Tag Archives: Trading

my recent Pink Sheet experience

February 11, 2014 By in buying and selling, pink sheets, Trading Tags: , , , , , Leave a comment

what the Pink Sheets are

I’ve written about the Pink Sheets before, in much greater detail than here.

Basically they’re an electronic marketplace for trading equities not registered with the SEC.  Some are stocks of foreign issuers and the Pink Sheets is the main place they’re traded.  Others are domestic.  Some of the latter are small, illiquid and haven’t filed financials (if they have any) with the SEC.  This second group, and the rough-and-tumble trading that sometimes occurs with both, are the source of the Pink Sheets’ shady reputation.

In the pre-computer days, quotes for such stocks were delivered to traders in daily lists printed on long strips of pink paper.  That was to distinguish them from quotes for bonds of similar ilk, which were printed on blue paper.  Hence the name.

anyway, what happened–

About an hour before the close in Hong Kong last Wednesday, the Macau casino regulator issued its report of the total amount lost by gamblers in SAR in January.  The figure was a surprisingly weak +7%, year-on-year.  The Macau casino stocks sold off immediately, and were down at the close by about 10% from their pre-announcement levels.  At the New York open, WYNN and LVS sold off  by more than 5% as well.

As the New York morning progressed, reports began to circulate that the Macau market had actually been strong–that the apparently weakness was caused solely by the timing of the Lunar New Year.  The US stocks rallied.

During the afternoon, I checked the Pink Sheet quote for Sands China (SCHYY).  I noted that average daily volume is US$1.6 million vs. US$145 million for HK:  1928 in Hong Kong.  More important, the stock hadn’t budged an inch; it was still stuck at the Hong Kong close.   Weird.

So I bought 150 shares.  Yes, it was a risky thing to do.  It took maybe ten minutes for my (puny) limit order to be filled, another warning sign.  But I was curious.

The Macau gambling stocks rose on Thursday in Hong Kong by around 10%.

SCHYY mirrored the Hong Kong close.  I sold as fast as I could.

The following day, Friday, the Macau gambling stocks were flat to down in Hong Kong.

here’s the interesting part:

SCHYY opened down 3%, at $76.53, on 21, 952 shares.

After that one trade, the market became 200 shares bid at $74.29, 300 shares offered at $76.29.

In other words, liquidity dried up completely.

The stock traded about 10,000 shares during the rest of the day, at what the chart shows as prices below $75.

Monday, the stock traded only 6,866 shares, or about $500,000 worth of stock, all day.

what you should notice

–no mutual fund or pension plan portfolio manager is going to buy SCHYY.  It’s just too illiquid.  So there’s going to be no buying support for the stock from this quarter.  (Let’s say an average position size for one of these professionals is $10 million and that they thought they could be a a quarter of the daily volume without anyone figuring out they were in the market (fat chance).  Even if so, it would take a month+ to buy or liquidate.)

–after the big (for SCHYY) opening trade, market makers widened the bid-asked spread to almost 3% and pushed the market down.  They also committed themselves to only trading a tiny amount of stock at the price they showed–meaning the market would sink further if more stock followed the next trade.

All this is designed to signal they’re only willing to take more stock on their books at a heavily discounted price–that is, to stop the selling.  As the rest of the day showed, this tactic was successful.

–in most cases, the best course of action for a seller who thinks he must get out of the stock for some fundamental reason is to accept the discounted price and be the first out the door.  Yes, selling will be ugly.  But that’s better than having the market 10% lower, with you having sold nothing.

Welcome to the Pink Sheets!!

coasting toward the finish line

November 26, 2013 By in Current Market Thoughts, Portfolio management, Recent Market Action Tags: , , , , , , Leave a comment

My sense is that Wall Street is, at least temporarily, beginning to run out of steam.

This is partly the way the calendar plays out.  Thanksgiving is this week.  But it falls on the latest possible day, the 28th.  When turkey-stuffed traders return to work next month, it will already be December–meaning only two weeks to go before Wall Street closes down for yearend.

At the same time, 2013 has been a spectacular year in absolute terms for equity investors.  The S&P is up by almost 30%, year to date, including dividends.  Why do anything in the final lap to muck up what has been an unexpectedly good outcome?

This is the mindset I see driving–or really not driving market momentum right now.

