Sponsored By:

The Urge To Merge

May 30, 2007

Dear Fellow Options Trader,

We just closed out the second-biggest week (in terms of dollar value) of public stocks being acquired by private firms this year, and from where I sit, the trend ain't close to being over!

In four months, we've already seen more than a trillion dollars of mergers and acquisitions (M&A). Given all of the cash that's sloshing around in coffers of publicly traded companies, private equity firms and global demand for higher yields, I think we could see the M&A numbers double and perhaps even triple beyond the already-impressive figures.

Without trying to sound like too much of a cheerleader for the U.S. stock market, I'll ask you to indulge me as I detail some of the catalysts.

1. Stock Buybacks -- Publicly traded companies have record amounts of cash to spend, and activist shareholders, such as Carl Icahn and Nelson Peltz, are not going without a fight.

A company's management team is under the gun to put that cash to work, pay it out in the form of dividends and/or use it to repurchase shares of the underlying stock. Just last week, home-repair retailer Lowe's (LOW) boosted its share-repurchase program to $3.8 billion. Since 2004, the company has repurchased some $4.2 billion worth of shares.

All told, CNBC estimated the weekly buyback activity in the U.S. markets now exceeds $12.5 billion!

2. Private Equity Competition -- There was a time when companies such as Cisco (CSCO) and Intel (INTC) would look at hundreds of smaller firms and competitors, spending months -- if not years -- analyzing whether a purchase would be accretive to earnings. But in today's marketplace, companies are displaying Type-A behavioral patterns as private equity firms, such as Blackstone and the Carlyle Group, are also doing their due diligence. And as we've observed in 2007, they're doing it much faster than their publicly traded counterparts.

3. Foreign Investment -- Foreign investment has always been around, but recent events have changed the landscape. For instance, when China National Offshore Oil Corp. (CNOOC) was effectively barred from buying Union Oil of California, the Chinese were understandably upset. The same was true for the United Arab Emirates and its broken deal to acquire U.S. ports in March 2006 (Dubai Ports World). So when you hear that there are trillions of dollars sloshing around in private equity, think for a moment and I believe you'll realize that the bulk of that cash might be coming from abroad.

The bottom line is that the markets may indeed take a break, do some retrenching or otherwise slow their ascent. But make no mistake: The more the bears press their case for why the markets can't continue rising, the more fuel there will be for the next leg up.

COMMERCE BANCORP (CBH) UPDATE

Yesterday, we recommended getting into the Commerce Bancorp (CBH) July 35 Calls (CBHGG) for $1.15. These calls started moving late in the trading day, no doubt as market makers tried to stealthily carry off trades when they thought no one was looking, so the time looked right to jump in and ride these to the upside.

What no one could predict, however, was how quickly these calls would move once they started their ascent. The July 35 Calls opened at 15 cents higher than our buy under price and skyrocketed from there.

This trade spiked faster than our usual recommendations aspire to move. We're typically looking for the opportunities that take anywhere from a couple of weeks to a couple of months to play out.

What made shares and, thus, the options take off today? It might be because an analyst with the brokerage firm Morgan Keegan said he believes Commerce Bancorp is likely to announce the resolution of an investigation associated with related-party transactions in the next couple of days. He anticipates that the news will be viewed positively, as it reduces headline risk, and that should result in a short-term relief rally. He also said M&A speculation could intensify for Commerce if the yield curve continues to pressure EPS growth.

If your buy order for the calls wasn't filled, then I don't recommend chasing these at this point, as they are trading at $2, and I believe this could very well be the profit opportunity we were waiting for but expected would come later rather than sooner. I am a firm believer in not overpaying for options, so at this point, even if there's additional upside to be realized, it's not enough to justify paying $2 and not making any significant gains from here.

We will continue watching this trade and let you know if it's still something to get into, but at this juncture, let's table this one and wait for the next opportunity to come along. Because as we all know, the smart money is always up to something, and we'll be hot on the trail as soon as the next set of tracks appears!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader