The CFDealer: Finding opportunities among the toxic waste

It is unusual to get such a strong bounce in the market after it torpedoed through the FTSE 4,000 barrier. Normally one would expect a bit of a sustained bear attack, before covering and/or bargain hunting. However, without trying to state the obvious, it appears as if all eyes are across the pond and with the Fed Chairman Ben Bernanke insinuating that there will not be a full nationalisation of any of the major US banks combined with a ‘euphoric’ speech by President Obama, many bears are running for cover.

In fact, recent research from JP Morgan suggests the S&P 500 short-term target is 800 with a stop loss at 725. This would equate to the FTSE hitting circa 4,050 before we run out of steam if JP Morgan’s prediction comes true.

The moves in the second liners (the FTSE 250) have been extraordinary. It appears that anything the hedge funds, prop traders and brokers are short of, have been rallying on nothing but bear covering. Hopefully this will allow others the opportunity to short what I would classify as inferior stocks at a higher level. Trying to find a purchase, to balance the books though, is becoming increasingly difficult.

On the short side I think there are a number of positions worth looking at. Millennium & Copthorne (MLC), the hotel operator, recently came out with its results and it looked decidedly weak.

Trading in New York is down 41%, while in Asia it is down 20%. The full-year dividend was halved, making its dividend yield just 3.23% at 193.5p (close of business Thursday afternoon).

In my opinion the stock will be liable to earnings downgrades, especially as the fourth quarter trading was dire. The shares plummeted on the announcement of its results, down to a low of 167.5p before staging a strong recovery. No doubt some of this partial recovery is bears taking profits, but with the global economy still showing no signs of a revival, this is not a stock I would like to own and therefore I am advocating short positions at market with a stop loss at 221p and an initial target of 156p.

Another ‘toxic’ stock that has recently recouped some of its losses is paper and packaging company DS Smith (SMDS). The company issued a trading statement on 17 February which looked pretty poor to say the least. Its net debt increased as a result of the majority of its debt being held in Euros: with the strengthening Euro it acted against the company’s balance sheet.

Additionally it stated that there is greater uncertainty regarding the level of demand across its markets.

The other major problem is with a $87 million loan that its Ukrainian associate, Rubezhansk is having difficulty with. Since the time the loan was taken out, the local currency (the Ukrainian hryvnia) has devalued substantially against the dollar. The terms of the loan are being negotiated with Rubezhansk’s banks but if the deal is not carried out successfully then there could be a non-cash exceptional charge of up to £33 million.

The stock was trading at 92p on 13 February, prior to its warning, having bounced from a low of 48p back in early December. The shares now languish at 74.25p and barring an almighty bear-led rally, I expect the shares to retest last year’s lows. Short positions should be considered at market with a stop loss at 83p and a target of 48p.