Tuesday, June 1, 2010

6/1/10 Midafternoon Report: Market adopts new tagline "Sell the rumor, sell the news"

Stocks bounced around today like BP's excuses for the Gulf oil spill or like Kelly Brook's "oil domes" while she jumps on a trampoline.  Solid US economic data pushed the market in to positive territory in the morning, giving investors a slight glimmer of hope before that hope was flushed away like a 3 story building in a Guatelamian sink hole or the Sears Tower in Paris Hilton's pants.  Leading off the slew of economic reports was that manufacturing in the US grew at a faster pace than analysts guessed with the ISM index coming in at 59.7, a whopping .7 above expectations.  The rounding error was driven by increased demand for exports which will clearly be short lived as the dollar strengthens against the Euro.  That said, the ISM's employment gauge climbed to its highest level since May 2004 when the subprime boom was still just a twinkle in Alan Greenspan's eye.  Factories did add 101k workers through the first four months of the year which is likely a huge relief for the 20MM americans still unemployed, and yes, that was sarcasm.  Construction spend in the US also rose by 2.7% which was the most since April of 2000 but it was likely spurred by the ending of the first time home buyers tax credit so it is more likely an outlier (like the straight Wiggle) than a sign of real recovery.

While US economic reports were as positive as a Pam Anderson hepatitis test, international macro data was as negative as an antithalian at a county fair.  Leading the way was data on unemployment in Europe where the 16 countries who use the Euro saw unemployment rise from 10% to 10.1% with Spain coming in at a robust 19.7%.  Making matter worse was that the Euro fell to a four year low against the dollar, though it claims it is just low because it is practicing its limbo technique for its 18th birthday bash also honoring the Treaty of Maastricht and Kaya Scodelario.  The Euro remains on shakier ground than Al Gore's marriage as it drops towards $1.20.  In other international developments, China's manufacturing grew at a slower pace than guessed as the government tries to curb its bubblicious growth.  China's Purchasing Manager's Index fell to 53.9 which was lower than the 54.5 estimates even though it included an ample dose of MSG.  The government is said to be introducing taxes on property holdings, cutting back loans provided by state owned banks, and only allowing one chopstick to be used at all meals.  China has simply grown too fast as the government unleashed huge spending programs last year so efforts to reign in the economy now are better than trying to do it later when it's too late, you hear that Bernanke?  Finally, the Bank of Canada raised the country's interest rate by 25 bps to 50bps causing the loonie to weaken a bit against the US dollar.  It was the first rate hike by Canada in three years and Canada now becomes the first G7 country to raise rates as inflation begins to rear its ugly head.

In stock news, HP is set to cut 9k jobs due to automation and CEO Mark Hurd's cold heart while AAPL is rising on reports that it has sold 2MM iPads and those are just the ones purchased by Steve Jobs' ego.  GOOG is also up today and they announced that they will only allow employees to use Linux operating systems blaming the overall crappiness of MSFT Windows for their Chinese operations being hacked.  The dumping of MSFT has made Bill Gates feel like he was back in high school.  Finally, BP is getting shit canned again, as they should be, with their "top kill" attempt to stop the oil leak failing worse than Gary Coleman's liver (what, still too soon?).  Money McBags has avoided writing about this catastrophe because thinking about it makes him wonder if he has been incorrectly using the word "clusterfuck" for all of his years.

In small cap news, QCOR continues to rally with investors awaiting FDA approval for QCOR to be able to market their Acthar drug to the infantile spasm market.  You know, the market in which they already have the leading fucking market share.  Money McBags has broken down this stock many times (just put QCOR into the fancy search box up top) and is excited for their nascent NS market but he is still confused as to why their Net Sales were such a high % of their Gross Sales last Q.  Also, a small crappy company Money McBags follows yet has been embarrassed to bring up before, NTZ, put up a decent quarter on Friday but is now continuing its slide to $0.  NTZ produces high end upholstered furniture like sofas, love seats, and bondage benches (ok, maybe not the last one but the definition of "love seat" can be so nebulous).  But here's the kicker, NTZ is an Italian company with ~50% of their sales coming from Europe.  So it sells a high end, highly discretionary consumer product targeted to european clients with Europe in the midst of bail outs, a crumbling Euro, and record unemployment.  Wow.  Investing in this company is like those old SNL Bad Idea Jeans commercials.  Honestly, buying shares of NTZ is dumber than jumping in to a Hot Tub Time Machine set for the 1980s and then going Lucky Pierre between Magic Johnson and Rock Hudson.  You might as well have bought shares of Amercian Home Mortgage right as the subprime mortgage market was melting down, invested in Daguerreotypes in the mid 19th century, or hired Bernie Madoff to manage your assets.  So why is Money McBags following/writing about this company seeing as how it is apparently more fucked than Taylor Rain in a Monsters of Cock video?  Simple, because it is cheaper than balls in the Castro.  The company just put up a quarter where they actually had revenue growth, but to be fair, revenue had fallen more than Eliot Spitzer's dignity after emptying his "mini-bar" at the Hotel Mayflower so the comps were easier than winning a spelling bee on a short bus.  Their net sales grew 14% to 126 Euro and their margin was up y/y from 25.5% to 38.5% which was inline with last Q.  This was enough to give them a .5MM euro operating income which is still piss awful (and not regular piss, but burning gonorrhea piss), but at least it is positive.  Of course, after taxes they lost 1.3 euro but tax rates in Italy are about as predictable as Lindsay Lohan's behavior after taking a powder break and as far as Money McBags can tell more spuriously correlated to profits than the market currently is to company fundamentals.  So lets throw out the taxes and look at EBITDA.  NTZ had ~8MM euro of EBITDA this Q and translating that to dollars is about $.99 or enough to buy a pack of M&Ms.  Actually, with the Euro now settling in around $1.20, that would be ~$9.6MM in EBITDA and the company has a $196MM market cap and $66MM of net cash (55MM euro) so ~$130MM enterprise value.  So if you annualize their EBITDA, it's trading at ~3.5 EV/EBITDA and less than .5 sales.  Sure they burned through a little cash this quarter, sure annualizing that EBITDA is giving them credit they may not deserve, sure they have one year of profitability in the last five, and sure they are selling one of the stupidest fucking items in one of the worst possible markets in the last 100 years, but how much worse can things get?  They cut selling expenses by ~15% for the year last year and are running at about that same rate so they have seen nice operating improvement and if sales can level off, there is no reason this company shouldn't trade at more than 3.5x EBITDA.  The point is, despite their CEO dropping another turd in the punchbowl by saying on the quarterly call that "the economic crisis and the worsening market conditions are not yet over and the Group order flows for the first months of 2010 with respect to the last months of 2009 confirm a slow down as compared to the previous positive trend," this company is trading as if its business is going to zero, which may well be the case, but they still have $66MM net cash and decent brand equity.  Even if Europe crumbles like Alan Greenspan's reputation, rich people are still going to spend on shit they don't need and as long as this company can stay afloat and keep their cash burn to a minimum, there should be long term upside.  Money McBags is not saying you should buy today, or even ever, but this is a stock that will shoot up faster than a heroin addict going through the DTs if and when the global economy stabilizes.  So put this on your watch list, be glad you haven't owned it, but be ready to pounce if shit starts gettting better.

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