Friday Roundup & Another Late Summer Rally?

Refreshed after a lovely birthday spent at the beach and retail window-shopping, I’m back for a quick check-in with the market and my positions.

MANDA Fund addition
Tumbleweed Communications (TMWD) announced today that its shareholders approved their merger with Axway, Inc., a subsidiary of Sopra Group S.A. The merger was announced June 5th with a cash offering of $2.70 per share of Tumbleweed. The deal is expected to close in the third quarter and is still subject to some regulatory approvals.

I picked up the stock today at $2.52/share. The expected yield on the transaction is 7% giving an annual return in the 40-50% range, assuming the deal closes near the end of September.

The FOMC interest rate decision straddle
Just before the Fed released its decision on interest rates this past Tuesday, I put on a hypothetical out-of-the-money (OTM) straddle on the SPY, buying the Aug132 Call for $0.27 and the Aug122 Put for $0.44. (I’ve done this before with at-the-money (ATM) straddles but wanted to see how it would play out with an OTM one.) I exited the call side at the close for a 13 cent gain. Yesterday, the market tanked and I was hoping to at least break even on the put side, but that was not to be. I would have closed it out at near the end of the trading session, but the market internals were indicating a continuation in downward momentum and so I held my position, hoping at least for a continued slide through today’s opening. Alas, that was not to be what with crude taking a $3 dip. Since the put has very little time premium left, I’ll hold it for another day or two. This may be a grave mistake since there’s been a late summer rally every year since 2002 and the way this market is looking, I would expect the same for 2008.

Why the late summer rally?
I think the reason for late summer rallies is the same underlying mechanism as for holidays–people are on vacation and in a good mood. August is traditionally the time of year that the Wall Street Masters of the Universe head for the Hampton’s leaving the less experienced smaller dogs in charge. If you look at the chart of the SPY you’ll see that trading volume dries up between the middle of August and the middle of September meaning that institutions aren’t contributing their fair share. This leaves the rest of the world–the Wall Street mutts and the retail investor (i.e. the average joe) in control. And with the price of oil falling hard and fast, it’s no wonder that the average joe is happy, and it’s my thesis that that exuberance is the main factor contributing to the buying pressure.

So, on the basis of history and the fact that oil is tanking, I do believe we’ll see another late summer rally heading into the middle of September. A good short-term play would be to buy long-term calls or call spreads on the index tracking stocks (SPY, DIA, QQQQ) or just the shares themselves for you more conservative folks. But watch out when the Masters of the Universe return, for the market just could make an abrupt about-face.

Enjoy your weekend!

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