Friday, October 12, 2007

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Fil Zucchi

I will refrain from too many comments on the nasty reversal we saw yesterday, since there are far smarter technical eyes in this community than me. Rather, a few thoughts on specific names and areas:

  • Keep a close eye on the Baltic Dry Index (BDI) and its proxies, companies like Paragon Shipping (PRGN), Quintana Marine (QMAR), and Dryships (DRYS). In my view they reflect better than anything else the true state of the world tangible economy; and in hindsight I believe they will be seen as the telltale sign of coming runaway inflation. Since July the Index has gone parabolic, with dry bulk shipping rates going through the roof, and there’s anecdotal evidence that the flipping game that spread from stocks, to homes, to commercial real estate, has now infected the “vessels” asset class. Yesterday’s break in these stocks arrived after several days of vertical moves on massive volume. If the BDI follows the stocks breaks, you can kick one more leg from under the broader market.

  • Chatting with folks very close to distressed-debt vulture funds, the consensus is that the weaker of the major homebuilders, Tousa Inc. (TOA), Standard Pacific (SPF), Beazer Homes (BZH), and perhaps even Hovnanian (HOV), would be better off filing for bankruptcy sooner than later; the theory being that there is no way out for them anyway, and at least right now they have enough assets left to effectively reorganize, and the economy is not in recession (yet). If they wait until things really turn ugly fresh capital will be much more expensive.

  • With respect to the last point however, one daunting question is how many multiples of the bonds’ face values are the outstanding CDS against such debts? And where is that time bomb hidden?

  • Corporate bond watchers and equity players are having a heated debate as to whether the recovery in the debt markets of the last couple weeks will set off another wave of M&A, LBO’s, and buybacks. We are already seeing the buybacks, and strategic M&A. In my humble opinion, and based on anecdotal conversations with folks at major PE groups, LBO’s are done and they are not coming back (corporates traders disagree). Debt fueled buybacks have been as consistently successful as flipping a coin: just look at Intel (INTC), Dean Foods (DF), Amgen (AMGN), St. Jude Medical (STJ), not to mention a bunch of the homebuilders. That leaves strategic M&A, where premiums are not likely to be nearly as fat as they were in LBO’s.

  • The last time the Dollar Index (DXY) touched current levels it reversed and shot higher within two weeks. This is week two since the break of the 79 level and any semblance of a bounce is still AWOL. I may end up eating my words (wouldn’t be the first . . . or tenth time), but in my opinion the greenback has at most two more weeks to mount a rally or the next move down will start getting tagged as a “currency crisis”. Of course with M3 ramping at 14% in September and gold and oil going relentlessly higher one could argue that the currency crisis is already here.

  • On a slightly more cheery note, if one has to be long something, I continue to think that small regional banks with little mortgage exposure should benefit from the steepening yield-curve. The RKH Holder is a lazy way to play this. Also, not a day goes by that I don’t find an article concerning the lack of bandwidth in the metro networks and at the switching nodes. Away from the ne’er do wells – Alcatel-Lucent (ALU), Nortel (NT), Tellabs (TLAB) – I think there are tremendous opportunities, especially in software rich companies. Favorites include Ciena (CIEN), Infinera (INFN), F5 Networks (FFIV), Akamai (AKAM), and Limelight Networks (LLNW); once the cable guys finally decide how to avoid getting run over by the Bells FTTP deployments, and they start formulating their capital spending (which is inevitably coming), other viable names will be Ceragon Networks (CRNT), Arris (ARRS), Harmonic (HLIT) and BigBand Networks (BBND).

    And always know where the “emergency exit” is!!

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