Events Trader: Final update on the Events Trader portfolio

Events Trader

25th June 2010

Final update on the Events Trader portfolio

Dear subscriber,

This is the last issue of Events Trader and I wanted to start by thanking you for following me over the last year. I hope you have enjoyed the service and have managed to make money using my recommendations.

Today I want to sign off by giving you some guidance on each of the open positions in the Events Trader portfolio.

I won’t be updating on these positions from now on. But if you need to contact me for any further advice on these, I’ll be available to answer your questions for the next three months on eventstrader@moneyweek.com.

Stay long on Tier1 securities

We have three positions open in the tier 1 securities: Barclays 7.5% (15/12/2010), Nationwide 6.02% (6/2/2013) and Barclays 4.88% (15/12/2014)

My advice is keep them open and let them run until expiry. The reason is simple. A second banking crisis is unlikely to occur in the UK because banks have reduced the size of their books and are continuing to restructure their balance sheet. But let me explain a bit further.

We are long on two bonds issued by Barclays and one by Nationwide. These banks have proved to be the strongest part of the system during the meltdown. So even if we had a further deterioration in the economy – leading to mounting losses at banks – I think the problems will confined to the weakest banks – the likes of RBS or Lloyds.

There is also another reason why I think we should stay long – interest rates. These will stay low for a while to come so it is unlikely that if you sold these bonds you will be able to enjoy better return on your capital. Low interest rates will also allow the banking system to rebuild their capital and will allow them to withstand further losses.

The first bond issued by Barclays will expire on the 15th of December 2010 and it is very, very likely that it will be redeemed at par.

The second tier 1 issued by Nationwide will expire in 2013, but pays a 6% coupon and if you hold it until maturity your yield will be over 12% per year.

The third bond, the one issued by Barclays has a similar yield and if you hold it until its maturity in 2014 it will yield over 10%. I see no reason to exit these positions.

Stick with the British Airways – Iberia merger

This trade was our last outstanding merger arbitrage trade. And my advice is to keep the position open and wait for the completion of the deal. Here’s why.

The merger is on track to be completed in the next 6 months. No obstacles have arisen from antitrust authorities, and there is still a 5.7% profit to be made just by holding on to the stocks. When we opened the trade we had a 10% potential spread, and so far this position has only moved by 4.3% in 6 months, that’s why I think it is still worth keeping open.

Now returns on these strategies are not spectacular. But they have few risks attached and of course with interest rates low you can’t get a nearly risk free investment with that yields 5.9% in 6 months or 11.8% on an annualized basis. So it is well worth hanging on till the deal closes.

Time to close out Dragon Oil

The next stock on our open trade list is Dragon Oil (DGO LN) – which I tipped back in November. My advice here is to close the position and take the 2% loss.

There is a very simple reason for this decision – the story has gone cold. The market has hit turbulence and it is unlikely that in the short term investors will start to focus again on the long-term potential of this company.

We also have two other oil stocks in our portfolio, BP and Transocean, which offer a much better risk reward profile. So a third oil stock in our portfolio would be redundant.

There is another more fundamental reason to ditch the stock. Political uncertainties are increasing in the region Dragon Oil operates. As you know the company owns oil fields off the Caspian sea in Turkmenistan.

Recently we had an uprising in Kyrgyzstan where the president was overthrown and political violence is continuing today. There is now fear that this state of chaos might extend to some of the other weak neighbours. Time to cut our losses here I’m afraid.

Forget the news on BP and Transocean

The advice here is simple – forget about daily news, leave your long position until after the summer and once you come back from holiday you should find that the situation has resolved and the shares are worth more than you paid.

Latest developments suggest that BP is managing to catch most of the oil leaking out of the well and that a solution with the US administration will be found resulting in a compensation fund of around $20bn (about 5 quarters of profit for BP).

The shares are now trading at very low multiples and once the compensation is paid they can carry on the daily business of making an awful lot of money. As I said in my original piece the situation might take a while to develop but in the end I really think that the BP bears will be proved wrong.

Transocean has already proved my point, it is up over 14% since we first tipped it.

Readers digest could make you 50%

This was the last open position, and again my advice is to keep the position open as you could end up making over 50% return on your capital.

The company has emerged from Chapter 11 back in March and is now trading as a private company. This means that you cannot sell your investment yet, but have to hold them until the company decides to refloat on the stock market, and this might take one or more year.

