I have previously highlighted my interest in corporate debt in my premium posts – there were incredible offers in the secondary markets in the latter part of 2008. This year, unless the world economy completely collapses, corporate debt continues to offer some very attractive opportunities. The debt issues that interest me fall into four broad categories: solid companies whose debt is selling cheaply because of the overall level of concern in the credit markets; financials in which the government now has equity; speculative plays on companies which should eventually recover with the broader market; and bets that the government will not let US automakers fail.

First, there are quite a few solid companies whose debt is selling at attractive prices. US Steel (X), with solid cash flow and a debt-equity ratio of 55%, has 7% bonds maturing in 2018 (rated BB+ by S&P and Baa3 by Moody’s) which yield 11.3% (CUSIP 912656AG0). Similarly, Freeport-McMoRan (FCX) 8.375% senior notes, rated BBB- and Ba2, have a yield to maturity (2017) of 10.7% (CUSIP 35671DAS4). Both companies should survive the downturn; purchasing their debt now allows you to lock in better than 10% returns for years with relatively little risk. There are better returns out there, but these offer a nice, relatively safe foundation which clearly beats the return on Treasuries.

Crude oil's price has fallen from over $145 in July to under $115 in August and there is every indication it will fall further, at least in the short-term, as expectations of global economic growth and the associated thirst for energy are both trimmed. As irrational as was the rapid surge to nearly $150 oil, current sentiment could easily take oil to $100 or lower, despite the predicted continued growth in long-term demand. Mr. Market, as is often the case, is hardly rational or efficient in the short-term -- his wild exuberance in driving the price of black gold sky-high has now been replaced with depression, which even potential threats to supply cannot turn bullish.

This sudden fire sale of all things related to oil has created some opportunities, as various energy stocks have been brought to below fair value. Though this applies to quite a few companies, one that I like and will use as an example is Transocean (RIG). Based in Houston, Texas, Transocean is the world's largest offshore drilling contractor. As of earlier this month, it owns and operates 137 mobile offshore drilling units, to include 39 high specification floaters (which include ultra-deepwater, deepwater, and harsh-environment semisubmersibles and drillships); it also has 10 ultra-deepwater newbuilds with ex-shipyard deliveries beginning in 2009.

I have not been much of a fan of the prospects for refiners. Now, I believe we may be on the verge of some opportunities ...

A little over one month ago, Brad Zigler (from HardAssetsInvestor.com) put together a very good article on Tracking Crack Spreads, which I strongly recommend for a clear explanation of that topic. In his explanation, he used the fairly standard "3-2-1" crack spread -- three barrels of crude oil to make two barrels of gasoline and one of heating oil. He further recommended using the product futures prices a month out from crude delivery in order to better simulate real-world conditions; for example, the crack spread for September crude would use the futures prices for October gasoline and heating oil. Of course, since oil contracts are measured in barrels while product contracts are measured in gallons, one has to multiply the prices of the latter by 42 in order to compare equivalent amounts.

I have long been bearish on the financial and the consumer discretionary sectors, though I am no longer significantly short. (In retrospect, I probably should have waited longer before covering some of those positions!) As the financials continue to get abused, is now the time to buy? From my perspective, the answer remains no -- there remain too many unknowns, leaving significant downside risk. There may be a "pop," but betting on that is more of a gamble than an investment. Financials will no doubt continue to be volatile; there is certainly money to be made on a good "guess," but there is also much money to be lost on a bad one.

Of course, with this attitude, I will likely miss the first part of this sector's recovery; I am fine with that, as the current risk/reward ratio is just not attractive for most financial firms. However, I am interested in a few, primarily in niche markets that stand to profit from the current turbulence -- one of those is Assurant (AIZ), in which I recently established a long position (through options).

I always read the Barron's Roundtable discussions with interest; the midyear version, which came out last week, was no exception. Regardless of your opinion of Barron's, the Roundtable brings together a good cross-section of experienced and respected investors -- thus presenting ideas from multiple unique perspectives while also providing indicators of the general tone of "expert" opinion.

