Tuesday, September 25, 2007

Sims Metal Mangement...or perhaps something else?

The definitive merger agreement announced today between MM and SGM.AX (see below) is a fantastic deal for both parties.
http://biz.yahoo.com/bw/070924/20070924005876.html?.v=1

I listened to the call today and there was some body language that I think is going to spill over into a bidding frenzy. I think the WSJ did a good job covering the story today, but I didn't hear a peep about it on the tube today. No worries, because I'm sure some private equity and hedge fund players took notice. That's right the big money. I've written plenty privately about the valuation of MM based upon comparable industry metrics and it's grossly undervalued. On a P/S of 1 it's worth around $92.45 and that would represent an 89% increase. Now that's where the action will be, because while Monday's premium of 18% and retained interest in the company is nice; cash is king! Now CIBC played advisor to the deal (Dienst's Alma mater) but he has ties to private equity via Apollo Group. Dienst was director for Metals USA which was bought at a cheap premium for 22$ cash.

When pressed on the call today by the GS analyst about whether they looked for other bidders Dienst said, "are you gonna make an offer?!?" Followed with, "everyday we're open we're for sale." Now you see what I mean about a bidding war? This stock saw spectacular runs when it was fresh out of bankruptcy and there was a run on the stock by EMR and a Jennings (who was an ex-MM employee.) I think the speculation of another bid will make this one run past the implied 57 handle of today's deal. I find it funny that the only month with an 80 strike on the options chain is Jan 08. Not Jan 09 or Jan 10, but Jan 08. You think the specialist knows something we don't? Perhaps, but that's besides the point. The point here is those Jan 08 80s @.15 look kind of sexy right here. Volume is Nil on the contract with 10 traded thus far. With expiration 4 months out and the purposed deal set to close in Q1 next year this is a viable trade. Time decay will play a factor here, but if you can get a few tomorrow I think you can make some quick money on the options themselves.

I'm expecting a gap up in the morning to the mid 50's a few percentage points below the implied value of the deal. It gets trickier though because there are 1.6m shares short as of Sep. 14th. This will take 6.22 days to cover based on 269,000 shares average trading volume. So there is some fuel underneath the common to push it higher. Of course this is a fantastic deal put together by MM and SIMS......I'm just saying don't be surprised if another bid surfaces...there's plenty of people here in the US that need that scrap domestically.....think NUE or others.
Depending upon how MM opens and trades tomorrow there could be some pin action in SCHN, IDSA, and MEA to name a few. The market will tell us soon enough.

Tuesday, September 18, 2007

50/50 : A prescription for a BAIL OUT!

One thing that holds true to this very day: "History always repeats itself."
Greedy financial alchemists and their ability to "create" products and then enable the use of leverage to speculators in order to buy their junk is how we get to this point every time. So we resort back to the trusty solution for dealing with this.....a FOMC BAIL OUT!

Today's move confirms the negative job numbers earlier this month......it also confirms that things are weakening at a rapid pace. Inherently lower discount rates are a positive for equities, but I wouldn't start throwing darts at any and everything. Be selective. Go for companies that support the global GDP of 5% and are in secular bull markets ie: Oil Service, Materials, and Tech. Things that are heavily levered to the U.S. consumer should be avoided until residential real estate reverts back to the mean. Until then stick with companies that support global growth and derive half or more of their income from abroad. Think SLB, FCX, and CSCO and all the derivative plays that go with these sectors.

Of course there is the seasonality of a market rally in the 3rd year of a presidential election cycle that occurs about 70+% of the time. For more on that go to www.usfunds.com and listen to some of Frank Holmes web presentations.


Release Date: September 18, 2007
For immediate release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.
Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.