Because it is a private company it is not subject to the various statements required by the SEC.

The original plan to convert the unsecured debt that we tipped into warrants has gone ahead and now the unsecured creditors are holding 1.9 million warrants on 6.5% of the new company. A warrant is basically a security which gives you the right to buy back the debt in a company at a later date for pre-agreed rate.

The recovery value of these securities is still around 3 cents (we paid 2 cents) but it will take longer to recover. Once the company refloats you should show a profit of more than 50%, possibly even more if in the meantime the company restart to make money.

The situation here is still developing and because of the timeframe involved which might be a year of more my suggestion is that if you hold these warrants. I’d recommend that you contact the company’s investor relations and ask them to be kept in abreast of the situation. You will find all the information you need here.

Don’t worry about contacting the company – it is standard procedure. Plus the number of shareholders will be very limited, and they will have to reply by law to any of your shareholders related enquiries.

Finally, we also had three stocks on our watchlist – Icap , Marine Harvest and ING. As these have not reached our entry point I think it will be best to drop them and move on.

That’s all from me, I hope you have enjoyed reading my trading ideas and found them useful. Good luck with your investing and I hope you also enjoy the 3 month trial to your new newsletter. If you have any questions regarding your new newsletter, please call one of our customer service representatives on 0207 633 3604.

Again if you want to contact me about anything, I will be available to answer your questions for the next three months on eventstrader@moneyweek.com.

Many thanks,

Riccardo Marzi
Riccardo Marzi
Events Trader

Trader Portfolio

OPEN TRADES

Distressed Assets

Issue

Tip date

Company/ Asset

Reccomendation

Price then

Price now (24th June)

Gain (%)

EVT #2

19/05/2009

Barclays XS0110537429

HOLD

65

98.54p

51.60

EVT #2

19/05/2009

Nationwide XS0284776274

HOLD

48

73.64p

53.42

EVT #15

18/08/2009

Barclays XS0205937336

HOLD

60.7

70.77p

16.59

Merger – Risk Arbitrage

Issue

Date

Company/ Asset

Details

Price now (24th June)

Exp. Closing Date

Change (%)

EVT #30

24/11/2009

Iberia (SM: IBLA);
British Airways (LSE: BAY)

Buy Iberia @ €2.02
Short-sell British Airways @ 204p
Ratio IBLA 0.98: 1 BAY

IBLA: €2.48;
BAY: 210.1p

Q4 2010

4.65%

Other Trades

Issue

Date

Type of Trade

Company/ Asset

Details

Price now (24th June)

Change (%)

EVT #32

08/12/2010

HOLD

Readers Digest bond D

BUY ISIN US755267AF83 at 1.5c

$1.25

-17%

EVT #56

25/05/2010

HOLD

BP

BUY at 485p Target 615p.

331.8p

-32%

EVT #58

08/06/2010

HOLD

Transocean (NYSE: RIG)

BUY at 44.58p Target $80.

51.24

14%

Watchlist

Issue

Date

Type of Trade

Company/ Asset

Details

Price now (8th June)

Change (%)

EVT #32

08/12/2009

Long

ING (AMS: INGA)

Buy it if it falls below €5.40

€6.01

N/A

EVT #40

16/02/2010

Long

ICAP (AMS: IAP)

Buy at 300p

390.9p

N/A

EVT #43

09/03/2010

Long

Marine Harvest (OL:MHG)

Buy it if it falls below 4.5 Kr

5.45 Kr

N/A

CLOSED TRADES

Issue

Date

Type of trade

Company/ Asset

Details

Status

Gain (%)

EVT #2

19/05/2009

Distressed asset

Lloyds XS0107228024

Buy at 45-46

Sold 10/11/09 at 88

91.0%

EVT #3

26/05/2009

Merger- risk arbitrage

Wyeth (US: WYE)
Pfizer (US: PFE)

Buy Wyeth
Short-sell Pfizer
Ratio WYE 1 : 0.985 PFE

Merger completed 15/10/09

8.8%

EVT #7

23/06/2009

Merger- risk arbitrage

Schering Plough (US: SGP)
Merck (US: MRK)

