Constellation Energy: Know When to Walk Away

Much like Amazon.com (AMZN), Constellation Energy (CEG) was a trade - however by being off by 24 hours we went from what could of been a sizeable gain to a small loss. However, those long term investors in this name really took the brunt of it as "when shorts attack" + S&P/Moody's downgrades required CEG to sell out at a prices not seen since 2002 to Mr. Buffet.

I was hoping for a counter offer but this piece of news dims that outlook...

• CEO Mayo A. Shattuck said the company is receiving $1 billion in cash on Monday as part of its upcoming sale to Berkshire Hathaway's MidAmerican Energy Holdings.
• In a conference call, Shattuck said the demise of Lehman Brothers led to speculation about his company's financial health, despite a filing from the firm last week that it had secured a $2 billion credit facility. Once its stock price fell, a ratings downgrade was imminent, and the company needed to raise cash or its operating business would have suffered, he said. (this is the vicious cycle of the "new and improved" credit agencies who take stock price into account of fundamental business strength - it truly makes such little sense but this is the new market)
• The transaction is expected to close within a year. MidAmerican CEO Gregory E. Abel said the overall business of Constellation remains sound.

So let's be clear - a company does not receive $1 billion in cash from an acquirer if there is any doubt about the transaction happening. The stock immediately spiked to around the takeover price (actually it went above briefly) so we took this opportunity to exit in $26.80s. This generated a $3K loss; considering the stock spiked to $36 and then fell to $20 within hours of our purchase, we'll consider this a "victory".

I read an interesting quote recently - a good trader knows how to book his gains; a great trader knows how to book his losses. Considering the losses we've been booking I'm going to call myself elite status ;) But in this specific situation the thesis is over, it was a trade - we took a bit of a loss and away we go. Back to cash.

It is what it is, I am flabbergasted the CEO sold out at such a price, but these are desperate times and with the downgrades by credit agencies literally pushing companies into bankruptcies one cannot take a chance. Risk is increasing as credit dries up - on a related note

Mirant (MIR) is halting a buyback due to worries.

• Mirant Corp (MIR) halted its share buyback program to ensure that it has sufficient funds to build new generating plants, the power producer said on Monday, sending its shares down 11 percent.
• "We want to ensure that we have funds for the required capital expenditures and for other requirements of the business, even if turmoil in the credit markets continues and commodity prices are depressed," said Chief Executive Edward Muller, adding that the company has no liquidity issues. (can't risk the rating agencies coming in to downgrade our debt, and hence drop 60% within a few hours)

Again this credit contraction has real and lasting effects on the general economy that this market is, in my opinion, ignoring in it's glee that it was able to offload its liabilities onto the back of American taxpayers.

Disclosure: Author has no position.