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business newsLooking Through the Macro Landscape: Long Green Dot, Short Merck
By
Fil Zucchi
Jan 11, 2012 9:30 am
Green Dot go-go days may be over but the bulk of the punishment has been inflicted; Merck's fat yield may be hoarding too many longs.
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On our side of the pond, the behavior of our financial markets is truly remarkable, if also mysterious. The S&P 500 (SPX) is up 7.5% since December 20, 2011, companies issuing earnings warnings are trading mostly unscathed, and as the cherry on top of this story, since January 4 buyers have mopped up a staggering $44.7 billion in new corporate debt, including a fair amount of junk bonds. With this size issuance it would be normal to see bond spreads widen some, but instead the appetite for yield is so high that junk spreads have actually tightened more or less 125bps since Christmas (depending on which index you want to watch), and were tightening even during the frenzied issuance calendar of the last few days.
Now if there is something I have learned over the years (often the hard way) it's that it is highly unlikely to see a bear market in equities in the midst of an orgy in corporate bonds. The recent flow of less-bad-than-expected economic numbers, and a sense of acceptance that a slowdown and earnings growth is nothing to be concerned about, doesn’t change the fact that our economy is surviving on printed money – stimulus; monthly job creation is not enough to keep unemployment from rising; consumers are back to their halcyon days of borrowing and spending (with the commensurate fall in the savings rate down to a paltry 3 1/2%); and the ECRI weekly index of leading indicators, one of the best predictor of where the economy is heading, has now fallen for six weeks in a row. And therein lies the dilemma, as I refer you back to the first sentence in this paragraph: It is highly unlikely to see the start of a bear market in equities in the midst of an orgy in corporate bonds.
The sum total of all of this is that traders and investors are basically forced to close their eyes, forced to ignore the fundamental and structural problems of economies and markets, and forced to ride the liquidity wave brought to us by our government and, as a further conduit, the corporate bond market. Not a comfortable place to be in, but it is what it is. End of macro rant.
Here are this week’s long and short ideas.
On the long side is Green Dot Corp. (GDOT) an issuer of pre-paid debit cards. I am in no way a fan of its brutally competitive business, but neither can I ignore that it is also a rather profitable business. Over the last several quarters earnings estimates for fiscal year 2012 have been reduced from about $2.15 a share to $1.93 a share; these reductions have cost the stock almost $40, or 60% of its value since the $65 peak back in January of 2011. Current estimates are for EPS growth of about 25% for the next three years, and the trend of earnings estimates seems to have stabilized. Also worth noting is that the company has a clean balance sheet, and it generates cash flow of about 130% of EPS. On the technical front a number of indicators suggest that the stock may in fact be bottoming.
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On a daily basis Green Dot just registered a TDST Sequential Buy Setup above TDST support; this is the third perfected TDST Buy Setup since September and in both prior occasions the stock rallied about $8 immediately thereafter;
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On a weekly basis we do not have too long a history because the company only came public in July of 2010, but last week the stock did register a TD Sequential Countdown Buy;
- On both time frames, TD Alignment – an aggregate of various DeMark oscillators – indicates that the stock is deeply oversold.
With the Volatility Index (VIX) back down to 20, and the corporate bond market wide open, my main concern with shorting individual names is once again the risk of waking up to a high premium buyout or LBO. With that in mind I'm sticking with companies that, given their huge size, are unlikely to be targets. One such name is Merck (MRK). There's no sense going over the fundamentals of this company because there are as many ways to interpret them as there are stock watchers. But from a technical standpoint there are plenty of signs of upside exhaustion.
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On a daily basis the stock is on bar 6 of a TDST Sequential Sell Setup, and on bar 5 of a Sequential Countdown Sell; given the qualified upside break of the TDST resistance level, one should assume that the Sequential Countdown will reach its 13-bar conclusion; but a completed TD Wave 5 and Megaphone 7 pattern should keep the stock price below $40 as the top completes; TD Alignment is highly overbought;
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On a weekly basis there are similar indicators: a TDST Sequential Countdown Sell registered last week and a Megaphone 7 pattern looks to complete this week (remember however that a Megaphone pattern requires a “price flip” to become effective); TD Propulsion Exhaustion Up sits at $40.22, as a further layer of resistance, and TD Alignment is at max overbought;
- On a monthly basis the primary Demark indicators are unremarkable.
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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