Two conclusions:

–this gives us much more time to think over how to play 2014, which at first blush seems likely to be a flattish year, and

–the coming trading sessions may well be dominated by yearend house cleaners, without much effort by anyone to bargain hunt.  This implies possible mild downward pressure on the S&P.  This also suggests that serious portfolio reshaping, if any, will probably be put off until January.  I doubt we’ll have much more clarity a month from today about 2014 than we do now.  But there’s a chance we will.  And until then most portfolio managers–outperformers and underperformers alike–will probably be content to bask in the glory of the absolute gains in assets under management (and, therefore, management fees) they’ve achieved this year.

Intel (INTC)’s $6 billion bond offering

December 6, 2012 By in Dividends, double taxation, Stock ideas Tags: , , , , , , , , Leave a comment

INTC has just filed a prospectus with the SEC for a proposed $6 billion bond offering.  The securities it intends to sell are as follows:

Title of Each Class of
Securities To Be Registered		 Amount To Be
Registered		 Proposed Maximum
Offering Price
Per Unit		 Proposed Maximum
Aggregate
Offering Price
1.350% Notes due 2017 $3,000,000,000 99.894% $2,996,820,000
2.700% Notes due 2022 $1,500,000,000 99.573% $1,493,595,000
4.000% Notes due 2032 $750,000,000 99.115% $743,362,500
4.250% Notes due 2042 $750,000,000 99.747% $748,102,500

Several aspects of this offering are interesting:

1.  INTC says it will use the proceeds for general corporate purposes (this is the boilerplate answer to the use question) and to buy back stock.

The dividend yield on INTC shares at a price of $20 each is 4.5%.  Total interest expense for the offering, ignoring accretion of discount, will likely be $142.875 million, meaning INTC is paying a blended interest rate of 2.38% for the money it will receive.

Unlike dividends, interest payments are a deductible expense for income tax.  After tax, the interest rate is 1.55%.  So for every share of stock INTC buys it will pay out $.31 in annual interest but save $.90 in dividend payments.  So the issue makes INTC’s cash flow go up. A $1 billion buyback at current stock prices would add about $30 million to annual cash flow.

2.  Why an offering now?

A short while ago, INTC boosted its quarterly per share payout to $.225, even though the company knew its new product spending would remain very high through this year.  Companies typically don’t raise the dividend based on future earnings potential;  they do so based on the idea that they have plenty of extra cash, come what may.  In other words, INTC thought it had lots of money to spare.

What’s changed?

–for one thing, the stock price is a lot lower than I would have expected, and the dividend yield is very high.  The chance to buy INTC assets for less than management thinks they’re worth + being paid through dividend savings to do so, the opportunity may have been too good to pass up.  I think this is the main reason for the fundraising.

–INTC’s operations generated over $5 billion in cash during a (relatively weak) 3Q12 alone.  The company also has about $11 billion in cash and short-term investments on the balance sheet.  So why borrow?   …presumably because the bulk of that money is located outside the US.

3.  My initial reaction on seeing the announcement was that problems had developed with planned cash flow in the US.  I don’t think that’s correct, though.  The US has been weak for a while.  It’s emerging markets that have been surprisingly bad for INTC recently.  And those profits presumably remain overseas.

In other words, I don’t think the offering comes as a result of adverse internal cash flow developments.

4.  INTC may be figuring that current low rates won’t last very long.  To me it’s striking that the company is raising 20-year and 30-year money.  Why else do that today?

my conclusion:  I’ve written about confirmation bias recently, partly with INTC in mind.  If I’m suffering from it, INTC’s board is, too.  In any event, the company’s indicated intention to buy back a significant amount of its shares appears to be what’s behind the stock’s current strength.  My guess is that this strength will continue for a while more.

 

better days ahead for Facebook(FB)?

November 16, 2012 By in Current Market Thoughts, Recent Market Action, Stock ideas, Technical Analysis, Trading Tags: , , , , , , , , Leave a comment

yes

I think so.  Insiders appear to be unwilling to sell at the current market price and Wall Street seems to have forgiven FB for what I regard as the less than ethical behavior of the company’s main underwriter during the IPO.

recent trading

Yesterday marked the end of the third–and final–period over which FB employees and early investors had agreed not to sell shares.  Just north or three-quarters of a billion shares were thereby released from lockup.  Wall Street was bracing for the worst.

But only about 50 million shares appeared for sale at 9:30.  Total volume for the full day yesterday was just under 230 million shares, or about 5x normal.  More important, the stock went up 12.6% in a flat market.

As I’m writing this just after midday Friday, FB is up about 6% while the S&P 500 is flattish.  Volume is high again, but I read this as professional investors reacting positively to the small percentage of insider shares that were put out for sale and to the strong price action that soon developed.

the IPO, in hindsight

Not Morgan Stanley’s finest hour.

