Posts filed under 'The Market'

Yield Spreads on Non-Investment Grade Debt

Though I don’t like to comment on the market too often, I wanted to quickly write about non-investment grade spreads.  Yield spread on junk bonds has narrowed to 341 BP, while during 2001 recession, spread was 836 BP, thus showing bonds are priced for a soft landing say some analysts.  But this could simply reflect that corporate balance sheets are in their best shape in 20 years with corporate cash at the highest % of GDP since the 1950s.  This is currently a bond issuers market with many deals increased in issuance size.  So is this a case of the market thinking the economy is going to have a soft landing and therefore it is still safe to invest in high yield bonds, or is this a case of excess market liquidity looking for yield with the belief that strong corporate balance sheets will provide a downside hedge if the economy does have a tougher time?

Add comment October 4th, 2006

Dow at New High and Churning a Bit

The stock market continues its fourth day of churning around 11,700 for the Dow after what has been a profound run-up in the face of significant economic uncertainties.  I believe the market will have a 5-10% correction in the short-to-medium term though we may see more upside momentum.  Question is, what event(s) will precipitate that downtrend as so far decreasing consumer spending, higher than desired core inflation (which is probably underreported anyway), small rise in incomes, 17th straight month of negative savings, fall in housing market, high corporate profits growth unlikely to go higher, negative yield curve, and the slowing of the economy, to name a few, have seemingly not slowed this market? 
But the market, like human emotion, is if anything, over-reactive at times on both the upside and the downside, and as with human emotion, the market sometimes ignores key signs and focuses only on specific data points, such as falling energy prices and the pause in the Fed rates.  The main problem I think is that there is just too much damn liquidity out there.  The deflationary trend of the last 20 years and the concomitant effort by the world central banks to provide liquidity after 2000 has simply flooded the financial system, not to mention the monetary leverage provided by the awe inspiring growth in derivatives outstanding, with the credit derivative market growing 106% in 2005 to $17.1 TRILLION (read about the risk of credit derivatives).
Interestingly, volume on Nasdaq has not increased as much as that of DJIA, though the recent trend for the Nasdaq has been a lot more up days since August but on lower volume than the down days of spring and summer.  I think focus has been on more blue chip safety stocks and the hesitancy by bears to get in front of this ‘little engine that could’ market.  But otherwise, this will most likely be considered a sucker rally with the opportunity to take out the historical high too tempting a ‘siren song’ to consider all the evidence.  I think a precipitator event will be a break below a key support level where momentum investors have placed stop limits. 
The Dallas Morning News had a pretty good article on how to reposition your portfolio when facing a bear market.

Add comment October 2nd, 2006

Taking Stock of Dot Hill (HILL)

Who knows what the future holds for Dot Hill.  Certainly the CEO and CFO don’t as they somewhat unexpectedly departed a few months.  Other issues, such as the overdependence on their main customer Sun Microsystems (which to a certain extent dictates pricing and A/R days) and a delayed 10Q filing, have further added weight to the anvil weighing this stock down over the past two years.  Turn the page though and you see a company with extraordinary revenue and income growth guidance (albeit, provided by the now departed management), an R&D engine generating some impressive patent IP, and new OEM partnerships that will hopefully spread the revenue mana in the year to come. 

ROIC should pick up very nicely even if guidance isn’t fully met and the company doesn’t require much capex spend allowing for significant FCF leverage when a revenue breakout does finally occur.  An additional reason for taking a long position is the increase in big/smart money positions on decent volume.  The risks? Not meeting guidance and the likelihood the market will have a correction soon.

Add comment September 27th, 2006

Taking Stock of Nabors Industries (NBR)

I think we all know by now that the energy sector has lost its momentum investor excitement.  I have to even wonder if the growth investors are now leaving this sector as economic slowdown becomes more tangible and the high cost of energy continue to push alternative energies into the mainstream.  I do not believe energy prices will fall too much further as much of the recent price fall was driven by speculative investors fleeing the commodity play (and crushing the likes of Amaranth Advisors LLC), and prices around $55+ should reflect fairly stable oil demand.  I would definitely avoid slim margin companies like the refiners as well as E&P companies whose cost of extraction is $40+ a barrel.

As with most of the Street, I am trying to come to terms with the prospects for this company two years down the line, especially if energy prices continue their nosedive as they recently have.  This company is making money hands over fist as high rig day rates continue to stay high and new rig contracts are booked for years in advance.  The problem with this company though is the capex spend that basically neutralizes the free cash flow and makes the DCF results look a lot less attractive than income based valuation techniques such as P/E, P/B and EV/EBITDA would suggest.  ROIC is improving marginally, though probably not enough to compensate for potential earnings risk.  At $30 a share, I am neither a seller nor a buyer, but this is the time to write some covered call options.  The risk is that the CEO ‘hinted’ at taking the company private if the stock remains low.  But at what take-out price: $35?

Add comment September 27th, 2006

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