Poison Pills and Baby Bubbles

April 23, 2014

  • A short history of poison pills… and how to profit on the back of an “activist investor”
  • Who’s left to buy now? David Stockman on the end of the baby housing bubble
  • The lawsuit that reads like a best-seller… because it basically is a best-seller
  • China’s latest stealthy gold moves… an unlikely place to discover gold… an earnest plea for gold standard understanding… and more!

  The official term is “shareholder rights plan.” The unofficial term is “poison pill.” It’s what companies do in the face of a hostile takeover bid.

And it’s what Allergan Inc., the company best known for Botox, is doing in the face of a bid from hedge fund manager and activist investor Bill Ackman. Not that he can pull it off alone; he’s teaming up with Allergan’s bigger rival Valeant Pharmaceuticals to launch a bid worth $46 billion for Allergan.

Allergan doesn’t think that’s nearly enough. Hence, the poison pill: If anyone not approved by the Allergan board takes a 10% stake in the firm, other stockholders will get the right to buy discounted shares.

Ackman disclosed a 9.7% stake when he made the bid public yesterday.

  The poison pill was the brainchild of a corporate lawyer named Martin Lipton — as the go-go era of corporate raiders and hostile takeovers reached its zenith in the 1980s.

And they’ve been effective: “These days,” The New York Times wrote last summer, “the directors of the 5,000 or so public companies have a better chance of being hurt in a car accident than by a hostile bidder.”

As we indicated yesterday, that might be changing with Ackman’s move on Allergan. Once content to shake up sleepy corporate boards and remove complacent CEOs, Ackman now believes a hostile takeover with the right partner might prove the most effective way to “unlock shareholder value.”

Ackman’s move produced a nice little bump in Allergan shares yesterday — up 16%. Nice… but Ackman’s more traditional activist investing has produced far bigger gains in the recent past.

  Consider when Ackman took a stake in Federal Home Loan Mortgage Corp. — which you probably know better as Freddie Mac.

Like its fellow “government-sponsored enterprise” Fannie Mae, Freddie Mac was brought under federal control during the Panic of 2008. Shares were delisted from the New York Stock Exchange in mid-2010, but they continued to trade on the Over-the-Counter Bulletin Board.

“For years,” explains Rick Pearson of Agora Financial’s Catalyst Trader, “Freddie Mac was flat-lined. The real estate markets looked dead in the water. Then out of nowhere, shares shot up — doubling in a few days… and then went up to gains of 1,803%.”

It all began a little over a year ago… when Ackman took a 10% stake in Freddie Mac. Mergers and acquisitions are No. 2 on the list of five “Newton’s Secret Profit Triggers” that Rick has identified — and made big gains from — during the last 10 years.

“Over and over again,” he explains, “we can spot these triggers, or a catalyst of some sort that will send a stock busting out to life-changing gains.”

[Ed. note: Rick’s new service identifying plays just like these, Agora Financial’s Catalyst Trader, remains available at the charter-subscriber price through midnight tomorrow night. After that, access to his recommendations will cost more. Click here to take advantage while you still can.]

  The aforementioned housing rally is showing clear signs of flagging.

New home sales crashed in March, falling 14.5%, according to Commerce Department figures released today. Existing-home sales, released yesterday, have contracted for seven of the last eight months.

“Prices, arguably unsustainably high prices, are a major factor constraining sales of new homes, as they are for sales of existing homes,” says a dry but cogent summary from Bloomberg, “The median price surged 11.2% last month, to a record high of $290,000. Year on year, new home prices are up 12.6%. This compares with a year-on-year decline in sales — not a gain in sales — of 13.3%.”


  The next downturn in housing prices “will show up any day,” says former White House budget director David Stockman at his lively Contra Corner website.

“In fact,” he says, “another downward plunge is a positive certainty now that the buy-to-rent LBO speculators are rapidly pulling out of those ‘flash’ bull markets in Arizona, California, Las Vegas, Florida and elsewhere.”

What he’s talking about is something our fearless leader Addison Wiggin has chronicled in Apogee Advisory for more than two years — the hedge fund and private equity crowd buying single-family homes, mostly foreclosures, to manage as rental properties.

That trend has now played itself out. “Yet,” writes Stockman, “even as Wall Street heads out of Dodge City, the normal wave of organic buyers is nowhere to be seen. That’s because the inexorable normalization of interest rates is already beginning to drive housing affordability even further south among the diminishing cohort of buy-to-occupy households with sufficient income to meet today’s financing standards.”

Yep. Eighteen months ago, a 30-year fixed mortgage could be had for less than 3.5%. This morning? 4.3%. Result? The percentage of homebuyers who are buying for the first time has cratered…

“This short-term flash boom in housing prices induced by Bernanke’s money printing spree,” Stockman sums up, “has driven first-time buyers out of the market.”

And no one’s stepping up to take their place…

  Stocks are generally in the red this morning.

The blue chips are holding up better than tech issues and small caps. While the Dow and the S&P 500 are little changed, the Nasdaq and the Russell 2000 are both down about a third of a percent — a continuation of a trend that has Greg Guenthner on alert.

