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Bonds, Burritos, and Chips


Cash keeps parachuting in corporate coffers, Chipotle takes gas, and my two favorite chipmakers head in opposite directions.

MINYANVILLE ORIGINAL It's been a few days since I last wrote so here's a quick summary of where we stand in the corporate bond market and then a look at earnings from companies I'm involved in.

I am running out of adjectives for what is happening with corporate bonds, so I'll just stick to some numbers:
  • On Tuesday buyers took down just shy of $5 billion of new bonds, which is a good day anytime, let alone during the sleepy summer.
  • So how do you describe yesterday's $12.2 billion of new issuance? And what if a fair amount of that were in the junk category? You get the picture.
  • Despite a slight give-back in Morgan Stanley's (MS) CDS, Morgan Stanley did its part by selling $2 billion 30-year bonds at 387.50 bps over Treasuries. So much for Morgan Stanley going out of business any time soon.
  • Other financials' CDS and diversified CDS indices are also holding on to most of the tightening of the last couple of weeks.
  • Spain and Italy is a tale of two countries, with the former continuing to worsen on all levels and the latter "steady at ugly levels."
  • The 2-year swap spread has been below 25bps for three days now and US CDS have tightened for several days in a row.
  • Despite the avalanche of new corporate issuance, HY spreads have tightened almost 20 bps in the last four days.
In summary, the appetite for fixed income is insatiable. I hear what you are saying: "These are dumb loans and the buyers are going to get killed." Yes, and yes. But not for a while, and in the meantime the sellers have accumulated yet another $17+ billion in two days with which to do anything they want, including, for example, squeezing the life out of people shorting their equities.

On to some earnings-related items:
  • Cypress Semiconductor (CY): Business is not good, to say the least. But the company is as good as any at navigating rough patches, as shown by gross margins and the bottom line, which were surprisingly good despite the weak revenues. The stock action suggests that things need to get much worse if the stock is to see much more downside. Please read/listen to the conference call if you are involved in this one; it's almost an hour and a half long and is worth every minute. One interesting side bar: Short interest has come down almost one-third in the last couple of weeks. There are two lines of thinking on this: It's good because a chunk of those who correctly foresaw the downside now think it's time to leave the party; it's bad because it removes a source of buyers. I tend to lean toward the former (shocker).
  • Chipotle Mexican Grill (CMG): After the company got done telling investors about its sour cream made of 100% free-grazing cow milk, sellers whipped the stock into the blender. There was a litany of items on the call explaining why just about everything – from food inflation, to having already used the price-increase ammo, to same store sales, to overwhelmed/overworked store managers, to . . . you name it – is heading in the wrong direction; all inevitable consequences of the law of large numbers as it pertains to restaurants. Last night, at 36x 2013 estimates, this is a fundamentally broken story. And when the stock opens this morning the back of a two-year long chart uptrend will also be cracked. Is Chipotle going out of business? No. Is it worth more than 15x whatever estimates you want to use? That's generous. I'll take the chance of "stepping in it" and publicize that I've pressed my Lilliputian put position (see Dream the Unshortable (Stock) Dream) with some short stock at $357.50 and I'm offering more between $360 and $380.
  • SanDisk (SNDK): It was ripping 11% after-hours as folks are apparently stunned that its business is not continuing to head down the toilet, but is actually marginally improving. The mule-like part of my brain that has had me long this stock for more than two years won't stop telling me that it's all about the Solid State Drive (or SSD) market, which already makes up 10% of SanDisk revenues; that market is en fuego, and only getting hotter. The scolded-chimp part of me that's been burnt multiple times and requires the patience of a saint to stay long this name, reminds me to enjoy the moment and to accept that the meat of the SSD story will take years to come to fruition. Somewhere in between you can trade SanDisk every which side you want until your fingers hurt.
Have a great weekend.

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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Position in CMG, CY, and SNDK.
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