We have had no shortage of catalysts and reports to ponder over the last few days. Let’s take advantage of it with two new plays.

Action to take: Purchase E.W. Scripps April 7.50 calls and iShares China 25 ETF’s May 39 puts

We have come to the end of yet another “energetic” week on Wall Street. We have had no shortage of catalysts and reports to ponder over the last few days. From the situation in Greece to waning consumer sentiment and, of course, an overly political healthcare debate that won’t go away, we have lots to think about.

While so many investors have focused on the big headlines, it is important to take a wider view at the smaller newsmakers, specifically the slew of earnings reports we received recently. You sure wouldn’t know it by looking at the Dow, but 70% of the S&P 500 companies managed to beat their analyst expectations during the most-recent earnings period. That’s a statistic worth noting.

Overall, the quarterly results have been good, with some very optimistic outlooks. This morning’s revised Q4 GDP figures, up to 5.9% from the previously reported 5.7% figure, help illustrate the nation’s recent growth. But with word that weekly unemployment claims are threatening to break the 500,000 mark once again and that consumers are far less optimistic than they were a year ago, partly due to the slow recovery in the real estate market, many analysts and investors are wondering if the future will be as good as the past.

Even with the week’s less-than-stellar action, I remain increasingly bullish. In part, my optimism comes from the consumer sentiment figures. The market’s overreaction to this far-from-scientific reading has driven market valuations significantly too low. Throughout the market’s history, sudden pullbacks in consumer sentiment have often been signals of impending bull runs. Remember, many consumers tend to buy at the peak of bubbles and sell in the trough of lows. This will prove to be another one of those events.

Political misinformation

I want you to think about what has been on the minds of consumers lately. We have seen massive political maneuvering in Washington. The Republicans grabbed a critical seat in the Senate, sending a strong message that the mess in the nation’s capital needs fixed. In an effort to regain political power, lawmakers from both sides of the aisle have been taking the nation’s woes into hyperbolic territory in hopes of scaring up some votes this November.

The consumer sentiment figures show it is working.

But it’s not just the politicians stirring the economic pot. A trio of nasty winter storms has affected the East Coast like few other times in modern history. Thanks to a February that saw Washington closed for an entire week, there is no doubt the recent housing reports, unemployment claims and inflation figures are skewed.

When data is even remotely untrustworthy, I toss it aside. Inaccurate data is dangerous and is often extremely costly. That is why I am concentrating on the recent earnings figures. They show that despite an economic slowdown and a wary American consumer, businesses are able to adapt their products and processes and find growth opportunities.

One company that has proven successful at overcoming a difficult industry and sales environment is E.W. Scripps (NYSE:SSP). On Tuesday, the owner of several newspapers and televisions stations as well as other media assets announced it managed a fourth-quarter profit of $12 million. A year ago, it marked a similar-sized loss.

If you have been following my thoughts on the event-driven trading strategy, you know I am quickly becoming fond of what I’ve found. Efficient market interruptions like business and capital restructurings have the ability to greatly skew share price. Scripps is a great example of the theory.

Over the past year, the company has worked tirelessly to restructure and cut costs as the media industry evolves. The company managed to trim operating expenses by about 17%, greatly helping to absorb a Q4 revenue drop of 18%.

Here’s the key to those figures. The cost cuts will remain, but revenues will eventually climb. In fact, we are already seeing it as Scripps reports TV ad revenue has “bounced back nicely,” a trend I expect to see continuing as we enter a hot political campaign.

A wildcard in valuing this company is its United Media division, which owns licensing rights to valuable brands like Peanuts, Dilbert, and the extremely popular reality show Deadliest Catch. In the company’s latest earnings report, it discusses the up-in-the-air future of United Media, mentioning a potential spinoff or joint venture.

As an event-driven strategist, this is an exciting notion that adds confusion to the market value and creates a potential catalyst for strong pricing action in the near future. As I have said numerous times, 2010 is going to be a year of mergers and spinoffs for the media industry. Recent headlines from ABC, NBC and the New York Times prove it is already happening.

Digging in

From a fundamental prospective, Scripps is in better-than-expected territory, especially given all of the negative sentiment surrounding its industry over the past 24 months.

In this credit-sensitive environment, one of the first financial aspects I gauge is a firm’s current ratio – short-term assets in the numerator and short-term liabilities in the denominator. With a figure of 1.52, Scripps is in no immediate danger of the inability to pay its bills. That means investors can be reasonably assured the company won’t be hitting the open market with share offerings and the dangerous dilution associated with high-cost money grabs.

Looking at the charts, there has been some recent moving average convergence, illustrating a possible overbought situation, but this week’s earnings report should provide a buffer from a significant correction. Going forward, however, we can expect some volatility, especially if my bullish sentiment takes a few weeks to be realized.

Overall, E.W. Scripps is undervalued, thanks to strong economic uncertainties and the market’s inability to shed less-than-accurate data. To take advantage of the situation, purchase the company’s April 7.50 calls to enter a moderate- to high-risk play.

Uncovering success

Earlier in the week I promised another “beta” pick to help test drive my event-driven research. So far, we’ve done a thorough job of testing the market-shaking ability of restructuring events with solid results. This time I want to try out the affects of capital restructuring.

When a company takes on a massive balance sheet shuffling, there is no doubt the markets will reach a state of confusion. Our job is to take advantage of the situation.

Now, if you think the domestic economic situation is confusing, grab your passport and head to China. After massive stimulus efforts, the possibility of a currency revaluation and banks virtually forced to make low-quality loans, China is in flux.

The nation’s banks are preparing for massive capital infusions as the bill for all of the recent lending comes due. While the balance sheets appear healthy today, Beijing is getting ready to see some American-style defaults. That means banks had better have some capital reserves if they want to weather the storm.

It is starting

China Merchant Bank recently announced a $3.2 billion rights issue that offers 1.3 shares for every ten shares currently owned by investors. China’s fifth-largest lender, Bank of Communications just announced a $6.15 billion offering that will take its Tier 1 reserves from 8% to 10.4%, a move that surely shows the bank’s intent to get ahead of a massive surge in bad loans.

All across China, some $30 billion has been raised in recent months. The action is a red flag that screams at us to take advantage of the situation.

One of the best ways to play China’s financial sector is the iShares China 25 ETF (NYSE:FXI). The Bank of China, with a 5.7% share of the fund, is the ETF’s top holding. Overall, financials make up 47% of the funds mix.

If the country’s financial sector takes a dive, thanks to massive dilution and loan write-offs, the ETF will follow in kind. Over the next six months, I expect a strong selloff, meaning it is time we use an event-driven strategy to take advantage of the situation.

The event is strong capital infusions and the play is the iShares China 25 ETF’s May 39 puts. This is a moderate risk play that we will hold as long as it looks like China is preparing for a strong surge in defaults.

Again, purchase E.W. Scripps April 7.50 calls and the iShares China 25 ETF’s May 39 puts.

Have a great weekend,
Andrew Snyder