Monday, May 7, 2007

Morning Market Comment

Depending on your perspective this is either a huge merger Monday, or a dud.

Alcoa (AA) is offering to buy Alcan (AL) for $33 bln dollars in cash and stock. AA is coughing up the equivalent of $73.25 a share for AL, a 20% premium to this past Friday's closing price. This is obviously great news if you were long AL or holding options, but implied volatility was fairly low on Friday for AL. The real option options activity was in AA where AA itself had been speculated as a takeover target. Not only were spreaders active in AA options, but there was plain heavy volume on the call side. Oops. AA is down, but less than $1, while AL is up $15 (I hold no position in either).

If you are a Yahoo (YHOO) long who was hoping for a "big announcement" this morning (as many on the YHOO message board were this weekend) - sorry, Charlie, there's no word of any sort about a $50 bln buy of YHOO by MSFT (I hold YHOO puts here).

If you were one of a huge number of options players who positioned ahead of the weekend for potential deals in names ranging from Sprint (S) to Jeffries (JEF), Sunoco (SUN), Newpark (NFX), etc - nothing at all to report. As I noted over the weekend, a lot of junk has been coming out of the rumor mill of late. Where the rumors come from - we don't know, but many of the "rumors" are providing unfounded, but still (and I suspect this is at the core) boosting stocks enough to allow better exit points for those who start the rumors. Beware of what you play.

Armour Holdings (AH) is flying higher by about $4. Wall Street Journal: "Britain's BAE was in final talks to pay $3.5 billion for Armor Holdings, a U.S.-based maker of military and heavy vehicles."

Stock futures are fairly flat this morning, and we may be in for a bit of backing and filling ahead of the Fed rate announcement this Wednesday: Fed to hold rates amid weak growth. No rate change expected. Many in the markets will bite their fingernails over what the Fed's statement will say about both inflation and slower economic growth which could keep the market in check until 2:15 Wednesday afternoon when the Fed statement comes out.

Earnings season is starting to wind down. While dozens more companies, mostly in the lower ranks of the S&P 500 report this week, the big earnings event comes Tuesday afternoon with Cisco (CSCO) expected to post earnings of 33-cents a share. My sources out of the west coast have told me that Cisco had a strong quarter last quarter and is off to a good start thus far this quarter. We'll see just how giddy John Chambers is on the conference call this Tuesday evening.

It's already back at the races again for Dendreon (DNDN) with a 7% pre market rise. The the FDA PDUFA date is May 15 for approval, approvable letter, or rejection. The FDA decision could come before Tuesday the 15th. I think the stock has a shot at $30-$35 on approval due to a huge short squeeze; $2 on rejection and less than $10 on an approvable letter which would delay Provenge with more testing. Even I, long since the mid single digits, bought some protective puts on Friday, though I may add more to the long side this week.

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