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Under-the-Radar Stocks to Watch as Debt Bubble Reflates

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While the insanity of credit extension continues at home and abroad, consider tracking these three names.

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A few days back I ranted over the latest act of lunacy, the loosening in the types of corporate bonds that can be pledged as collateral for "swap" type products. The latest salvo came courtesy of the CME, but we know that the Fed accepted all kinds of nonsense as collateral during the financial crisis, and currently the European Central Bank is extending credit to banks against anything that can be pushed in the door.

Michael Comeau wisely noted that while this kind of behavior by central banks and exchanges is a precursor to inevitable disasters, the unwind usually hits when most people have grown too exhausted, or have taken too many losses, to wait for it any longer. Long-time Minyanville readers know I experienced that firsthand during the housing bubble. I'm highlighting the danger of trying to front-run the next crisis because the classic signs of impending doom are nowhere to be found at this point.

To wit, I've recently posted on how the corporate bond market is running white-hot, and white-hotter. On Monday, for example, another eye-popping $5.8 billion of new issuance was slurped up, including $3.5 billion of "junk" paper, with some deals upped in size for good measure. As a whole spreads on recent high-yield deals continue trending tighter.

Since hitting a high of almost 60bps back in November, 2-year swap rates have collapsed. Credit Default Swaps of US financial institutions are shriveling...



...and in what is perhaps the most glaring sign that the financial world is nearing a newfound "permanent plateau of prosperity," the CDS curves of Bank of America (BAC) and Morgan Stanley (MS) (see charts below) have normalized after spending months in a worrisome inverted shape.






All this to say that the insanity of throwing the kitchen sink at re-leveraging the world economies will inescapably end in a Greek tragedy, but not before everyone has partaken in the bliss of the "free lunch" being dispensed by our government/central bankers' delusional policies.

If Minyanville readers can find novel actionable ideas within the above framework, please do share. For my part, I'll keep to some more mundane updates on stocks I've highlighted in the past.

Portfolio Recovery Associates (PRAA)
In its latest issue Barron's magazine highlighted a tax row between Portfolio Recovery Associates and the IRS. The dispute is very technical so laymen, and even sell-side analysts, are going to have a very difficult time divining how it will ultimately play out. Furthermore, the timing of any resolution is still quite a ways out. Generally I am fairly sanguine about pending litigation since most of it ends up being settled after the lawyers extract their pound of flesh. But I am a bit more concerned about this particular case, and it constitutes the primary issue that's holding me back from getting really aggressive on the long side. If Portfolio Recovery Associates loses the tax case, the potential liability is large enough that it may have to find financing to pay it off. Worse yet, an adverse ruling would really mess around with the company's income model. On its last conference call the company addressed this matter by saying that it is confident in its legal standing. When a company brings up pending litigation on an earnings call, "confidence" is not what I draw from it. It's a shame that Portfolio Recovery Associates' basic story has to be clouded by this tax fight, but ignoring it isn't the way to go, either. Read the company's rebuttal to the Barron's column, here.

DeeThree Exploration (DTX.TO)
When dealing with small-cap/low-priced stocks there is often the temptation to tell ourselves, "It's only at $x.xx, it can go much higher," overlooking that a $1 jump in a $3 stock constitutes a hefty 33% jump. On the flip side, sometimes great things do come in small packages and overthinking a move can leave us with a serious case of seller's envy. The latter may be the case for DeeThree, which after busting through some technical resistance has been relentlessly rising. Of late the company has issued a steady stream of positive development/production news, so I chatted briefly with my energy guru to get a sense of how far we may go on this one. His response was, "just getting going brother . . . Should have a couple of great wells on the back of the most recent." Current consensus price target is C$ 5.50. I'm going to be greedy, and all things being equal I will stick around with my entire position until at least the C$5.20, which represents TDST resistance on a weekly basis. For those itching to get in, on Tuesday the price registered Sequential and Countdown Sell completions, arguing for a few days of consolidation/pull-back.

Allot Communications (ALLT)
I'm heading back for a second round Allot. After peeling it off in the $18s, it reported a good set of quarterly numbers, with strong book-to-bill ratio, and more talk that 2H 2012 should see the beginning of bona-fide adoption of DPI technology by wireless carriers, the catalyst these companies have been waiting on for a long time. For whatever reason (profit taking?), the market has reacted in non-plussed fashion and the stock has been bleeding lower. With deference to the price action, I'm selling out-of-the-money puts for now, until daily DeMark indicators (which for now suggest more weakness) turn more supportive.

Happy trading!

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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Positions in ALLT, DTX.CN, PRAA
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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