#$emc

A competing bid in the go-shop is a long shot.

by Scott Stuart

The tracking stock issued in the $61 billion acquisition of EMC Corp. (EMC) by Dell Inc. makes the merger a potentially tricky trade.

Dell and EMC unveiled their anticipated merger Monday at $24.05 per share in cash and 0.111 of a new tracking stock designed to link to a portion of the economic interest EMC holds in VMware Inc. (VMW).

VMware is a software storage management business linked, in part, to EMC's data storage infrastructure offerings.

Elliott Management Corp. had previously battled with EMC over the spinoff of its VMware interest, but entered a settlement that gave it seats on EMC's board. Monday Elliott said it supported the deal and the potential to participate in VMware's potential through the tracking stock. Elliott also owns about 2% of VMware common.

The tracking stock will offer additional liquidity to VMware, but the limited borrow in the common shares poses a difficulty in trading the deal.

Risk arbitrageurs would be shorting the VMware common to hedge the issuance of the tracking stock received in the deal. But VMware's supply for short sales is limited and likely will become scarcer now that demand is up.

There are also some issues with the valuation of the stub tracking stock because a tracking stock typically lacks voting rights and trades at a discount to underlying shares.

The tracking stub will likely trade with a significant discount given the leveraged buyout risk in the deal, an arb said. In addition, the value VMware is now lower given the lesser chance of a full spin out of the EMC state, the arb said.

On the deal call, the companies said they believe the tracking stock will trade close to the VMware shares because the VMware float is limited and the new issuance will provide institutions with greater opportunity to buy the stock. Michel Dell is also saying he will be a buyer of the tracking shares.

But the limited availability of the VMware common while the deal is pending will make trading the spread in the large tech deal a challenge. Given the limited borrow, shorting the VMware could become expensive and there is the potential for a short squeeze, arbs said.

The deal does have a 60-day go shop. But since the companies were in talks for several months and the deal itself is complex, the potential for a competing bid looks slim, an arb said.

Carl Icahn and Southeastern Asset Management Inc. did make a run at Dell during its 2013 buyout process, but that was focused on a leveraged recapitalization that would have left the computer company with a public float.

Since the go-shop is unlikely to yield a competing bid, and the borrow is tough, this deal is one to avoid, an arb said. The merger agreement is yet to be filed with the Securities and Exchange Commission, and issues like reverse termination fees and other terms for the LBO, which is not conditioned on financing, remain to be seen, the arb said. But the transaction could take a long time to complete due to the new tracking share listing and the need to get approval in China, the arb said.

EMC Corporation, $EMC, has some shared history with me.  Founded in Newton, MA (I owned a home there) and now headquartered in Hopkinton, MA (I owned a home there too) it is a role model to the Route 128 Technology beltway around Boston.  Recently though there seems to be as much or maybe even more attention paid to one of its subsidiaries, VM Ware.  But back in the day......

Actually that has been a theme recently, old school technology companies making a comeback in the stock market.  Why not EMC² as well?  The stock did make a run at it over the back half of 2014.  But that failed with a high in December that led to a pullback to a retouch at the 25 level from May 2014 that began the move.  The trip lower looked like a falling channel except for a failed break down at the end of January.  But since touching that 25 level again it has regained some strength.

Just last week it broke above the falling channel and started higher.  It ended the week at resistance from the high in April, but with the Bollinger Bands® opening higher while the RSI improves in the bullish zone and the MACD has crossed up and is rising.  All of these support more upward price action.  And a break above that resistance would trigger a Measured Move to 29.  From there technically it would trigger a bearish Shark harmonic but with a Potential Reversal Zone (PRZ) I up at 30.29 and PRZ II at 31.63 should it continue.  

The options market shows large open interest at the 27 and 27.5 Call Strikes this week, suggesting that it may stay in this range for a week.  And the June open interest is also large at 27 but sizable at 28 and 29 as well.  On the Put side the June contract has large open interest at 25.50 below.  Moving to July the peak open interest is at 28.  S there is not much movement expected from the options market for a while.  Short interest is low at only 1.5% and the company is expected to report earnings again next of July 22nd, after July Expiry.  