“Smaller stocks (along with the technology and biotech stocks everyone’s so worried about) are lagging the market,” he writes in this morning’s Rude Awakening. “The S&P 500 is within spitting distance of new highs. But small caps have more work to do. The Russell 2000 needs to rise 4.5% before it can test new all-time highs.”

Since the start of 2013, new highs in the S&P were consistently met by new highs in the Russell. No more. “As the big stocks recover and make a go at new highs,” says Greg, “small caps are stuck in neutral.

“The small-cap lag is a big tell. We want to see small stocks lead rallies, not fall behind. If small caps can’t get it together, you’ll have one more reason to lighten up on stocks as summer approaches.”

  “What took so long?” writes Bloomberg’s Matt Levine with an amusing take on the lawsuit filed over high-frequency trading (HFT) we noted here on Monday.

The suit, filed by the city of Providence, R.I., comes less than three weeks after publication of Michael Lewis’ book Flash Boys. “The lawsuit is basically just a synopsis of Lewis’s book,” Levine writes, “and, I mean, how long can that take?…

“The other problem with the lawsuit,” Levine writes, “is that it pretty much sues the stock market for being the stock market. So the defendants include pretty much every stock and options exchange, and also literally every brokerage and literally every high-frequency trading firm.”

Even the ones that have spoken out vociferously against HFT. Heh…

“I don’t get this case at all,” Levine goes on. “The problems here, if they are problems, are structural. They’re about exchange rules and Securities and Exchange Commission regulations that have created a market system that not everyone likes. But that is the system that exists, and it seems unfair to blame everyone for operating within the system.”

While the lawyers slug it out, all you need to do is tell your broker five simple words — or click five simple words on your discount brokerage account — to insulate yourself from HFT. We still have a few copies of Flash Boys available for only $4.95… and we’re pairing it with an exclusive special report, Five Simple Words to Beat the Flash Boys, available free.

It’s a bundle you won’t find anywhere else — only through us, and only at this link.

  Gold has perked up — barely. At last check, the spot price was $1,282.

The metals might catch a bid and recover the $1,300 level between now and the end of tomorrow, when options on the May gold and silver contracts expire. Whether that level holds is another matter entirely…

  China is about to ramp up the secrecy over its ever-growing gold stash.

Reuters reports China has begun allowing gold imports through Beijing — in addition to Shanghai and Shenzhen.

“China does not release any trade data on gold,” the wire service reminds us. “The only way bullion markets can get a sense of Chinese purchases is from the monthly release of export data by Hong Kong, which last year supplied $53 billion worth of gold to the mainland.”

Indeed, the presence of a third direct conduit in the mainland might take away some of the volume now going through transparent channels in Hong Kong.

The new Beijing trade is so hush-hush that Reuters could get only anonymous confirmation through “an industry source.”

  Tomorrow, by the way, marks the fifth anniversary of the day the Chinese central bank last disclosed its gold holdings — 1,054 metric tons. The consensus among everyone we speak with is that the tonnage is now at least 2,500 and maybe more than 5,000.

China’s objective? EverBank’s Chuck Butler believes it’s part of China’s plan to create a gold-backed yuan. The Death of Money author Jim Rickards says China wants a “seat at the table” whenever the international monetary system collapses and is reorganized.

Either way is long-term bullish for gold…

  Gold smuggling the hard way: Surgeons in India have extracted 12 gold bars from the stomach of a man who was complaining of — well, stomach pain.

For as long as India has slapped duties on gold imports — at least a year now — we’ve chronicled the inventive ways people have tried to get around them. Our favorite is importing old tube TVs with capacitors made of gold.

The 63-year-old patient in the present case was not so inventive about it. “X-rays showed there was intestinal blockage,” said a doctor on the case in New Delhi, “which required surgery.”

Each bar was 33 grams, or a little over an ounce.

Take 12 of these and call me in the morning…

No word on the name of the patient or where he might have brought the bars from. Police have sent the bars to customs for further investigation. Ouch…

  “You say gold standard and people nod,” a reader writes, “but what exactly would be the workings of such a standard?

“How would it prevent moneyed elites from making hay easily? I would like to come aboard the gold train, but frankly, I don’t see it as the cure-all. Maybe I am deaf and dumb, but I have run an international business for many years and know a little bit about currencies and money transactions. Please, somebody help me out!”

The 5: “The primary argument upon which I would rest my case for a gold standard,” Lewis Lehrman told us last year, “is that it preserves the purchasing power, the wages, the salaries, of all those who are unable to defend themselves in the halls of Congress in Washington or elsewhere, in citadels of power like Wall Street.”

You can read some of Mr. Lehrman’s case here. A more comprehensive case is found in his 2012 book The True Gold Standard.

Lehrman has some business acumen himself, with decades of experience as an investment banker. In 1982, he was one of two dissenting members of Reagan’s Gold Commission, the other being Ron Paul. We republished their “minority report” awhile back — available here.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Nothing like taking a sure gain: Yesterday, Byron King recommended his Military-Tech Alert readers take 183% profits on half of a year-old recommendation, and let the rest of it ride. From here on, it’s “playing with the house money,” to use the gambling analogy.

For access to all of Byron’s profitable recommendations drawn from his decades of contacts built up in both the military and private industry, check this out.


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