Level 3 Redefines Short Covering

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Two press releases drove Tuesday's rally in Level 3 Communications (LVLT):

Level 3 Communications, Inc. announced today that it has terminated its stockholder rights plan, commonly referred to as a "poison pill."

Level 3 Communications, Inc. announced today that it has reached agreements to sell $880 million aggregate principal amount of 10% convertible senior notes due 2011.

Given the recent consolidation news in the telecom sector and the potential, albeit unconfirmed 'bidding war' for MCI Communications (MCIP) between Qwest (Q) and Verizon (VZ), I felt it appropriate to comment on Tuesday's announcements (see above) by wholesale network provider Level 3.

Quite simply, the termination of the poison pill simply takes away a takeover defense, and the move to increase its capital base did anything but. Level 3 is a candidate for bankruptcy in the years ahead, even though this offering has bought it some time. As its business merely 'stands still' or even deteriorates modestly, bankruptcy becomes an ever pressing issue.

However, Level 3's shares climbed more than 20% Tuesday given many believe it is prime takeover material because all the low-hanging fruit of U.S. network infrastructure has already been picked by acquirers. This takeover speculation is pure folly and I consider this rally to be nothing more than short covering of the highest degree. If I were long the stock I would use this rally to exit my shares. But more importantly, considering the challenging telecom environment for 2005 and beyond, I would consider selling the shares short in small amounts on rallies given they are prone to 'fail'.

My reasons are quite simple: Outside of takeover speculation, there is no bullish fundamental catalysts whatsoever for a rising share price. None. Zero. Zilch. But there are a collective host of negative catalysts that aren't going away and will in some cases accelerate.

To own this stock as an investment is pure insanity.