EMC Corporation, Ticker: $EMC

Trade Idea 1:  Buy the stock on a move over 27.40 with a stop at 26.85.  A straight stock trade.

Trade Idea 2:  Buy the stock on a move over 27.40 and add a collar, buying the July 24 Expiry 27/26 Put Spread, and selling the August 29 Call (5 cent credit). Adding defined protection for earnings in July and removing the cost with a covered call sale.

Trade Idea 3:  Buy the July 28 Call (47 cents). Defining risk to the premium paid.

Trade Idea 4:  Buy the August 25/28 bullish Risk Reversal (46 cents) and sell the July 29 Call (20 cents).  A levered trade in August with risk of owning the stock at 25, the bounce point, and lowering the cost with short term upside cap at large open interest in July.

These are the types of trades given to subscribers every week. If you like what you see sign up here for more ideas and deeper analysis.

After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, heading into next week sees the equity markets continuing to look a bit vulnerable on the daily timeframe but strong on the weekly timeframe.

Elsewhere look for Gold to continue lower while Crude Oil consolidates with a slight downward bias. The US Dollar Index also is in broad consolidation with an upward bias while US Treasuries look to continue lower. The Shanghai Composite is back off to the races higher with a chance of consolidation while Emerging Markets look to continue to the downside.

Volatility looks to remain subdued keeping the bias higher for the equity index ETF's SPY, IWM and QQQ. Their charts suggest that the IWM is strong and taking over leadership while the QQQ looks strongest on the longer timeframe. The SPY may need more sideways consolidation before resuming higher. Use this information as you prepare for the coming week and trad'em well.

So the technology stalwart EMC has decided to splurge $1.2bn on Virtustream - a company dating only from 2008 - in an attempt to keep relevant in a world where its clients are increasingly using cloud services and applications.  And they have big hopes for this acquisition noting in the presentation document that accompanied the deal conference call that:  

That’s a proud and bold claim but in keeping with the breadth of the EMC Federation with its different constituent parts including VMware the virtualisation company in which EMC holds an 80% share equal in value to around half the overall EMC market cap.  

It sounds that there will be a little overlap between the VMware and Virtustream business but EMC’s management played down any duplication concerns believing the latter’s high flexibility in ‘hosting mission-critical workloads including SAP and others’ will be materially complementary to the overall group and allow earnings accretion in 2016. I would agree with this.  Always better to leave no product gaps and have a little overlap consequently.

There were few numbers supplementing the deal announcement aside from the aforementioned overall earnings accretion in 2016...but given the strength of the cloud theme and EMC’s dull outlook statement at the time of their last quarterly earnings statement this was probably the right deal for them.  

With EMC shares back close to support levels that have held over the past year...

Source: BigCharts.com

... potential investor interest should be rising too. Yes they could have used their continuing excellent cash flow to have bought back even more shares but, in a fast moving technology world, sometimes you have to spend today to remain a player tomorrow. There are certainly worse ways EMC could have spent a little over $1bn.  

Sources: unless stated taken from EMC presentation documentation

Image: sourced from here

These are the Positions Dragging Down Greenlight Capital

There has been a lot of chatter about the death of computers.  If I listened to it all I would think I am the only person in the world that uses a laptop, and please don't tell anyone I just bought a new desktop.  

But you cannot always believe what you hear.  And this seems to be one of those cases.  For when you take a look at the Computer Technology Index (yes that is a real thing). It rose through most of 2014 before being dragged down with the market in October.

Since then the index rebounded fast in the more recent 'V' shaped recovery mode until a consolidating period from December through to mid February.  But there are signs it is ready for a break out higher.

First the Bollinger Bands® are opening higher.  The momentum indicators are rising and bullish as well.  As the index sits at the top of the range, a break higher would target a move up to 1750.  That is still short of the March 2000 peak at 1819 but quite a strong recovery.  

