Greetings. There's plenty to talk about this week as usual -- and plenty of topics to catch up on. We'll start off by checking in with your friend and mine, incognito hedge fund manager Cash McDash.

Last week, Cash gave the raspberry to two IPOs (going so far as to highlight one as a potential short). Both names stunk up the joint, just as he expected. What came as more of a surprise, though, was a sudden flood of additional new offerings hitting the market.

This week Cash explains why new offerings can suddenly pop up out of nowhere; how he's still making money hand over fist on the trading side; and, last but not least, he gives the scoop on an upcoming name in the red-hot shipping industry. Enjoy.

Warm Regards,

JL

JL: So last week, you were sweating over the need to "take one for the team." You pointed out two upcoming names, American Capital and Verso Paper, strongly hinting that both would be duds and that the second could be a good short for savvy readers. How did things turn out?

CASH: Well, both were indeed duds -- just as I expected. Verso Paper (VRS) priced at $12 on Thursday morning. That was below the published range for the expected price.

JL: And I'm assuming the lower price didn't excite anybody or inspire any value thoughts.

CASH: Oh, heck no. The lower price wasn't indication of a better deal for investors... it was simply clear sign that the underwriters couldn't find enough buyers for the deal, and had to price it deep in the hole just to get it done. The result was a smaller group of less-than-pleased buyers -- me included -- with a chunk of weak stock on their hands. The only thing to really do was sell. That's why the stock immediately traded down two bucks, or nearly 15% of the share price. That's no small loss.

JL: Ouch, no kidding. I'd imagine you'll need multiple good deals to overcome that setback.

CASH: Actually, it should be easy to overcome. See, I took a portion of stock, but I did so grudgingly (if you'll recall) and kept my allocation on the small side. I made sure my guys knew that this purchase was a personal favor, and that longer term, I expect the business relationship to work out much differently. It's good, in a sense, because now I have "credit in the bank," in a good will sense, when it comes to leveraging the next few deals coming out.

JL: Gotcha. And as for the American Capital Strategy (AGNC) deal, that one did just what you said it would, too. I saw the stock was priced at $20 and immediately went to a discount.

CASH: Yep. It doesn't take a crystal ball. When you've been in this business day in and day out for nearly a decade, as I have, some things are just easy to see. Any IPO trader worth his salt should’ve been able to spot that outcome a mile away.

JL: So with two "cost of doing business" trades on the books, does that cut into your profits for the year? Or rather, how big was the cut? A nasty gash, or just a little nick?

CASH: Actually, there were a few other unexpected events that came up last week. Those events in the "other" category had an outsized impact on the 'ol P&L sheet.

JL: Uh-oh. More pain?

CASH: Not hardly! Just the opposite, in fact. Surprisingly enough, there were no fewer than a dozen additional deals that came to market last week. Enough of 'em were profitable for yours truly to push the equity curve to a brand-new high!

JL: Sounds like a pretty sweet week. You made your i-banker buddies happy by taking on some weak deals, enabling you to bank good will credits for future deals, and yet the market was strong enough for you to power past the small losses and make your investors happy, too.

CASH: Yep. Better than a poke in the eye with a burned stick, as you always say.

JL: Ha ha, true. I picked up that saying from a grizzled old stockbroker -- a guy I worked for two summers back in college days. But anyhow, where did these dozen deals come from? Weren't there only four on the calendar when we last talked?

CASH: Indeed, you counted right. There were four last time we chatted. But when we get into a market that's been dormant and tough for an extended period of time -- like we saw from September of last year through March -- it creates an extra flurry of activity when conditions change. When the window opens, deals can pop up like mushrooms overnight. In fact, there's an industry term for this kind of thing: "rapid overnight offering."

JL: Sounds like a FedEx or UPS commercial. Or maybe some kind of clandestine military term... swift movements in the dead of night, that kind of thing.

CASH: Heh. In some ways there really is a bit of cloak-and-dagger to it. Normally you'd think a new offering benefits from press exposure -- the more press the better. But with some of these more rapid-fire deals and secondary offering deals, the opposite is true. If there's too much press beforehand, existing shareholders will sell in the face of added stock coming to market. The deals dilute their ownership in many cases, which no shareholder likes. And so, unless you have a relationship with the underwriters (as I do), you might not get the news until it's all over.

JL: The offering and the damage done.

CASH: What?

JL: Sorry -- obscure Neil Young reference. Couldn't resist. Probably should've. Anyway, so existing shareholders don't even get a say as to whether the transaction happens? Aren't they the technical owners of the company? Why wouldn't there be some kind of announcement or proxy vote?

CASH: The firm's board of directors typically makes the decision. It's perfectly legal under the docs that outline corporate governance.

JL: Nice. So a public company can dilute its shareholders pretty much at whim... this sounds like an important area for investors to be more aware of.

CASH: No kidding. I'm actually surprised how few investors pay heed to the "syndicate calendar." There is a ton of important supply/demand information there that most folks miss.

JL: Ah, but inefficiency means opportunity too, yes? Perhaps it's good that not everyone pays attention...

CASH: True. Our upcoming trading service will help subscribers spot some of these "secret" events, and take advantage of all kinds of imbalances.

