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Corporate Bond Market, You Had Me at $29 Billion


My weekly astonishment at the goings-on in the corporate bond market, and a quick review of some old and new investing ideas.

Continuing to watch the corporate bond market, from where the juices of the equity bull flow, yesterday we saw the biggest issuance of the year, a mind-bending $29,000,000,000 split about 20-80 High Yield to Investment Grade. According to Dealogic that's just shy of the $33 billion record set in November 2002 (data goes back to 1995). And buyers aren't playing hard-to-get either, as the HY spread index I follow has widened an anorexic 8 bps over the past week. Should one wonder why strong corporate issuance matters to equities, consider this example: Berry Petroleum (BRY) issued $600 million of 10-year paper at around 6.25%. With the proceeds it will redeem $200 million of 8.25% debt, $150 million of 10.25% debt, and reduce its secured revolver by $250 million. Right there its debt service went down by $10 million/year, it extended the maturity, and freed up $250 million of liquidity. And this is for a junk-rated company.

But is this the peak of the frenzy? Probably... at least until tomorrow. Portugal's rates are again behaving badly, and Spanish and French spreads also have had a rough few days, but Credit Default Swaps on our financials have barely budged. I did see a tweet -- without attribution -- to the effect that "80% of recent HY issuance is trading below par." That's kind of vague and hard to reconcile with the terms on which new deals are getting done, but if true it is certainly something to keep an eye on.

As for the stock market, yesterday's drop was ugly only if 15% ramps 11 weeks constitutes the "new normal." Daily DeMark TDST support resides at S&P 500 (SPX) 1341, and today was touched on just bar 2 of a Sequential Buy Setup. But unless and until a break of TDST support is "Qualified" it's hard to get too worked up about it. Notable that TD Alignment (an aggregation of various TD oscillators) needed just three days of weakness to reach moderately oversold levels.

On a traditional chart, the yellow flag is the impending turndown of the 20-day moving average, which has consistently been followed by some more weakness; but beyond that it'd be hard to make a straight-face case for worrying at least until a break of SPX 1290.

Getting down to specific names and strategies, the refrain from telco-tech companies presenting at various conferences has been one of continued and disappointing frustration over the lack of carriers' spending. Hence the (past-due) beating inflicted on Acme Packet (APKT), Finisar (FNSR), Ciena (CIEN), etc. I'm choosing my names and my levels, and using ratio put spreads to try to get long at the desired prices (see Smart Money Will Sit Tight for Better Prices). For now I'm focusing on Acme Packet at $25.

F5 Networks (FFIV) has continued to behave like a stud following its earnings report; all things staying equal, and careful not to gorge on the name, I'm OK adding (or selling puts) under $120 on the continued thesis that F5's products are shifting from the "nice to have" to the "must have" column for any network worth its money. For full disclosure, a slug of long-held January 2013 100 puts serve as a nice hedge (financially and psychologically) against an unexpected wipeout, and they may well be coloring my view on this one. And in case you missed it, F5 has also jumped on the Deep Packet Inspection / Session Border Controller opportunity with its acquisition of Traffix. Count that as a very loud shot across Acme Packet's bow.

In the "what are you thinking category" this week I added some Human Genome Sciences (HGSI) stock. The rationale is that being tortured daily by Dendreon (DNDN) is not enough for the true masochist. Hence the chase after another company with a thought-to-be-blockbuster drug (Benlysta for lupus) that no one wants. "It may be right (Mr. Market), I may be crazy," but with Benlysta peak sales estimates of nearly $500 million by 2015 and an Enterprise Value of $1.5 billion, I'm thinking there's something there . . .there.

Human Genome Sciences was going to wrap up this week's piece, until Cypress Semi (CY) rudely decided to take down guidance after Tuesday's close. You can search the archives for my looong history with this company, almost always on the long side, so at the risk of sounding Polyannaish (yes that's a word folks), it was probably the least surprising surprise in recent memory. Management all but said that business would stink in Q1 and Q2, while the company ramps up a slew of next-gen products. After-hour traders seem to agree and the stock is down an insignificant $0.09 from the close. But -- and yes, there is one -- do make a mental note of this: Cypress and ON Semiconductor (ONNN) are two semi companies that sell primarily through distribution channels; both book sales out of the channel, as opposed to into the channel. This prevents channel-stuffing or other quarter-end games, and paints a much truer picture of underlying demand. If ON Semi were to warn also, and/or Cypress is misreading the reasons for weakness in final demand, then tech in general may have some serious issues which, in my view, are not baked in anywhere. I'm not saying that's the case but keep this tidbit on your radars.

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.
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