When the Going Gets Tough, the Greeks Run on Their Banks

By Fil Zucchi  MAY 16, 2012 9:55 AM

Watching corporate bonds for signs of a disorderly euro unwind, and some "funny" trading in energy names.

 


MINYANVILLE ORIGINAL Good morning Minyanville readers.  Aside from the opportunity to once again bash Wall Street, the revived Greek drama and the JPMorgan (JPM) derivatives “issue” have moved the importance of the corporate bond market from the forefront to being pretty much the only thing that matters.  Equities can -- and likely will -- go down more, but the likelihood that they will stay down in the face of resilient corporates is not high.

It is no great shocker that all sorts of credit metrics, from sovereign derivatives and bonds, to corporate derivatives, are flashing red, and as I type on Tuesday night, the two-year swap is now at 39.25bps.  On Tuesday one of the steadiest and wisest heads on the Street, UBS’ Art Cashin, wrote the following in his morning piece:

Greece cannot exit the euro without collateral damage and significant damage at that.  A Greek exit move would likely cause an instant run on the banks in Spain, Portugal, and Italy. Some think the contagion could even spread to Ireland and parts of northern Europe.  A few think the recent strength in the dollar and US Treasuries is the first wave of capital flows. These folks think people in Greece, Spain, and Italy are withdrawing euros to shift to greenbacks and Treasuries rather than get stuck with drachmas, liras, and pesetas.

Right on cue, later in the afternoon, chatter started that close to €1 billion had been withdrawn from Greek banks.

Still, in what is becoming a "Groundhog Day"-type refrain, the corporate bond market yesterday could not have cared less.  A fresh $6.5 billion of issuance flew out the door, including $1.8 billion of junk debt.  Of the latter, the tranche taken down by one issuer was upped from $1 billion to $1.5 billion, and a company often mentioned in the same breath as "accounting questions" was handed $300 million at 8% for eight years.  It is this kind of schizophrenia that is driving bulls and bears equally crazy.  

Of course the credit markets could shut down on a moment's notice, which is why it is also important to monitor the price action of recent corporate issuances.  I keep about 20 tickers on my screen, all longer dated paper, and across the credit spectrum.  Among them are Amgen (AMGN), Devon Energy (DVN), Dish Network (DISH), Wellpoint Health (WLP), Bill Barrett Corp. (BBG), and a bunch of the usual "financials" suspects.  Should we start seeing these bonds break par decisively, it would be a truly ominous sign. 

Aside from how the credit "tail" is wagging the "equity" dog, a few words on the energy space. By now the travails of Chesapeake Energy (CHK) are mainstream media fodder. But over the last couple of days the mess this company has made of itself seems to be affecting many other names, and I don't mean just in the way of "sympathy" selling.  I have no hard data to back this up, but 15 years of watching tickers flicker for 6.5 hours a day have given me a decent sense of the difference between "selling" and "forced selling"; what's been happening in energy over the last 48 hours, at least in some stocks, smells like the latter.  In and of itself, Chesapeake is not an Enron, but an enterprise value of $32 billion, including $13 billion of debt, it's nothing to sneeze at.  We also know that some of its assets may have been leveraged a few times over, and we can't really tell how deep its derivatives tentacles reach in the natural gas market.  And if Chesapeake is forced into "yard sale" mode for its properties at least on a temporary basis, the NAV and leverage ratios of some of its neighbors might become issues. 

I am not running away from the group, in fact I have been adding to some of the names I have often mentioned -- SandRidge Energy (SD), Gulfport Energy (GPOR), Southwestern Energy (SWN) and Swift Energy (SFY) -- but I have stock-specific puts under virtually all of these longs, as well as a growing June put spread on the SPDR S&P Oil & Gas Exploration & Prod ETF (XOP). I will also be using any kind of bounce to shed the few energy services names I have left.

Before wrapping up, and perhaps inconsistent with the above scaremongering, I want to put on your radar a stock I have owned for a while and whose outlook just may be perking up: Atlas Air Worldwide (AAWW).  It’s had its ups and downs in the last year, but the last report suggests that a more lasting upturn may be ahead.  Air freight volumes are closely tied to economic activity of course, but Atlas has a few advantages.  First, much of its business depends on commerce between the Americas and Asia, regions that are still doing relatively well.  Second, a lot of what Atlas moves consists of high end electronics (Apple (AAPL) iPads, iPhones, etc.) and high-value auto parts.  We know gadgets run neck-and-neck with food and water as a priority in consumers’ budgets, while auto production is highly dependent on the availability of consumer credit, something that Ben Bernanke & Co. seem to have vested upon all breathing creatures as a human right.  And third, the company recently secured some nice additional business from the Department of Defense, ferrying our troops between various operational theaters.

Trading at a modest 9x ’12 estimates and 7.6x ’13 estimates, against forward growth rates of 26% and 20%, the stock may not be sexy but the valuation leaves plenty of EPS-related and multiple expansion upside, and enough of a cushion to stomach Atlas’ significant financing and fixed costs.

Good luck, and stay on your toes.
 
Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of “DeMark” indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.
Positions in SD, BBG, GPOR, SWN, SFY, XOP, AAWW

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