JL: So, this past week has been no picnic for the bulls. Friday’s news from General Electric whacked the Dow for more than 200 points, and more bad news keeps trickling out from the banks. How are things looking in Cash McDash world?

CASH: I can’t disagree. This past week was impressively, um, unimpressive.

JL: Impressively unimpressive? That’s a new one.

CASH: Last week we talked a little about how the easy money was in the bag. While I kept my bullish stance, I mentioned that caution lights were beginning to glow.

JL: If I remember correctly, though, you were still holding some strong long positions (along with that pharma short).

CASH: Yep. And I still have some solar positions on the books, plus a nicely profitable chunk of Blackstone. But I’m finding fewer reasons to remain bullish now, and looking to “balance my book” a little more. So I’m rounding out these great long stories with a few names that have the potential for serious carnage.

JL: Getting ready to play Whack-a-Mole, eh?

CASH: I’ve got a mallet in each fist, baby! But before I give you my latest short candidate, let me fill you in on the next batch of IPOs being cooked up. They’re less than two weeks from pricing, and I think one or two will be right up your alley.

JL: Go on, go on…

CASH: There are three IPOs scheduled for the week of the 21st. The first is a digital media company that is cash flow negative. I don’t think either of us cares much about that one, although I’ll probably take a small allocation just to keep things friendly with my underwriter pals…

JL: Always working the angles.

CASH: Sometimes ya gotta foul off a curve ball here and there if you want the chance to swing at that nice big fastball right down the middle.

JL: That’s right -- it’s spring for all you East Coast baseball fans. Peanuts, hot dogs, apple pie…

CASH: Hey, careful! We can’t give away my identity remember?

JL: Oops, you’re right. My bad. Now our readers can nail you down to one of the, uh, 50 million or so traders on your side of the Mississippi.

CASH: A hint here, a hint there -- you never know! It’s a trader’s job to be a little paranoid, right? Anyway, back to business… What else happens in the spring?

JL: What happens in spring? Umm. April showers bring May flowers? Birds start singing?

CASH: You’re actually not far off the mark. Think global, something that affects emerging markets and Western markets alike.

JL: Not far off the mark… ah, right. We’re heading into the prime growing season for the Northern Hemisphere. So you’re talking agriculture, grains and shortage, right? We’ve been all over that story here.

CASH: Bingo. So I ask you, what better time to introduce a fertilizer and agricultural chemical company?  Intrepid Potash -- expected ticker IPI -- is the largest producer of potash in the U.S.  They’re raising about $600 million to pay off debt and fund expansion.  The company is already profitable, but knocking out the debt burden should make them even more so.  

JL: Nice. If we hope to succeed at feeding the world, we’re gonna need more potash in a bad way. I imagine you’re expecting a warm reception.

CASH: Definitely. They’re bringing out the big guns with this one. Goldman, Merrill Lynch and Morgan Stanley are all on the tombstone.

JL: Why don’t you give the readers a quick refresher on what a “tombstone” is, so they don’t think we’ve switched from birth to death here.

CASH: Sure. The “tombstone” is just trader speak for the prospectus that gets filed whenever new shares are issued. The front page always includes the names of the underwriters participating in the deal. Usually there are one to three names in bold print. That designates them as the “lead” underwriters. Then there are often several names below that, not in bold, which are the “follow on” underwriters. The follow-on guys have less of a say as to how the deal goes down, but typically get a few hundred thousand shares or so to pass on to clients.

JL: And having Goldman, Merrill and Morgan Stanley all on the same tombstone is a good thing, right?

CASH: You bet. Those three have the biggest distribution networks of all the different players, so they can pick and choose who they do business with. With a strong sector and an all-star underwriting team, it’s likely that Intrepid Potash will do pretty well.

JL: Great. So that’s two names, the digital media play (which we don’t care about) and potash (which sounds great). What’s the third one coming up?  

CASH: The final name on the calendar for next week is American Waterworks. It’s the largest investor-owned water and wastewater treatment utility company. These guys actually operate in 32 different states, and claim to treat and deliver over a billion gallons of water each day.

