Tag Archives: etf

What Lies Ahead For M&A ETF?

Merger and acquisition (M&A) activities across a number of sectors were on a tear last year, with a record level of such activities. But the momentum for M&A – one of the major drivers of the stock market ascent in recent times – seems to be fading this year. At least, the numbers are giving such cues. The volume of global deals is $US822.2 billion ($1.1 trillion) so far this year, which represents a decline of 17% year over year (read: Merger & Acquisition ETFs: Will 2016 Replicate 2015? ). In addition to this data, there has been a surge of failed M&A deals lately. As per data provided by Dealogic , “US targeted withdrawn M&A volume is up 64% on full year 2015 ($231.1bn) to $378.2bn in 2016 YTD (as of May 4, 2016).” This is because several mega deals have been called off lately which took the size of U.S. oriented withdrawn M&A to a record level. Drugmaker Pfizer’s (NYSE: PFE ) decision to abandon its $160 billion deal to unite with Botox maker Allergan plc (NYSE: AGN ) due to the new Treasury guidance related to tax inversion is the largest called-off deal on record. The $103 billion deal between Honeywell International (NYSE: HON ) and United Technologies (NYSE: UTX ) is also out of action. There was also a proposed $38.7 billion merger deal between Halliburton (NYSE: HAL ) and Baker Hughes (NYSE: BHI ), which finally fell apart in April. As per Dealogic, with the termination of these likely deals, investment bankers were hard hit as they lost about $1.2 billion in possible investment fees. What’s Next? It looks like that the removal of mammoth deals in the U.S. actually inflated the size of withdrawn M&A data ($357.8 billion); the data speaks less about the diminishing number of activities. As per financial review, though there was a plunge in global M&A deal size, the number of announced transactions is 8,025 so far in 2016 versus 8,085 last year, indicating that the number has just moderated, and is far from completely losing momentum. The stringency in the U.S. tax inversion rule is less likely to put an end to cross-border deals. Yes, it could slow the momentum, but cannot stop them altogether (read: New Tax Inversions Rules: Threats to Healthcare ETFs? ) Another reason for the M&A slowdown is the underperformance of hedge funds in recent times. Notably, activists’ hedge funds play a huge role in companies’ merger and acquisition decisions. If the climate improves in this area, maybe M&A sector will receive a fresh lease of life. Also, being an election year, activities may remain slightly subdued in the U.S. Plus, the banking sector is facing stringent regulation and is also caught in a trap following energy sector issues. This is because banks have considerable exposure in the energy sector, which may default on persistent low oil prices. This scenario made the banks unsure of “how much leverage they should supply to private equity transactions, which has caused them to shy away from lending to PE-backed deals .” If the banking sector recovers in the near term, mergers and acquisitions may also perk up and investors could easily take advantage of the merger arbitrage strategy. This strategy looks to tap the price differential (or spread) between the stock price of the target company after the public announcement of its proposed acquisition and the price offered by the acquirer to pay for the stock of the target company. This is especially true given that investors should go long on the target or the acquired company and short on the acquiring company. When the deal is completed, shares of the target company will increase to the full deal price (in some cases slightly below the deal price), giving investors a nice profit. How to Play? Here are three merger arbitrage ETFs, any of which could make compelling options for investors seeking to play this area. These are the IQ Merger Arbitrage ETF (NYSEARCA: MNA ), the ProShares Merger ETF (BATS: MRGR ) and the Credit Suisse Merger Arbitrage Index ETN (NYSEARCA: CSMA ). Link to the original post on Zacks.com

Taking Profits On Our SPY Put Spread

A 40% net short in a single asset class is a rare event for me. So I vowed to cut it back on the next down day for risk control purposes only. The S&P 500 SPDR’s May 2016 $212-$217 in-the-money vertical bear put spread had the most profit to take, given that it was the furthest out-of-the-money with the shortest expiration date. If I blow up my performance betting the ranch on a single asset class, I am too old to get my job back at Morgan Stanley. Besides, they probably wouldn’t have me anyway. I never believed yesterday’s frantic 220-point rally in the Dow for two seconds. No volume, no news, and no cross-asset-class confirmation meant it was not to be believed. It was just another opportunity for the high-frequency traders to pick the pockets of hedge funds by squeezing them out of their shorts, which they have been doing on a weekly basis all year. That conviction allowed me to hang on to my aggressive 40% net short position. Better yet, we are poised to make as much as another 10% profit by the end of next week with out remaining positions. To remind you of why we are short the S&P 500 in a major way, let me refresh your memories: It’s all about the strong dollar. A robust buck diminishes the foreign earnings of the big American multinationals, major components of the S&P 500. I think it is much more likely that stocks grind down in coming weeks to first retest the unchanged on 2016 level at $2,043, and then the 200-day moving average at $2,012. Share prices are anything but inspirational here. Price/earnings multiples are at all time highs at 19X. The calendar is hugely negative. Soggy and heavily financially engineered Q1 earnings reports came and went. Huge hedge fund shorts have been covered with large losses, and no one is in a rush to jump back into the short side. Oh, and the bumping up against granite-like two-year resistance at $210 that will take months to break through in the best case. Did I mention that US equity mutual funds have been net sellers of stock since 2014? This position is also a hedge against what I call “The Dreaded Flat Line of Death” scenario. This is where the market doesn’t move at all over a prolonged period of time and no one makes any money at all — except us. To see how to enter this trade in your online platform, please look at the order ticket below, from OptionsHouse. The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out. Here are the specific trades you need to execute this position: Sell 22 May 2016 $217 puts at $9.27 Buy to cover short 22 May 2016 $212 puts at $4.44 Net Cost: $4.83 Profit: $4.83 – $4.40 = $0.43 (22 X 100 X $0.43) = $946 or 8.90% profit in 23 trading days. The Downside Protection That Worked Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.