Buy Schering-Plough
Short-sell Merck
Ratio SGP 1 : 0.5767 MRK

Merger completed 03/11/09

5.9%

EVT #15

18/08/2009

Distressed asset

HBOS XS0353590366

Buy at 52

Sold 10/11/09 at 99

90.3%

EVT #15

18/08/2009

Distressed asset

RBS XS0193721544

Buy at 65.4

Sold 10/11/09 at 61

-6.7%

EVT #16

25/08/2009

Index Trading

iPath S&P 500 VIX (NYSE: VXX)

Bought at $55 – 56.50

Sold at $43.70 on 27/10/09

-22.6%

EVT #18

08/09/2009

Distressed asset

RBS XS0102480869

Buy at 75

Sold 10/11/09 at 68

-9.3%

EVT #19

15/09/2009

Short

National Express

Short sell at 480p

Closed short at 390p 19/10/09

23%

EVT #20

29/09/2009

Options Trading

Vodafone

Put option Strike 140
November 2009 @ 6p

Sold at 10p 13/10/09

67%

EVT #20

26/05/2009

Options Trading

FTSE 100

Put option Strike 5,100
November 2009 @ £1.40

Sold at £2.25 02/10/09

60%

EVT #27

04/11/2009

Options Trading

Cadbury

December 2009 Put, Strike 24p / December 2009 Put, Strike 740p

Sold 10/11/09 for negligible gain

0%

EVT #35

12/01/2010

Options Trading

Cadbury

BUY the Cadbury’s March Put option, strike price 760p at 23p

CLOSE POSITION AT 3

-87%

EVT #37

26/01/2010

Long

FTSE 100

BUY the FTSE at 5,205 (midpoint)

Closed at 5,155 02/02/10

Loss of 55 points

EVT #12

28/07/2009

Merger

Sun Micro

Buy Sun Micro only: 50% at $9.24; 50% at $9.15 (so average price $9.19)

Merger completed

3.37%

EVT #22

06/10/2009

Merger

Xerox

XRX: $8.88

Merger Completed

5.5%

EVT #28

10/11/2009

Long

BNI

Buy BNI at $97.60

Merger Completed

2.7%

EVT #23

13/10/2009

Long

Ladbrokes (LSE: LAD)

Buy at 140p; double up if hits 120p: TARGET 180p

147p

5%

EVT #43

23/02/2010

CLOSE

VT Group

Buy at 673p

762p

13%

EVT #35

12/01/2010

Merger

*CLOSED* Buy 3Com at $7.64

$7.90 (details on HP deal to follow)

Q2 2010

3.40%

EVT #49

16/04/2010

Short

Ryanair

*CLOSED* Short at €3.90 (stop loss at €3.90)

€3.90

0%

EVT #46

30/03/2010

Long

Arriva (LSE: ARI)

*CLOSED* Buy at 680p

764.5p

N/A

EVT #52

04/05/2010

*CLOSED
Long

Nokia

Buy at €9.04 Target around €10. Set stop loss at €8.40

STOP LOSS TRIGGERED AT €8.40

-7%

EVT #53

06/05/2010

*CLOSED Long

BP

BUY at 572p Target 600p. Set stop loss at 500p

STOP LOSS TRIGGERED AT 500p

-13%

EVT #28

10/11/2009

SOLD

Dragon Oil (LSE: DGO)

Buy at 447p

436p

-2.4%

Closed average % gain

9.895%


Your capital is at risk when you invest in shares, never risk more than you can afford to lose. The share recommended is denominated in a currency other than sterling. The return from such shares may increase or decrease as a result of currency fluctuations. Please seek independent personal advice if necessary.
 
Spread betting is not suitable for everyone – ensure you fully understand the risks involved and never risk more than you can afford to lose. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit.

Figures are calculated using the closing mid-prices on the date on which shares are first recommended. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments.

Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.

Events Trader portfolio is not intended to represent the exact prices at which you could get in or out of a share. Our reference price is the price of our recommended shares at the time we wrote the recommendation. Sometimes readers will achieve better entry/exit prices; sometimes worse. This portfolio represents the value of our recommendations at the time our material is published.

Events Trader is issued by MoneyWeek Ltd. Registered office 7th Floor, Sea Containers House, Upper Ground, London SE1 9JD. Customer services: 0207 633 3604. Registered in England and Wales No 04016750. VAT No GB629 7287 94.

MoneyWeek Ltd. is authorised and regulated by the Financial Services Authority. FSA No 509798. http://www.fsa.gov.uk/register/home.do

© 2010 MoneyWeek Ltd.

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