive comments on ECT, AWK, EPB, and ARG.
  • MMI – positive review of the new MMI Atrix (although not a big fan of the phone’s laptop dock).  Says this is the best Android device on the market.
  • CSCO, NOK – both stocks are prob. dead money.
  • CSCO – downside limited and a rally into the mid $20s is plausible although it will require a surprise-free Q and a realization of a dividend.  
  • QCOM – repeats pos comments on the stock.
  • HPQ – next critical date for the stock will be Mar 14, when new CEO Leo Apotheker meets w/Wall St.
  • AMZN – negative comments; the stock is expensive and margins are shrinking as it moves into lower-margin categories.
  • AZO – neg. comments – similar story to AMZN…stock has run a lot and valuation rich.  Says demand was strong during the recession for car parts but this will slow as the economy recovers.
  • SGI – mentioned in Barron’s – no real opinion – notes that the co had blow-out earnings and the stock has rallied a lot.
  • KLAC – positive comments; the stock is cheap w/strong rev + earnings growth.
  • IP – positive comments; the stock is cheap; operations + cash flow generation are improving; the co could hike its dividend another 33% as well as buyback 10% of its shares.
  • ANR – positive comments; the MEE deal is a good one and fundamentals in met coal are strong; the stock could easily top $60 in 12 months.
  • NYX – pos. comments; the deal will prob. wind up going through and shouldn’t face any fatal anti-trust opposition; the NYX shrs now are pricing in most of the transaction’s upside although there is still some left.
  • Exchange M&A – the article speculates that CME could look to buy NDAQ; the article also postulates that NDAQ may look to buy CBOE.
  • DVN – positive comments – production and earnings growth will both be strong while valuation is cheap.  The co’s balance sheet is strong.  Stock could top $100.
  • Gold is unlikely to continue rallying at the pace seen in ’10.
  • QE2 – the program will prob. stay in place despite some skepticism from certain Fed officials.

RIMM: Another Nail in the Coffin

This morning (Friday Feb 11, 2011 that is) Microsoft and Nokia announced a broad strategic partnership.  Nokia will start supporting the Windows Phone mobile operating system as its principal smart phone strategy.

Under the proposed partnership:

- Nokia would adopt Windows Phone as its principal smartphone strategy, innovating on top of the platform in areas such as imaging, where Nokia is a market leader.

- Nokia would help drive the future of Windows Phone. Nokia would contribute its expertise on hardware design, language support, and help bring Windows Phone to a larger range of price points, market segments and geographies.

- Nokia and Microsoft would closely collaborate on joint marketing initiatives and a shared development roadmap to align on the future evolution of mobile products.

- Bing would power Nokia’s search services across Nokia devices and services, giving customers access to Bing’s next generation search capabilities. Microsoft adCenter would provide search advertising services on Nokia’s line of devices and services.

- Nokia Maps would be a core part of Microsoft’s mapping services. For example, Maps would be integrated with Microsoft’s Bing search engine and adCenter advertising platform to form a unique local search and advertising experience

- Nokia’s extensive operator billing agreements would make it easier for consumers to purchase Nokia Windows Phone services in countries where credit-card use is low.

- Microsoft development tools would be used to create applications to run on Nokia Windows Phones, allowing developers to easily leverage the ecosystem’s global reach.

- Nokia’s content and application store would be integrated with Microsoft Marketplace for a more compelling consumer experience.

What does this mean for RIMM you may ask?  Well it definitely doesn’t bode well for the company.

1) For those that have been expecting Microsoft to buy RIMM this is another obstacle for them.  Microsoft is very acquisition shy as they prefer to do strategic partnerships over outright takeovers realizing the inevitable issues with antitrust reviews and integrating acquisitions.  Now that MSFT is teaming up with NOK, it is even more unlikely to buy RIMM as they are obviously trying to figure out ways to grow Windows Mobile.  Also, note that NOK’s market cap is very similar to RIMM’s and yet MSFT still chose to do a partnership.

2) Microsoft is clearly not giving up in Windows mobile.  May RIMM advocates have said that MSFT will just give up on its mobile strategy and buy RIMM.  This is now clearly not the case.

3) NOK has the largest mobile phone market share in the world.  MSFT saw this and also saw NOK struggling with the development of a workable and user-friendly operating system and saw an opportunity  to grab market share.  If this succeeds it will only strengthen Windows Mobile which will make things even more difficult for RIMM as it becomes even more marginalized.

4) A reorganized NOK will be a tough competitor internationally for RIMM.  Lately, RIMM’s US sales and market share have been declining.  However, emerging markets have been a bright spot for the company where they have been growing sales and market share largely as a result of the mess that NOK has put themselves in.  Now that Stephen Elop (a former Microsoft employee) is at the helm and is reorganizing NOK’s mobile strategy around Windows Mobile they will likely become a much stronger competitor for RIMM.  If anything, it will cause people to wait and see what NOK will come up with from the is partnership thereby negatively impacting the one brightspot for RIMM.

The partnership is another nail in the coffin for RIMM.  You have been warned.

Microsoft and Nokia alliance will hurt RIMM

Apple out of Positive Catalysts for Now

Apple has rallied on a spate of positive catalysts for the last few months. now that the VZ iPhone is out there are no positive catalysts until the late Feb board mtg where there is the possibility that the board discusses splitting the stock which could allow AAPL to be up for consideration for inclusion in the Dow, which is a price weighted index. Given the lack of positive catalysts, AAPL is vulnerable to silly stories like the NY Post reporting that the lines for the VZ iPhone are not very large. Long term, AAPL is one of the cheapest stocks on the planet trading at close to 11x forward EPS ex-net cash.

AKAM and TQNT Q4 FY10 Earnings Review

AKAM reports earnings – pretty weak guidance

· Revs came in $284.7MM vs. the St $283MM

· EPS came in 0.40 vs. the St 0.38

· EBITDA came in $129.2MM vs. the St $128MM

· For next Q, sees rves $265-275MM (vs. the St $284MM(; sees EBITDA margins 45-46%; sees EPS 0.35-0.37 (vs. the St 0.38).

TQNT reports earnings – EPS misses and guidance was weak

· Revs came in $253.4MM vs. the ST $250.7MM

· EPS came in 0.25 vs. the St 0.28

· GMs came in 39% vs. the St 41.5%

· For next Q, sees revs $215-225MM vs. the St $227MM

· For next Q, sees EPS 0.14-0.16 vs. the St 0.19