And what is in this index?  Just about every company that was around in for the 2000 technology bubble and still exists today.  Companies like ADP, Adobe, Apple, EMC, Microsoft, Texas Instruments.  I have put the full list of 30 names below.  To me this is a sign of a very strong market when these old tech companies are joining and leading higher.

More at Dragonfly Capital and get my book, Trading Options: Using Technical Analysis to Design Winning Options Trades.

The CBOE composite put/call ratio closed on Friday at 0.74, its lowest level since August 21st.  Single stock options activity was focused on the tech sector.

1.  EMC – The stock broke out above $30 last week, but failed to hold that breakout by Friday’s close, though it is still on the cusp at the moment.  Buyer of around 25k of the Dec20th 32 calls for 0.18 to open.  EMC has recently been targeted by activist Elliott to spin off its take in VMW.

2.  AMAT – Another bullish roll in AMAT, which has been a frequent theme in the options trading in the name.  Trader sold 25,000 of the Jan15 24 calls to close at 0.62 to buy 15,000 of the Apr 25 calls to open for 1.05.  AMAT remains below its high of the year of $23.46 from early July.

3.  INTC –  Buyer of 17k of the Nov 35.50 calls for .85 to close, vs. selling 17k of the Dec 38 calls at 0.19 to open, likely rolling an overwrite position in the stock as INTC hit a new 12 year high last week.

4.  GLNG – Golar is a shipping company focused on LNG tankers.  The stock is up 46% year-to-date.  Buyer of 4k x 8k of the Dec20th 55 / 60 1×2 call spreads for even money near the close.  GLNG reports earnings on Nov 26th before the open.  The stock traded from a September high of $74.44 to an October low of $42.52 before bouncing back a bit in the past month.

5.  GME – GameStop declined nearly 14% after a disappointing earnings report on Friday.  The Jan15 37/33 put spread traded 16k times at 1.30 in the morning.  The 52 week low is $33.10 from February.

Options volumes were very light on Friday.  In fact, it was one of the lightest days of 2014 for options, a reflection of the very low level of realized volatility (10 day realized volatility in the S&P 500 index hit 4).

1.  OIH – OIH has consolidated in the $42-$46 range over the past 3 weeks.  The oil services ETF saw some aggressive buying on Thursday near the close after the potential HAL bid for BHI was reported, but OIH still closed down 2% last week.  The Nov22nd 44 calls traded over 50k at an average price of 1.03, mostly buyer initiated.

2.  T – The June 35 / 34 put spread traded 19k times at 0.44, vs. the Apr 38 calls trading 35k for 0.33, all in the morning.  T closed at its highest level since July on Friday, benefitting from the shift towards defensive stocks in the past month.

3.  EMC – EMC closed abov$IYR

e $30 for the first time since 2001, though it did not break its intraday high of $30.18 from mid-September.  Call buying was significant, including a buyer of 25k of the Jan15 31 calls for 0.80 to open in the afternoon.

4.  BHI – BHI rallied around 15% last week after the HAL news, though the stock is still down more than 20% from its July high of $75.64.  30 day implied volatility jumped to a 2 year high of 57.  There was a buyer of 20k of the Dec20th 62.5/75 call spreads for 2.38 to open vs. selling 20k of the Dec20th 50 puts at 0.63 to open, trading for a net debit of 1.75 as a three-way package in the morning.

5.  IYR – Bearish roll in IYR – trader sells of the Nov 74.50 puts, 10,000 times to close and buys 10,000 of the Jan 73/64 put spreads, paying 0.73 for the package when stock was $75.  IYR has not been able to move above its May 2013 high of $76.21 in the past month.

Equities started the day weaker, adding to one of the worst trading days in months Tuesday, but markets turned decisively positive after results from the Fed Minutes of its September FOMC meeting was considered “dovish”. The Dow Industrials surged triple digits after the release of the minutes, while bonds cut losses, the dollar sank, and gold reversed.

So once again, the markets in disarray, and the Fed came to the rescue! The Dow Industrials posted a triple digit move for the 9th time in last 13 trading days, while today’s gains wiped out yesterday’s losses (note NASDAQ futures had a 90 point bounce off the lows!).