MorningWord 8/8/13: Ackman Trades Can End In Tears $TGT, $JCP

by Dan August 8, 2013 9:00 am • Commentary

MorningWord 8/8/13:   Yesterday I wrote a post on JCP (here), where I detailed a few of the issues troubling the beleaguered retailer on the fundamental front, but also that the stock’s 23% decline in the last week, the 300 bps rise in the company’s cds and the amazingly bearish and fairly large options activity all signal that the vultures are circling.  While I am not sure I could have been more objective as to the challenges for this company to stay afloat over the coming year as cash burn will very soon become a sizable issue for JCP, the situation may becoming so bad on such little confirmed news that the stock could be nearing a good set up for a contrarian trade into their Q2 earnings due Aug 20th before the bell (albeit with defined risk, I wouldn’t buy this stock with your money!).

One important fact that I failed to mention in yesterday’s post is that Bill Ackman’s Pershing Square (yes of HLF fame) is the single largest shareholder in JCP with nearly 18% of the shares outstanding and while he has been in it for the long haul, at some point in the near future the question has to be asked if and when risk management sensibilities kick in, and will he be forced to liquidate if in fact the stock falls further into a death spiral.  If Ackman started selling it would be lights out for this pig, and the high short interest (~26%) would likely be fairly patient to cover until the stock price resembled a small child’s hat size.  There are many market participants who would love to see this happen, not to see an iconic American brand go down the tubes, but to put Ackman on the ropes on another high profile concentrated bet.

This morning on Twitter @JeffMacke of Yahoo BreakOut reposted a story he wrote back in 2009 when Bill Ackman’s attempt to affect change and get substantial board representation at TGT was denied by TGT shareholders which led to a 93% decline in a fund solely designed to hold TGT shares and options.  93%!!  Wow, now I remember this very clearly as Ackman’s fund single handily caused a massive short squeeze in TGT implied volatility after he got long through multiple counter-party relationships.  The chart below shows very clearly that TGT was a sleepy Vol name stock up until early 2007, sort of like WMT, and then quickly became a sort of AMZN vol name.  So add the dozen or so Options market makers to the heap of investment professionals who have no love lost for Ackman.  Even though Ackman’s TGT trade ended in tears years later, it was no consolation to the gaping hole it left in many of his trading partners’ PnL’s in 2007 and 2008 as they scrambled to cover their short volatility positions.

TGTat the money implied volatility Jan 2007 to Sept 2008 from Boomberg
TGTat the money implied volatility Jan 2007 to Sept 2008 from Bloomberg

I guess the main point here, much like HLF, is that this one is a bit of an adult swim.  There are lots of people out there who would like to force Ackman’s hand, and this is not exactly the sort of situation that individual investors usually want to get in the middle of at this juncture.  The trade that I laid out in the post yesterday (Aug regular/weekly call calendar), while bullish by design, sports a very small delta (~15), but does define my risk and gives me a few ways to win taking a contrarian view, not trying to be a hero.  As I said yesterday, I know full well what I usually get when trying to pick a bottom…….stinky fingers.