Blockbuster (BBI / BBI.B): Pairs Trade

Author: ajalper

Blockbuster’s A shares are currently trading at 2.25-2.75x the value of the B shares. Blockbusters pre-September ratio tracked at roughly 1.1x. Since mid September the ratio has varied wildly from 1.25-2.75. The spread had closed significantly in the last two months. On Tuesday there was a bankruptcy rumor that sent the A shares from over $1.00 down to $.20 in a half hour before the trading was suspended. Both A and B shares experienced high volume during the sell off and the next day during the purchasing of shares. The scare and high volatility had unhinged the correlation between the A and B shares. The A shares are currently trading at about $.45 and the B shares $.17. It is likely that the spread will close significantly towards 1.5x in the next month, once volatility subsides. Because of high selling pressure, the available shorts for the A shares are limited. If you are willing to risk a forced buy-in if shares to borrow run out, this is a high probability pairs arbitrage play. (According to the IB Website, there are currently 700,000 shares available for shorts, 3/6/09). To take advantage of this spread, short A shares and buy long an equivalent dollar value of B shares.

I am short bbi and long bbi.b, and continuing to add to my position.

Atlas America (ATLS): Relative Value Hedge

Author: MPC

Atlas America (ATLS) is a natural gas drilling and pipeline holding company.  Per share of ATLS, I believe the parent owns 0.7754 shares of natural gas driller Atlas Energy Resources (ATN), 0.4520 shares of pipeline GP Atlas Pipeline Holdings (AHD), 0.0282 shares of pipeline LP Atlas Pipeline (APL), $2.54 of cash, and $0.40 of a small VC firm at book value.  At today’s prices, I believe you can buy the parent and short the ATN portion for even money, i.e. own the rest for free.

Berkshire Hathaway (BRK.A / BRK.B): Pairs Trade

Author: ajalper

The A shares are currently trading at a 6% (down from a peak 10%) premium to its historic relative value to the B shares. The premium usually bounces between 0-2%.  This is a highly unusual spread for this pair that tends to track very closely. Other smaller spreads in recent past have closed within a day or two. The unusual market conditions and the recent heavy sell off and long-term low of the B shares, may cause it to revert to the mean a bit more slowly, since a rally in the B-shares my be required to close the gap. This is not a large spread in relationship to other opportunities currently in the market, but has a very high probability of reverting to its historic relationship in the short-term. A shares represent 30 times the face value of B shares.  A relative arbitrage play of selling 1 A share short and 30 B shares long would return approximately $4500. Obviously, enough capital and margin is necessary to make the initial trade.

I am currently short on the A shares and long on the B shares.

Pimco High Income Fund (PHK): Short at 68% Premium to NAV

Author: JEllis

The Pimco High Income fund is at a 68% premium to NAV.  PHK got to such a crazy premium because Bill Gross talked it up in the Barron’s roundtable (helped by the high dividend).   Per Gross’s rountable comments the fund made major changes at the end of the year and is now 60% IG.  Gross’s comments might be the best indication of what is in the fund as the most recent filings are 6/30/08.  My interpretation of his comments  is that there are a lot of financial hybrids in this fund, which may explain why the NAV has done nothing recently even with a nice rally in IG credit . This fund is very levered (assets 2x equity at 6/30).

I took a small short in this a couple weeks ago and see it as a partial offset of my long credit and equity exposure.  Share availability might be an issue now, as I tried to add to the short and could not.  Gross is smart and generally wouldn’t want to bet against him, but a 68% premium is ridiculous.

http://www.etfconnect.com/select/fundpages/gen.asp?MFID=108698