The main underwriter threw gasoline on speculative flames instead of tamping them down.  And NASDAQ’s computers broke down just as it was dawning on individuals dreaming of instant riches that they’d been had.

That was bad enough.  But the really damaging part of the IPO, to my mind, was the way I think the underwriters “spun” the mandated company disclosure in a way that made FB look better than it is.

Any professional investor would take it for granted that Morgan Stanley knew exactly what it was doing.  The real question is whether company management was complicit in this shady process–in which case they couldn’t be trusted and buying the stock could be hazardous to your career.  On the other hand, maybe FB executives were just too inexperienced or naive to understand what was going on.

The price action of the past two days seems to me to be saying portfolio managers and buy-side analysts have decided the latter is the case.

So, two plusses for FB.

the Knight Capital Group (KCG) end game: effective change of control

August 7, 2012 By in Preferred Stock, Recent Market Action, Securities regulation, Trading Tags: , , , , , , , Leave a comment

a recap

Last Wednesday morning, KCG started up a new software trading link, whose total purpose still isn’t clear, to the NYSE computers.

The new software went berserk, buying everything in sight–and without regard to price–as soon as it was turned on.  As subsequent media comment has made apparent, stuff like this happens every so often in today’s financial world.  Usually, though, the defective program is shut down within a minute or two.  Not so in the KCG case.  It took–for reasons also not clear–the better part of an hour for KCG to pull the plug.

The company subsequently announced it had lost $440 million due to the malfunction.

big problems

KCG faced a number of related problems because of this.  Specifically,

1.  If the average loss was 10% of the purchase price, KCG had bought $4.4 billion worth of stock that it would have to pay for three days later.   If the loss was 5%, KCG would have to come up with $8.8 billion.  In any event, KCG only had about $400 million in cash on hand.

2.  The software glitch was like a gigantic fireworks display.  Every trader on Wall Street knew KCG was in trouble–and might have difficulty settling (i.e., paying for) the trades it had made.  So selling out of the positions it had accidentally accumulated, without offering substantial discounts, would have been very difficult.  In some cases (see my previous post on KCG), KCG held far too much to be sold quickly.

KCG appealed to the NYSE to cancel the accidental trades, but was mostly refused.  After a similar incident last year, Wall Street drew up a set of rules for when such trades might be broken.  Only six of the 150-odd stocks Knight bought qualified.

KCG solved this issue–apparently on Wednesday–by selling the bulk of the erroneous position to Goldman.

3.  As a market maker, KCG makes money by collecting a fee for matching buyers and sellers of stock.  It’s a little like a bank.  Customers only deal with it if they believe it is financially sound.  And, regulators require that it put aside a little capital to back each trade it brokers during the three-day settlement period.  But the rogue software program had tied up all of KCG’s capital. The loss it generated had also wiped out all its cash.

So KCG couldn’t accept any new trading orders.  And long-time customers wouldn’t place any, for fear of potential problems (too geeky a topic, even for PSI) if KCG went out of business before trades could settle.

the solution

One part was the sale of stock to Goldman, which got KCG out from under the need to come up with the money to pay for the erroneous trades.

The second, reported in an 8-K filing with the SEC on Monday, is the sale of $400 million in convertible preferred stock in KCG to a group of the company’s long-time business partners.

There are two classes of convertible, one with limited voting rights.  Both earn interest at a 2% annual rate.  Each $1000 preferred can be exchanged for 666.667 shares of common, meaning an effective purchase price of $1.50 per KCG share.

According to the 8-K, conversion would leave the preferred holders owning 73% of KCG.

tidying up may still need to be done

The complicated structure of the preferred issue–two classes, each with different voting rights–seems to me to imply that some of KCG’s rescuers aren’t allowed to own a market maker, either because of conflict of interest considerations or market share concerns.

change of ownership has happened, though

…although in a deferred way (which, of course, is what convertibles are all about).  The directors of KCG have agreed to turn over almost three-quarters of the company to their rescuers in exchange for the bailout.

an attractive stock?

I’m not an expert at financials, so I don’t have a professional opinion.

The one think that strikes me is that, pre-crisis, the stock was trading at about $10 a share (down from the 52-week high of $14+ achieved last October).  If we assume that the $400 million injection from the preferreds offsets exactly the loss from the renegade trading software, then the only factor that’s really changed over the past week is that there are 4x as many shares outstanding.  That would imply the equivalent share price today would be $2.50.  But the stock is currently trading at well over $3.   Strange.   Very strange.