Berko: JCP secondary offering and the Hindenburg Omen
Friday, November 15, 2013 7:00 AM
Dear Mr. Berko:
I’ve owned Dodge & Cox Stock Fund for three years. Did it buy the lousy J.C. Penney stock on the recent secondary offering, at $9.65, by Goldman Sachs in late September? What about Colonial Fund and Vanguard Wellesley Income Fund, which my sister owns? And can you explain the Hindenburg Omen and what triggers its predictions?
P.E., Destin, Fla.
I can tell you, with a high degree of certainty, that Dodge & Cox Stock Fund (DODGX-$160.24) didn’t purchase J.C. Penney Co. Inc. (JCP-$8.46) on the secondary offering. And I can tell you with a similar degree of certainty that John Gunn, the lead manager of DODGX, unloaded 20.4 million shares of JCP at $17 or so in May and June. I didn’t ask what DODGX paid for JCP, but I was told that the stock was sold at a loss. JCP notwithstanding, DODGX was up 25.2 percent for the nine months that ended Sept. 30. And as of this writing, neither Colonial Fund nor Vanguard Wellesley Income Fund purchased JCP from Goldman.
I know two large hedge funds that had to take positions in JCP’s $850 million secondary, but I was asked not to reveal their names. However, I was told that Mark Cuban and George Soros added to their positions and that Kyle Bass at Hayman Capital and Larry Robbins at Glenview Capital Management also took large positions. I was also told that Goldman did a lot of persuading to get them (and others) to buy this “Humpty Dumpty” stock. And that persuasion, according to the elevator talk at 200 West St., included promises of significant participations in hot initial public offerings in which Goldman will be a lead underwriter during the coming dozen months.
The Goldman people would sell their grandkids’ kidneys if they could generate a commission, and the firm will collect a sweet $25 million fee on the JCP deal. Goldman knew that JCP was a pig in a poke, but this a firm that sharpens its sales skills by selling fertilizer to Eskimos and hand grenades to Buddhist monks. Heck, even I would have bought 1,000 shares at the $9.65 secondary price if Goldman had promised me 1,000 shares of Twitter at its IPO price. And that’s how this business works; one hand passes to the other. No deal is too grungy for Goldman, and I’m hearing that it will underwrite a $356 million municipal bond deal for Detroit, which filed for bankruptcy last July. Goldman should make $15 million to $17 million on the Detroit deal, and the bonds may come at 7 percent. The consensus is that the bonds will do well. Meanwhile, only Puerto Rico, which should be bankrupt but isn’t, has municipal bonds outstanding with higher yields.
The Hindenburg Omen is a highly technical indicator that flashes warnings about the health of the U.S. stock market and can supposedly predict a major market crash. It’s named after the German dirigible that smoothly crossed the Atlantic in May 1937 from Frankfurt but, upon landing in Lakehurst, N.J., burst into flames. Unforeseen elements sparked the fire. (Some claim sabotage.) Thirty-five of its 97 passengers were killed.
The Hindenburg Omen monitors four criteria among the 2,000 issues included in the New York Stock Exchange composite index that signal a market crash. 1) The daily number of 52-week highs and the daily number of 52-week lows are 2.2 percent or greater of the sum of the NYSE issues traded that day. 2) The new 52-week highs do not total more than twice the number of 52-week lows. 3) The McClellan Oscillator, which measures the differences between the number of rising stocks and the number of falling stocks, is negative. 4) The NYSE composite rises above its 10-week moving average. If all those things occur on the same day, it’s time to get nervous. If that happens twice in a 30-day period, the market is expected to crash within the next 40 days.
The Hindenburg Omen predicted the 2007 meltdown and the tech bubble. It looks as if it’s trying to predict something again.
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