JL: The day can't come fast enough -- although I can't believe how fast time is flying already. In the meantime, got any trading dirt on what's happening here and now?

CASH: I do. Right now we have only one IPO and four secondary offerings. By the time we catch up again next week for our customary chat, though, my bet is that we'll have seen at least 10 more deals get priced. More "unexpected events" popping up.

JL: So tell us about the IPO. Is this one a buy after last week's duds?

CASH: Sorry to disappoint, bud, but the IPO this week is basically same song, second verse.

JL: Just don't start singing.

CASH: Nope, I won't. I tried that one time, remember, and your lack of auditory refinement prevented you from appreciating my skills.

JL: What can I say, I'm a philistine.

CASH: So the IPO is MF Residential Investments, Inc (MFR). It's yet another company that plans to raise initial capital to turn around and invest in mortgage-backed securities -- the same thing we talked about last week. If you liked the way that American Capital Agency Corp sold off right away, then you'll get excited about MFR. If you like making money, though, you might as well stay away from this one.

JL: So another chance to pay the blinds like last time.

CASH: Exactly. Last week I put up the big blind, but luckily won the pot. This week it's only the small blind, and I'll have to wait to see my hole cards.

JL: Ah yes, more poker metaphor. (Or is it analogy, I forget.) I know the World Series will be kicking off here soon, but we should probably lay off the Texas Hold 'Em talk for a while.

CASH: Sure, no problemo. Gotta keep it fresh, I agree. Moving on to the secondary offerings -- the one worth paying attention to is TBS International (TBSI).

JL: Hmm. What's TBS stand for? Turner Broadcasting System? The Bottle Shop? They Better Stop?

CASH: No you'd better stop... TBSI is a shipping company, much like Dryships (DRYS), Diana Shipping (DSX), Euroseas (ESEA), and so on. The whole industry is trading sharply higher, and I've made some serious profits trading many of these names. It's a bit late in the game to get involved there, as the charts are very extended, but the TBS deal may give us a great opportunity regardless.

JL: Who's selling the stock (and why)?

CASH: That's a great question. Some of these deals are essentially a golden parachute for large institutional owners. They might have sold 10% of their ownership during the IPO, and then, over time, these secondary offerings act as a way for them to fully liquidate and dump all their shares on the public.

JL: That doesn't sound super appealing.

CASH: No, definitely not. But fortunately this isn't the case with TBSI. The offering is a chance for the company to raise nearly $170 million to pay down debt and reload the balance sheet. This way, the next time they have a chance to buy a new or used ship at an attractive price, they'll be ready to go without needing to access the capital markets.

JL: Correct me if I'm wrong, but it seems like a pretty good time for a shipper to be selling shares. Dry bulk rates have been hitting record highs lately. This means the shippers can charge more for each voyage they take on, and the higher day rates have led to higher stock prices and plenty of media attention.

CASH: Exactly. Management is definitely picking a strategic time to be selling stock. The problem is the additional vessel purchases. See, with all this attention, it's tough to find ships for a reasonable price. The prospect of building a new ship is also daunting with steel prices so high.

JL: Not to mention that new ships aren't exactly built overnight. There's no guarantee that by the time a new vessel is ready for service, the rates will still be at such a high price.

CASH: You got it! That's why I'm impressed that TBSI's management hasn't committed to purchasing a new vessel with the offering money. They're simply taking advantage of the high stock price opportunity to shore up -- shore up, get it? -- their balance sheet, and then wait for an opportunity to put the capital to work.

JL: So do you think the deal will trade well?

CASH: The stock is trading strong even though shareholders know the deal is coming; that's usually a great sign. It means there's enough demand for the stock that additional supply isn't likely to pressure the price too much.

JL: But...

CASH: But the deal isn't a slam dunk. These names are very highly correlated to the spot price of the dry bulk shipping indexes. I'm going to be active on the deal, and I think there's a great chance it will work -- but if the entire sector begins to trade heavy, I'll cut bait and set sail.

JL: Aye aye, Cap'n. Want to mix another couple analogies in there while you're at it?

CASH: Sorry. But you see what I'm saying I think. The momentum belongs to the bulls now... But at some point, when the shouting is over and the buy tickets have all been stamped, the shippers might end up on my short list.

JL: Not yet, though.

CASH: Oh no, definitely not yet. No way in the world I would short this sector right now. I'm just saying the shippers are beginning to show classic signs of an extreme. Barron's has been bullish on the sector, many names have had 30% to 50% runs in the last few months, and if management is as smart as we give them credit for, they will try to sell at the top and buy at the bottom. Remember, TBSI is a seller of their own stock right now.

JL: How quickly the worm can turn. Right now you're bullish, with good chances of making money on the long side of the shippers -- but you'll flip to bearish when the time comes, and make money on the downside, too.

CASH: That's the name of the game. It takes wisdom, experience, and plenty of good information to catch both sides of a move. Not to mention paying close attention to all that's happening, day in and day out. But that's what makes the trading worthwhile... and that's why I'm here.

JL: And believe me, we're most glad you are here, my friend. Talk to you again next week.