Today I'd like to introduce you to an old friend of mine, Cash McDash.
I've known Cash for almost a decade. We struck up a friendship based on our mutual love of markets and have been talking shop and swapping trading tales ever since. (We both have particularly vivid memories of 2002, one of the wildest years in recent memory. This year is shaping up a little like that one.)
“Cash McDash” isn't my friend's real name, of course. He writes under a pen name for reasons you'll soon understand.
You see, Cash is a hedge fund manager with a lot of connections on the Street. He spent seven years learning the ropes at a $100 million shop and now runs his own fund. He's there in his turret, day after day, taking live fire as he executes new trades.
A big part of Cash's business involves talking to people with sensitive information -- investment bankers, IPO underwriters, company executives and the like. Cash also enjoys writing about markets. (Like me, the writing process helps him focus and develop his opinions with greater clarity.)
When I asked Cash to become a contributor to Taipan Daily, he was excited about the idea -- with the natural understanding he'd have to keep a low profile. (Hence the pen name.)
I find Cash's insights extra valuable because he and I look at the world so differently. Or rather, we share a lot of the same opinions, but our starting points are different. You could say that I'm a “macro” guy, whereas Cash is a “micro” guy.
Essentially I think about markets in terms of "top down" -- the big movements, key developments, and major sweeping trends. Cash, on the other hand, has carved out a career in the world of new growth companies and IPOs (initial public offerings). He loves getting up close and personal with specific stocks and industries.
Cash also gets a lot of sensitive information using his Rolodex full of high-powered people. He's got a network of contacts that you and I can’t replicate… at least not without opening up a hedge fund (preferably one with tens of millions under management) and then spending years cultivating relationships on the Street.
That's enough from me. Let’s talk to the man himself.
JL: So, Cash. We’ve never been big on social graces, so let’s get right to it. As a hedge fund guy, how do you make money? You don’t mess around with that subprime stuff, do you?
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CASH: Ouch! So that’s how we’re gonna roll, eh? Insulting my honor with the very first question? I see how it is… No, I don’t do anything with that toxic stuff. Me only simple caveman trader, not high-powered rocket scientist.
My world is new growth companies and IPOs -- initial public offerings. That’s the area of the market I’ve been focusing on all day, every day, for the past seven years. It’s a fascinating space. Lots of, uh, cash to be made. No pun intended.
JL: Of course not. So do you trade these IPOs, or invest in them for the long haul, or what?
CASH: A little of both. It depends on the opportunity and the situation. Sometimes your holding period is days to weeks. Sometimes it’s weeks to months. And sometimes you get hold of a winner with the potential to triple or quadruple over time. Those you might trade in and out of a little bit, but you want to establish a core position and hold on to it for years.
JL: Gotcha. So, sometimes you flip after a few days or weeks, other times you dip in and out, and with the real blockbusters, you take an investment view and look for triple-digit gains.
CASH: Yep.
JL: I’m sure our readers are wondering, though: How are you handling this market? I mean, it’s been a little rough out there, as I’m sure you’ve seen. Do you ever worry about the IPO pipeline drying up?
CASH: Nah. There’s always opportunity. Always.
JL: Even when the markets are getting beat up?
CASH: Who you gonna believe -- me or your own eyes? But seriously, my world has its own rhythm. Take last Friday’s action, for example. Two offerings came out this past Friday (January 25th). The market was selling off hard, but both IPOs were up big time.
JL: So these IPOs trade independently from the general market action?
CASH: For at least the first few weeks, yeah. The price action has much more to do with how good a job the underwriter did creating interest in the stock, and how many money managers and traders (like yours truly) want a piece of the offering.
JL: Underwriter not being anything like undertaker.
CASH: No, wise guy. An undertaker buries the dead. Underwriters are basically the investment banking guys who put the deal together. They “underwrite” the shares of the IPO and distribute them into the market for a fat fee.
JL: What about the total volume of IPOs? Has it still been good? I mean, everyone remembers the dot-com bubble, when IPOs were popping up all over the place.
CASH: Not only has it been good, it’s actually been better than ever. Last year (2007) was the strongest year for IPOs since the year 2000. There were more than 230 offerings and more than $50 billion in capital raised -- in spite of all that mess with subprime and the “credit crunch.”
One of them, VMware, was the biggest tech IPO since Google. They raised more than a billion bucks and picked up 76% in their first day of trading. A lot of top performers came out of China, too. The U.S. exchanges saw four times as many Chinese IPOs in 2007 versus the year before.
JL: Nice. What about the rough start to 2008, though? Are you worried at all that the good times might not continue?
CASH: Nah. Don’t forget, I’ve been doing this for seven years. I was doing this in 2002, one of the ugliest years in decades. Even if ’08 winds up being as crazy -- and ugly -- as ’02, there’s still good money to be made… on both sides of the coin.
JL: Both sides of the coin. You speak in riddles, master.
CASH: Patience, grasshopper, and all will be explained. You see, it doesn’t really matter what market conditions are like. There will always be IPOs coming to market, and there’s always opportunity. When the sun is shining and a new issue looks promising, I put on my white hat and go long. When conditions aren’t so hot and a new issue looks dodgy, I put on my black hat and go short.
JL: So you go short as well as long.
CASH: Absolutely! It would be crazy not to. You see, here’s something a lot of people don’t understand: It isn’t just the stars who do initial public offerings. A lot of these companies are coming to market because they have to. They are desperate for cash. (Don’t say it!)