The opinions of these experts normally range across a fairly broad spectrum -- from the perennial perma-bull, Abby Joseph Cohen, to the "gloom and doom" Marc Faber. (Of those two, I must confess that my views tend toward the latter -- you have to like someone who features The Dance of Death on his investment advisory website!) I normally do not jump at their advice, but I do use it as a starting point for further investigation -- it represents informed and well-researched opinion and is certainly worthy of consideration.

Last week was not a great week for the stock market -- the Dow Jones Industrials dropped 507 points (3.9%) and the S&P fell 49 (3.5%). After a strong climb from the March lows, the market seems to have reversed. Was this simply a bull market correction, exacerbated by the release of the FOMC minutes and the surge in oil prices, or the end of a bear market rally and we will now resume a downward trend?

Not surprisingly, I do not know the answer. If I had to pick, I would lean towards this being a correction, but I am far from certain. I am fairly confident, however, in three points... First, there is more economic pain to come -- housing, credit, and energy prices, among other factors, will continue to weigh on the economy and impact consumer confidence. Second, equity prices, especially for the investment banks, have discounted much, though likely not all, of this bad news. Third, growth in emerging economies, especially in Asia, will remain a substantial driver of overall global growth and continue to fuel demand for energy, foodstuffs, and raw materials.

Meanwhile, the Chinese market has corrected sharply from the highs of last year and now looks more reasonably priced. After hitting lows in mid-March, Chinese equities have regained some upward momentum and have begun to recover, though they remain significantly lower than the levels achieved in mid-October. At these prices, there are more attractive opportunities in that market than was the case last fall.

WSP Holdings (WH), which is headquartered in Wuxi and went public in December 2007, offers an inexpensive play on both markets. As I have described in my earlier posts, WSP Holdings is a leading Chinese manufacturer of API (American Petroleum Institute) and non-API seamless casings, tubing, and drill pipes used for oil and natural gas exploration, drilling, and extraction, known as "Oil Country Tubular Goods" [OCTG]. It has a market cap of $787 million. At a price of $7.67 per share at last Friday's close, it has a trailing P/E of 8.43 (based on its last quarterly earnings report) and forward P/E ratios of 8.72 for 2008 and 6.79 for 2009.

At its earnings conference call on April 28th, Visa reported a 48% increase in net income for the first quarter of 2008. Quarterly earnings per share were $0.39, or $0.52 when adjusted to exclude litigation, restructuring, and purchase amortization. Payment volume grew to $681 billion, 19% over the prior year. For the six months ending March 31, 2008, earnings per share were $0.93, or $1.08 when similarly adjusted. Visa indicated that it expects annual revenues to grow 11-15% over the next three years, with operating margins running at around 40%. Earnings per share should grow at 20% or greater. Annual free cash flow should exceed $1 billion.

After some mixed trading following the earnings announcement, Visa shares resumed their upward trend; they have only recently pulled back a little.

The soaring prices of agricultural commodities have hit the covers of both The Economist and Barron's. According to contrarian wisdom, the story concerning "the silent tsunami" on the cover of the former should signal a peak in prices, while the negative cover story in the latter should be proof of just the opposite. Certainly, many are talking about the boom in agricultural commodities (with rice as the latest hot topic) and this could be taken as a bearish sign.

Grain prices did have a sharp drop in March (before the Barron's article), which appeared, for a time, to indicate a top in these markets. However, prices quickly recovered and, in the case of corn, surpassed previous highs.

As I wrote earlier in response to one subscriber's question, I closed my position in Lehman Brothers (LEH) because, despite the recent optimism in the markets, I remain bearish on the financials, especially on the investment banks. Market action in the few days since this trade seems to be trying to prove me wrong, as the stock went up almost $2 from my sales price, but I still think that it has more downside in store.

