Georgia Gulf (GGC) reported net income of $230.2 million for the third quarter of 2009. However, like sausage or legislation, you have to be very careful about what is going into this net income number.

Specifically: In the third quarter of 2009, Georgia Gulf successfully exchanged $736 million of its outstanding notes for 1.3 million shares of its common stock and 30.2 million shares of its convertible preferred stock. The debt exchange resulted in a $400.8 million pre-tax gain.

I think I know why Georgia Gulf (GGC) has flatlined this week: the bond funds are asleep at the switch. Everyone with a clue sold out on Friday.

This happens all the time.

After the big selloff on Friday when the registration statement for 30 million new Georgia Gulf (GGC) shares was approved, trading has slowed down, and the stock is hovering around 15.

Author's Disclosure: I am short GGC and long GGC debt and long OLN.

There are a ton of new people coming here from the Google Finance pages about Georgia Gulf and Olin. If you want to catch up, here are all of the GGC posts and all of the OLN posts from Credit Bubble Stocks. You might also like the Regency Centers pair trade.

Georgia Gulf Corporation (GGC) will be releasing Q3 financial results on Wednesday, November 4, 2009 at 5:00 p.m. ET, with a conference call the next morning at 10:00 a.m. ET. Olin (OLN) announces earnings this Monday with a conference call on Tuesday.

Georgia Gulf (GGC) got creamed again Wednesday, down 5%. Olin (OLN) was down 2.4%. I have been selling GGC outright in addition to the pair position I have.

They amended their registration statement for the new shares (released a new S-1/A) again Wednesday.

Let's talk more about the bond funds that now own Georgia Gulf Corp (GGC).

FMR (Fidelity) is the largest holder and owns 8,986,271 shares which is 27.286%.
Capital World Investors owns 8,770,360 shares which is 26.6%
Pioneer High Yield Fund has 3,374,442 shares or 10.23%, with various other Pioneer funds owning more.

I have been looking at shorting the Mexican Peso. I would do it via FXM, the CurrencyShares Mexican Peso Trust. The expense ratio of 0.4% is a tailwind for the trade.

Shorting pesos does have a big carrying cost of almost 7%. That is a disincentive, since God knows how long it will take people to realize what a basket case Mexico is.

I like to send inflation bulls articles demonstrating that we are in a deflationary spiral. Case in point, WSJ article Wal-Mart Sharpens Its Pricing Pincers.

It says, "Wal-Mart (WMT) appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. [...] Wal-Mart Chief Executive Mike Duke told [the WSJ] he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves."

[Further update below]

I forgot to mention in the report - the new equity is owned almost entirely by bond funds that exchanged their notes for equity in the restructuring.

I have been meaning to post about this for months; here it is.

An extensive restructuring of Georgia Gulf Corporation (GGC $29) involving a distressed debt exchange, convertible preferred stock issuance, and a 25:1 reverse split has caused confusion and led to a huge mispricing of GGC equity. Enterprise value for GGC is 14x management’s estimated 2009 EBITDA versus about 5x for its closest competitor, Olin Corp (OLN $16.50).

This is the latest business inventories release from the Census Bureau.

From the horse's mouth: "The total business inventories/sales ratio based on seasonally adjusted data at the end of July was 1.36. The July 2008 ratio was 1.27."
[click to enlarge image]

Inventories are still much higher than pre-credit bubble. Why am I always hearing that inventory levels are low?

Great comment:

As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money.

This is really interesting - Zero Hedge has an annotated critique of an RBC research report on Regency Centers (REG), the shopping center REIT.

One funny comment in the report is that REG is "well positioned to recapture much of the lost NOI from the recession" once real estate "regains its footing" (p. 16). Their thesis is that leases expiring in 2010-2012 are going to roll over at higher rates. Uh... you can consider me in strong disagreement with that.

'The Market Here' is the zombie movie all star cast, roughly in order from most to least outrageous:

General Motors (MTLQQ.PK) - hovering at a half-billion dollar market cap, even though the stock is worthless.
Lehman Brothers (LEHMQ.PK)- up 200% on Friday, even though it faces $100 billion in claims.
AIG (AIG)- up over 5x since beginning of July, even though the CEO admits there is no equity in the company.
FNM (FNM) - up hugely. But the preferred stock still less than 10 cents.
FRE (FRE) - same as FNM,
Washington Mutual (WAMUQ.PK) - up 35% on Friday. Why not buy the holding company notes for 70 cents?

The ratio of oil to natural gas is at its highest level since at least 1990 at 26.35.

However, there is a glut of natural gas in storage, thanks to the recession and the immense amount of exploration during the energy bubble last year.

As part of a great conversation in the comments over at The Sovereign Speculator, I prepared a list of short-sale candidates meeting the following criteria:

Total assets > 50 * tangible book
EBITDA(ttm) / EV yield less than 5%
Debt > 3 * market cap
Interest coverage ratio MRQ < 1.5

Looks like the oil/natural gas ratio has begun correcting but is still at an extreme.

The products are not the best of substitutes, but their price movements should be correlated positively instead of negatively as has been the case recently, since they are both derivatives of economic activity.