Wednesday, January 20, 2010

1/20/10 Midday Report: China flexes pimp hand and vows to curb lending, businesses cower in the corner and promise to work harder for daddy

The big news bringing the market down today is that China is beginning to realize they may have a bit of a bubble on their hands as they opened up their fortune cookie last night and saw their fortune was written on the back of a yuan (as for the fortune, it said "man who puts balls in peanut butter is fucking nuts").  As a result, China will reel in their profligate lending.  The chairman of the China Banking Regulatory Commission said that he expects banks in China to decrease their loans by 22% in 2010.  So in the year of the golden tiger (and also the year of Tiger Wang), businesses may not receive the showers of money they saw in 2009 (now aptly renamed from the year of the Ox, to the year of the golden shower).  It is good that China is realizing that they need to reign in their stimulus sooner rather than later, but this news of course is putting fear in to investors who worry about the short term recovery from the global recession.

In US macro news, US wholesale prices showed virtually no inflation as energy price declines offset increases in food prices.  This is bad news for fat people but good news for the Tin Man.

In stock news, BAC and WFC reported earnings, well to be more precise, WFC reported earnings and BAC reported losses.  BAC underperformed analyst expectations by posting a loss of $.60 per share vs. estimates of a $.52 loss per share.  They blamed the $.08 miss on analysts being really bad at math.  Without the TARP repayment and dividends paid on preferred stock, the Q4 loss would have only been $194MM, and in related news, if I didn't have a dick, I'd be a chick, so unfortunately the details matter (and if I were a chick, I would be totally gay for Aubrey O'Day).  BAC also raised their provision for credit losses to $10.1B in Q4, from $8.5B a year earlier because of some little thing I believe they referred to as "people not wanting to fucking pay shit back."  They also had total write-downs for the year of $33.7B, more than double the $16.2B in 2008, so at least we finally know the price of dignity.

The point is, BAC benefited from the investment banking gains of Merrill Lynch while they still took it in the yingus from their consumer portfolio.  They suffered a loss of $4.9B on their consumer credit card business, compared with a $3.3 billion loss a year earlier.  So guess what market, things aren't getting much better.  People still love charging off like Martha Coakley loves being bad at politics (and I need to digress for a second here.  Money McBags does not get involved in politics.  He does not care one iota what the fuck happens in this world as long there is world peace, no capital gains tax, and free blumpkins for all.  And to be honest, he'd be happy with just one of those three, unless that one was world peace, and then he'd need at least one of the other two.  The point is, Money McBags is completely apolitical, for all he cares, a gay person could marry an abortion while smoking a joint through the barrel of a shotgun in the middle of the oval office while spraying chlorofluorocarbons all over a bald eagle, so the fact that he has an opinion on this senate race is unusual.  But this must be said.  For a democrat to lose Ted fucking Kennedy's senate seat in Massachusetts after having a 30 point lead in the polls and without having killed someone, been arrested for fraud, or openly rooted for the Yankees and claimed Bill Russell was a bitch, is perhaps the worst performance not just in the history of politics, but in the history of anything.  Think about it.  Ted Kennedy killed a lady and that couldn't stop him form winning election after election.  All this Coakley broad had to do was be alive, and yet somehow she fucked that up.  Sure the dude who beat her (and yes this is really him, and sorry to my straight male readers) had a secret weapon in his lovely daughter Ayla, for whom Money McBags would cure cancer (though not one of those hard cancers like nut cancer, something much easier, like cancer of the mouth, also known as Kathy Griffin), but Coakley's loss is so colossal it should be part of the lexicon.  So here we go, BAC did not lose $.60 per share this Q, they Coakleyed $.60 per share.  Diatribe over).

Most interesting was the verbiage from BAC's CEO who said "economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”    Which seemed at odds with WFC's CEO's statement that:  “While losses remained elevated during the quarter as expected, a more favorable economic outlook and improved credit statistics in several portfolios further increase our confidence that our credit cycle is turning, provided economic conditions do not deteriorate.”  Of course, WFC managed to turn an $.08 profit compared with a ginormous loss last year, so things are looking a bit rosier for them, except if you look at their charge-off numbers which were up sequentially $300MM to$5.4B driven by commercial and consumer real estate.

So are all banks created equal or will performance differences really start to show now that the economy has sort of recovered?  More importantly, has the economy actually recovered?  Here are four interesting stats from this NYTimes article (as always, buyer beware with facts and the NYTimes):

1. Bank of America said the percentage of credit card loans it thinks will never be paid hit 13.53 percent in December. JPMorgan Chase expects to charge off 10.5 percent of its credit card portfolios in the first half of 2010.