JL: Nice! You’re right, these names are right in my wheelhouse. The water infrastructure story is huge -- not just overseas, but here in the United States. At the same time that freshwater supply is becoming a problem, there are literally hundreds of billions of dollars worth of upgrades to be done to the country’s decayed plumbing infrastructure. I think I recall one estimate as high as $400 billion.

CASH: I knew you would like these names.

JL: Do you think American Waterworks will be as strong as Intrepid Potash?

CASH: Hmm. I actually think they’ll have to use a lot of lipstick to make this one look pretty. It’s no doubt a vital company doing much-needed things. But at the same time, the company is reporting losses right now due to construction cost. The cost of building new facilities is weighing on business results.

JL: So will the American Waterworks offering help the company raise cash for these new facilities?

CASH: Nope. It’s actually a simple matter of private investors liquidating a chunk of their positions to partially cash in on their investment. The company won’t get a dime from the offering.

JL: Bummer. So there’s no money for the company, and with an IPO they get the added regulatory burden of being publicly traded. Is this actually a net negative move for American Waterworks? One of those deals where all the value goes to insiders?

CASH: No, it’s not that bad. I actually think it’s a long-term positive move. Eventually the company will be able to issue stock to employees. That will help them attract more talent. At the same time, it’s likely that the company will issue additional shares and use the funds to pay down debt later on. When that happens, the reduction of interest rate expense could be a turning point towards profitability.

JL: Sounds like this is a name to put on the shelf and keep tabs on for later.

CASH: Exactly. I’m taking a “wait and see” approach to American Waterworks, as the outlook isn’t super hot for unprofitable companies coming to market right now. This ain’t the late ‘90s, where anything with “dot-com” in its name took an automatic moon shot.

JL: Very true. Speaking of dot-coms, you started out talking about “balancing your book” a little with some bearish names. Got any short plays on the radar screen?

CASH: Indeed I do. On the bearish side, I’ve got my eye on National Cinemedia Inc., ticker symbol NCMI. The company provides advertisements for movie theaters.

JL: Ah, advertising. I can see why that might be a short situation. Even the strongest advertising players are getting hurt right now as consumer spending gets reined in.

CASH: You’re right there with me as usual. As the consumer faces more difficulty, advertisers are getting less and less bang for their buck. People don’t have as much room in the budget for frivolous discretionary items, and advertisers know this. So, while no smart company is going to stop advertising altogether, the pace of ad buying is going to back off.

JL: Not to mention that movie theatres are getting hurt by digital media. More people surfing the Web or watching Netflix at home on their big screens.

CASH: I don’t think we’re going to see movie theaters completely abandoned anytime soon. But you’re right, there is some concern there -- and Wall Street hates uncertainty as a rule of thumb. I think it will be difficult for the movie theater industry to draw investors for at least the next several months. Plus, there are some issues with NCMI specifically that are raising red flags. 

JL: Such as?

CASH: The company is expected to be a turnaround story.  But the stock appears to be pricing in a full recovery, and analysts seem extremely bullish.

JL: Isn’t that supposed to be good?

CASH: When those guys zig, I want to ZAG. Know what I mean?

JL: So is this just a contrarian play against the analysts then?

CASH: Not just that. The stock has a huge multiple relative to the industry it’s in, and there are some scared shareholders hanging on by their fingertips. When those shareholders throw in the towel, I want to be in there with a short position.

JL: What makes you say they’re afraid?

CASH: The stock is toying with its IPO price of $21.  It’s managed to hold above that level for the majority of this year, save a few spikes below.  If the market rolls over, however, and NCMI drops below $20 alongside, I anticipate a mass exodus that could see 25-40% of the stock’s value wiped out!

JL: Wow. That’s a bold statement and a juicy-sounding short. We’ll have to come back and unpack that a bit down the road. In the meantime, I’m feeling fired up about that new potash name…

CASH: When you check in next week, we can take a final look before the IPO pricing.

JL: Sounds good.