In retrospect, I should have gotten out of Lehman much earlier. (Of course, that assessment comes with the benefit of 20-20 hindsight!) I was tempted to do so on several occasions, but kept the stock in my portfolio, as I have generally held a higher opinion of Lehman Brothers and Goldman Sachs (GS) than of the rest of the investment banks and was encouraged by its relatively better performance during the early stages of the subprime crisis. In part, I also held on to the former as something of a "hedge" for my bearish positions on Merrill and Citigroup. I should have realized that none of the big banks would escape unscathed.

In the midst of this, the Fed charged into the breach again, taking drastic action to increase liquidity in the financial sector while also cutting interest rates by another 75 basis points (though this was less than many expected). In response, the bottom fell out of many commodity markets, including gold, grains, and coffee. Goldman Sachs and Lehman Brothers reported earnings which, though down, were above analysts' consensus estimates and led some to announce that the worst was over. Then, just this past Monday, J.P. Morgan agreed to raise its offer for Bear Stearns to $10 -- 5 times the original fire sale price. Over the past week and a half, the Dow Industrials have recovered from below 12,000 and now trade at just below 12,500.

Did we reach the bottom? Last week, I thought we were close -- we had an investment bank almost fail; the panic was there, followed by assurances from the Fed that it would be ready to step in, as often and as forcefully as necessary. Was the sale of Bear Stearns for $2 (regardless of the final settlement price) the cathartic event that signalled the end of this gloomy phase in the markets?

During 2006 and the first part of 2007, I had a significant amount invested in Chinese financial, industrial, and consumer discretionary shares. At that point, valuations became too rich for me and currently I only hold Guangshen Rail (GSH). Despite my pessimism, and that of many others, Chinese shares just kept going up for most of the rest of 2007! In recent months, however, the Chinese market has experienced a significant correction -- the iShares FTSE/Xinhua China 25 Index (FXI) is down about 34% from its October highs.

Despite that, the valuations on some Chinese stocks still appear to be unsustainably high. New Oriental Education and Technology (EDU) trades at a P/E of 53.06; with 5-year growth estimates at a generous 30%, this gives it a P/E to growth ratio (PEG) of 1.74. ReneSola (SOL), down from an IPO high of $82 to $10.63, is still rich at a P/E of 30.63. Ctrip.com (CTRP) commands a P/E is 88.63, also well above estimated growth. Home Inns & Hotels Management (HMIN) has a P/E of 105.16 -- even if the company achieves projections of 40% growth annually over the next 5 years, that pricing still produces a very rich PEG of 2.63!

The Federal Reserve rate cut on 22 January, in response to the global market stumble of the previous day, followed by another cut at its regular meeting, has certainly cheered the bulls and led many to mark that day as a market bottom. The Fed, certainly, has given indication that it is ready to intervene and provide liquidity to bolster the markets. At the same time, many seem convinced that the latest wave of write-downs has accounted for all the bad news associated with the subprime meltdown and the credit crunch. It may be a little too early for that, too.

What we are currently experiencing is another bear market rally; financials, consumer discretionaries, and other sectors will likely continue to suffer in the coming months. Due to travels in Asia during these past several weeks, I have not been active in the markets -- this has provided me with an interlude during which to step back from the daily torrent of market news and its associated wild gyrations. As I return, I see little that leads me to believe that we have turned a corner...

I purchased these Jan calls on Joy Global (JOYG) early last summer in order to take advantage of the benefits to coal mining firms of high oil prices and worldwide demand. Unfortunately, not long after I purchased these, Joy Global announced that its next two quarters (the remainder of 2007) would be adversely impacted by the weak domestic coal market and its shares took a hard hit. I have held these calls (having little to lose) for the possibility that fundamentals would cause this stock to recover -- it has, but not fast enough. I finally sold this week in order to recover some of the investment.

