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  • kennethkohwk

Large traders are hedging agressively.

In a research note from

How do we see this?

Traders are paying an extra high premium to hold on to their short positions.

In a sense, they are paying a high price for fear, anticipating a deterioration of the real economy.

Two possibilities:

if we are heading into a soft landing, not quite a hard recession. Then the markets are "cheap" sentiment wise.

However, looking at 2009 as a guide. Even if the markets continue to fall, we are closer to the end of the bear market than from the beginning.

If we take out the recent lows in the S&P500 and starts a capitulation, I'd be vigilent for buying opportunities.

During that time, It is best to look for stocks that are at great valuations, produce cash flow, not overleveraged, and have optionality to grow and return value to shareholders directly through dividends or buybacks.

VST and ET are some ideas.

VST is a utility. Their earnings don't go up or down too much due to the cyclical economy because everyone needs energy.

ET is midstream oil. Although the stock is correlated to the overall crude oil sector, it is on the short term, and less on the long term. This is because midstream oil companies own pipelines that oil field operators use to transsport the oil from the point of production to points of sale or exports. They usually have "take or pay" and fixed-fees contracts that clients must pay a minimum about regardless of how much volume of oil is pumped through. As such, there is an element of defensiveness the stock, and ultimately, their cash flows are generated not by the price of oil, but by the volume of oil pumped. In order words, if oil gets cheaper, but people are using more oil because of it, they might benefit.

Both produce cash flow, and are still at cheap valuation, and have the optionality to grow as they are going to hit their debt targets soon.

CROX, FRG are worth taking a look.

Although some work is needed to determine how much the growth rate of their businesses will be, they are trading presently at cheap valuations and have great optionality soon as they pay back their loans to hit target debt levels.

I'd take a second look at such stocks if there is a significant pullback.



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