2.  Fourth quarter of 2009, the number of domestic credit card accounts has declined by 20 percent from its peak in the second quarter of 2008, to 341 million from 426 million

3.  the amount of available credit on cards has declined by 21 percent since its peak, from $3.51 trillion in the third quarter of 2008 to $2.77 trillion in the fourth quarter of 2009, the data shows

4.  Hayley Atwell is still really hot, and Money McBags will drive this bandwagon into the ground until playboy drops by the Atwell residence.

So available credit is shrinking for the US consumer.  What would be interesting to know is how utilization rates have changed and whether anything can be gleaned from this other than people got rid of their 3rd and 4th credit cards which they rarely used anyway and unemployment is still high (no word on how it can afford to keep getting high though).

In small cap news, KITD, a company Money McBags is following closely announced they will be issuing shares in both the US and Prague (where they will soon be listed).  They are seemingly raising capital for more acquisitions where they buy companies for their customers, fire all the employees, and enjoy the benefits of leverage.  KITD is basically a large database of videos for internet/IP delivery.  They get raw video from customers and then help clients manage, view, distribute, manipulate, and store that data.  They have a greater than 99% customer renewal rate because once a customer gives them their data, it is a huge pain in the ass for that customer to get all of the data back and have to reformat it, etc. (it is more of a pain in the ass than Valentine's day).  KITD's market is growing 100% a year as IP takes off, they have little competition, they also have a ton of NOLs, and 93% of their business is outside of the US.  IP video is cheaper and better than digital and it represents only 23% of the global video market so there is a lot of room to grow.  That said, the company is a bit odd as it has had headquarters in Dubai and now Prague and they are still unprofitable from an operating eps standpoint.  Also, the CEO loves himself almost as much as he loves money and looking silly at the movies and the company basically just relaunched less than a year ago when this new CEO came in and developed a new strategy.  Now the good news is that the CEO is the biggest owner and has a substantial portion of his net worth in the company, the bad news is that the CEO has led failed companies before.  But he has had success recently and at least we are betting with him.  Also, despite little US exposure, they did win the business of Verizon Fios which is the only IPTV telco user in the US.  The company has little sell side coverage but recently announced fiscal 2010 guidance for revenue to increase at least 60% to more than $75 million, with an annual operating EBITDA margin exceeding 17.5%.  Ok, so EBITDA will be somewhere around $13MM and their market cap $120MM is with $13MM of net cash as of their last 10Q, so they are trading at around 8x EV/EBITDA before their just announced capital raise and at around 1.5x revenues when companies like this who use the software as a service model tend to trade at between 2x and 6x revenues.  These are relatively cheap multiples for a growing company with a high recurring revenue base which contains many blue chip customers.  Money McBags does not yet own KITD because he is still trying to fully understand the company's competitive advantage, but he is thinking about buying a starter position and will throw down the gauntlet to his loyal readers to do some of their own research here and see if they come up with anything else important.

Oh yeah, a Money McBags longtime reader e-mailed him about a Korean-American bank HAFC which is apparently now trading at around .5x of TBV (even with today's big run-up) and promises to love you long time.  Money McBags knows nothing about HAFC and how real their TBV really is but if it is even 80% correct then there is room to grow here.  So you should all do some due diligence.


Anonymous said...

You asked about KITD's competitive advantage. My research indicates that it lies within their strong back end. Their content management solution within VX differentiates them. Brightcove, one of their competitors, tries to differentiate itself by providing one of the most customizable players. KITD's player within VX is good but their weapon is the back end.

Money McBags said...


Thank you for your thoughts and research. Honestly, you could not have written anything to have excited Money McBags more about this company since Money McBags loves strong back ends more than just about anything. Whether it is the lovely Carmen Kinsley or the beautiful Alexis Texas, back ends are Money McBags joie de vivre if you will.

Brightcove is KITD's biggest competitor and my understanding is that the valuation estimate for them is several times that of KITD, though Brightcove is private so it is really second hand speculation.

Again, I do appreciate your insight and more than anything I love me any company whose greatest weapon is their back end. Delicious.

Feel free to share any other competitive advantages or industry knowledge, though if you next say KITD also has a better gag reflex, I will know you are just screwing with me.

Happy Hunting,

Money McBags