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Ebix split date plus BGC and wild macro thoughts ?3

07:39 21-Nov-18


Ebix has not issued a press release, but some of my brokerages have informed me that the 5 for 1 split will be effective November 28th.  An 8-K filing by the company confirms that the associated almost 40% increase in authorized shares was approved.  Note that this is non-dilutive and simply leaves headroom for future transactions.  That will take time, but I think the macro commentary below supports rapid growth.

Turning to another distribution, today is the last trading day to buy BGCP in order to receive NMRK shares, since markets are closed tomorrow.  I've been at options to judge the arbitraging around the transaction, and I note January open interest of almost 35K on the $12.50 calls, and nearly another 11K at the same strike for February.  For reference, the total December open interest for all calls is just above 1K, 80% of which was traded yesterday, and there is no significant open interest in NMRK.  The 4.6M contracted BGCP shares represent about 3 days worth of average trading volume.  From this I infer that BGCP & NMRK valuations may take months to normalize, and that the institutional entities who own more than 60% of BGCP shares are more interested in that side of the business, just as I am.  This makes sense given my expectation for a BGCP dividend increase with the full-year report in early February, or more likely, the first quarter report at the beginning of May.

What's seemingly being ignored, however, is the Uniform MBS initiative that I've mentioned in the past.  Rule making has come out of the comment period and it should surprise nobody that comments from the mortgage and finance industries are very different.  The mortgage industry worries about the cyclicality of the industry and its effect on the required capitalization of the GSEs.  That makes a lot of sense to me, but of course, the finance industry only cares about its own cents, not common sense.   It wants rules to be based more on anticipated returns as correlated to gross Weighted Average Coupon pricing, and for alignment to only be measured by prepayments in certain mortgage pools.  As ever, I suspect that the underlying motive is to be able to game the system more effectively.

If that seems convoluted to you, then avoid even glancing across the pond, where Theresa May has not faced a no-confidence vote... yet.  That's because both sides are waiting on a Brexit-deal vote by the E.U. on Sunday, followed by a Parliament vote early next month.  If a coup were attempted now and May were to survive it, she would be immune for another year.  So, it's really a matter of optimal timing.  If ousting May does succeed, look for increased no-deal Brexit worry.  However, I suspect that might trigger another referendum, but that possibility hinges on a European court of justice hearing scheduled for Tuesday.  Vodafone investors should be interested because of the effect on currency, which has already improved their dividend by a percentage point.  On the other hand, figure on the standoff with Italy getting worse before it gets better, after EU elections in May, unless the markets can force some change by dumping Italian bonds.

Then there's hydrocarbon markets and Sino-American tensions possibly escalating beyond trade... The former has already taken down one small hedge fund and is troubling Canada greatly.  The Brent/WTI spread is back down to $9 and natural gas is back up to $4.75.  We'll see if things steady after this holiday week, but the G20 summit and associated trade talks are not until the end of the month.  My guess is that we'll get a sound byte, but neither significant progress nor escalation beyond the rhetoric.  That strengthens the roles of middle-man countries like India and Australia, and their economies should gradually benefit so long as they can trade freely with both sides.

In the meantime, expect ongoing volatility to benefit BGCP, even if the stock doesn't show it in the short term.  Also, I think we're starting to see some method to the madness.  My thoughts on diversifying away from American-centric business are already gaining more media traction, which can be seen in VOD, whose ex-dividend trading for the rest of the month will be of interest to me.  That overall trend has a good chance of intensifying in December, which could benefit ABB shares more than it has so far.  The rotation towards dividend safety that I discussed in the history lesson is also being exemplified by AES and its over-bought status.  CVA has faired decently over the past month as well, but it is still undervalued.  CenturyLink is not yet recognized as either safe or a global business, but it should be.  CTL is one of the few under-performing the Nasdaq over the past month, primarily due to the earnings drop.  For those who don't already have enough, the stock goes ex-dividend on Friday.  There was also another executive departure, which I simply see as a sign of good management from Level 3, though Dish is another name I watch for eventual telecom consolidation.

In summary, we got a brief bounce in November.  Now, the indexes are right back where they started, and they may have trouble recovering, along with headline tickers.  I think select names stand to do better, though, and am prepared to enjoy both the holidays and the wild market ride.