I bought these additional Merrill Lynch (MER) April 50 puts for the same reason as my earlier purchases -- it was clear that Merrill Lynch would have some very large write-offs associated with residential debt obligations and CDOs. As I discussed earlier, the impact on book value could be nothing other than substantial. Citigroup's (C) dismal results only confirmed the likelihood of this -- though Merrill's shares did not seem to react -- and it was time to purchase more puts. The reckoning came last Thursday...

Merrill Lynch announced Thursday $16.7 billion in write-offs, $11.5 billion of which are due to subprime mortgages and CDOs. The result was net loss from continuing operations for the fourth quarter of $10.3 billion, or $12.57 per diluted share. Its book value has fallen to $29.37; it had been $41.35 at the end of 2006.

One of the reasons cited in support of the argument that now is a good time to invest in financials, and especially the investment banks, is their very low ratio price to book value (P/B), especially when compared to historic norms. However, at least for some of these firms, it is not yet time to rush out and buy.

Anyone reading this site probably already knows the meaning of book value and the P/B ratio. However, how sure are we of the book value for a specific firm? For financials, the P/B ratio has generally been considered a good indicator of relative value; yet, in this environment, things have become a little more difficult -- basing one's investment decisions on this ratio may produce unfortunate results.

On Tuesday, amid reports of increasing delinquencies and foreclosures, compounded by rumors of bankruptcy, I decided to monetize much of my bearish position in Countrywide (CFC). I had purchased my Jan 27½ puts in August for $4.70 each, I was able to sell them at my target of $20.00; similarly, the Jan 17½ puts, which I purchased in September for $2.60, I sold at $10.00. As Countrywide's share price approached $7.00, the risk-return ratio for these positions became difficult to justify (though the stock still managed to fall below this level to a low of $4.43). Since the summer, this mortgage lender's price has been the story of the triumph of grim market realities over its management's cheerfully optimistic pronouncements.

What now? The volatility of the current situation was highlighted by Thursday's 51% jump in Countrywide's price on talk of a buyout by Bank of America (BAC). Though I am hardly bullish on the stock, at these depressed levels, too many variables could produce violent changes in price -- as was shown today. Though I hold some longer-term puts (which are still well ahead, even after today's action), adding to bearish positions almost becomes a bet that Countrywide will declare bankruptcy -- an event that does not look all that likely at the moment. At the same time, you will not see me buying any of the stock, either. There are better choices, regardless of whether you are a bull or a bear.

This year, Countrywide (CFC) has offered some outstanding opportunities for bearish investors. Despite the gathering storm of the subprime crisis (and even after that storm had hit!), Countrywide's management could be relied upon to provide cheerfully optimistic assessments and some investors were more than eager to either grasp at these straws or try their luck at bottom-fishing. Neither of those two approaches proved overly lucrative, as the stock has fallen steadily from a high of over $45 in January and currently trades at $9.80.

As the subprime fiasco deepened, management was reliably consistent in being too optimistic in its assessments. Earlier in the year, Mr. Mozilo downplayed the potential impact of the subprime crisis on the company. In August, the infusion of capital from Bank of America was supposed to solve Countrywide's problems. However, in late October, the extent of those problems became more apparent when Countrywide announced that it was forced to write down $1.2 billion in the third quarter. Nonetheless, it promised a quick return to profitability. To use a now hackneyed phrase, the market reacted with irrational exuberance and Countrywide stock jumped 32% on 26 October.

MBIA's (MBI) share price had a healthy 13% bounce after news that private equity firm Warburg Pincus will purchase up to a $1 billion stake, buying $500 million of common stock at $31 initially and receiving warrants to purchase up to $500 million more at $40 next quarter. This news cheered investors, indicating that MBIA may not suffer a downgrade in the next few weeks, which Moody's had earlier described as "somewhat likely."

The announcement overshadowed MBIA's statement that writedowns of the value of the debt it guarantees will exceed $342 million in the 3rd quarter and that it will have to set aside $500-$800 million in the fourth quarter to cover losses in its residential mortgage-backed securities portfolio.