See, at a certain point in the growth cycle, new companies need to raise capital for whatever reason. Maybe they need to expand operations, or pay off debt, or upgrade their technology or step up the marketing plan. It doesn’t really matter what the reason is.
The bottom line is, even when market conditions are harsh, there are a number of companies out there waiting to do an initial public offering or a secondary offering. And even during raging bear markets, you have those windows of optimism where the market pokes its heads up and the weather clears for a short space of time.
When that window opens, these companies rush to do their IPOs and secondaries as fast as they can. They have no choice. The underwriters might not be too happy, but they want the fees -- so they hold their nose and just get it done.
JL: I see. And because these companies are desperate to raise capital, oftentimes the deals won’t be so hot. Sometimes they’ll even stink. So you figure out how to separate the strong deals from the stinky ones -- and then you pick your spots to go short.
CASH: Bingo. Sometimes the short side can be a lot of fun. When you see an offering from a company that’s bleeding cash, and you know they’ll be coming back for more later, and the writing is on the wall as their growth prospects slow -- sometimes the short side is like shooting fish in a barrel. You don’t get the same upside you do with buying and holding for a 400% gain, but shorting can be very profitable.
JL: Nice! Now let’s talk about your Rolodex for a second. You aren’t just surfing the Web to find out about these deals. You’re getting them from a carefully cultivated network of contacts.
CASH: That’s right. It goes back to the underwriters. As we discussed earlier, every IPO or secondary offering is put together by an investment bank. The underwriters write up the terms of the offering, figure out how to price it, handle the marketing push and use their sales team to distribute it.
JL: What do you mean, “distribute it.”
CASH: Well, these IPOs don’t sell themselves. Sometimes they practically do, but not always. The underwriter’s job is to make sure that when the shares hit the market, they are going to get bought. That’s why they are constantly in contact with money managers and traders like me.
JL: So you’re regularly in contact with the underwriters at all these various houses -- Merrill Lynch, Bear Sterns, Morgan Stanley, Credit Suisse, etcetera -- and they are calling you up and trying to get you to buy shares?
CASH: Yep. You have something called “deal flow,” where guys like me establish a relationship with the underwriters. Their job is to get me to buy what they are pitching. My job is to be a good customer and regularly take shares in their IPOs. In exchange for being a good customer -- a source of liquidity and a regular purchaser of what they sell -- they keep me in the loop. I call them, they call me, and together we get a handle on what’s going on.
JL: But wait a minute. Not to put too fine a point on it, you were just telling me that only some of these IPOs are stars. A lot of them are dogs. So how do you make money if you have to regularly buy the dogs? And what about your habit of going short as well as long? That can’t make your Rolodex buddies too happy.
CASH: You’re quick on the draw, my friend. My underwriter contacts would indeed be a wee bit ticked if they knew about my shorting activities. Why do you think I’m using a pen name?
Really, though, it’s just the nature of the business. Traders like me couldn’t be profitable year after year if we had to buy and hold every stinky IPO the i-banks put on the Street. We agree to buy the dogs from time to time in order to have access to the stars and keep up the deal flow… and then we turn around and go short.
JL: So sometimes you’re sitting there at your desk with a phone at each ear, yelling out orders to buy XYZ on one side and short it on the other?
CASH: Not exactly, but that’s kind of the gist of it. To use one of your pet phrases, you have to “shuck and jive” a little with this stuff. And you have to be really sharp in terms of assessing the deals. There are a few key things that are really important. One of them is reverse psychology.
JL: Explain.
CASH: Well, a good gauge of a deal’s strength is how many shares are available. If there are lots of shares available, that’s a bad sign. If there are practically zero shares available, that’s an excellent sign.
But this is where the reverse psychology comes in. When there are lots of shares lying around, the underwriter isn’t happy. After all, his job is to get these shares out the door! So he tries harder to sell them.
When I get a call and I hear “Cash, old buddy old pal, this deal is an absolute must-own!” My warning indicators immediately start flashing red. If I ask them how many shares I can get and they tell me I can load the boat, there’s a good chance the deal is a stinker.
On the other side of the coin, when there are few shares available, it’s because everyone wants ‘em. When this happens, the underwriter is going to be cagey. If I call up to ask about a new deal and I hear “Hey, Cash. Forget this one -- it’s a snoozer,” my ears perk up. If I try to get my hands on some shares and can hardly get any -- or can’t get any at all -- then I know the IPO is going to be very, very strong.
There are a lot of metrics and “tells” like that. The basics aren’t hard to explain -- it’s just a matter of putting the pieces together. That’s where the contacts and the experience come in. Again, I’ve been doing this for seven years. I’ve literally analyzed thousands of these deals six ways from Sunday. I’ve heard every sales pitch known to man. Sometimes I see spreadsheets in my sleep.
JL: Good stuff, my friend. There’s so much more I’d like to ask, but we’re running out of time here. I’m glad you’re sticking around. Maybe next week I can pump you for a few specific examples.
CASH: Sounds good. I think this is going to be fun. And yeah, there’s plenty more to talk about. We haven’t even scratched the surface on growth companies yet, or the huge investment potential. Trading is only the half of it! The investment side is where you can see the Godzilla-sized gains. These new growth companies don’t just sit around and pay dividends. The best ones have explosive long-term potential.
JL: Well, we’ll certainly be digging into that. I look forward to making you our eyes and ears on the Street. And if any of our readers have questions, would you be willing to answer those?
CASH: I can certainly do my best.
JL: Excellent. If you have any questions for Cash, e-mail them to
e-news@taipanfinancialnews.com. We’ll hear from him again soon!
Warm Regards,
JL