Tuesday, June 8, 2010

6/8/10 Midevening Report: Bernanke speech fails to significantly rally the market, says he'll overpromise more next time

The market was relatively quiet today as there was a lack of macro news though Fed Chairman Ben Bernanke was out late Monday saying: "My best guess is that we’ll have a continued recovery, but it won’t feel terrific like a blumpkin from Sara Varone followed by a nice wipe with that oh so soft aloe infused Cottonelle.  Instead, it will feel more like having your nut hairs pulled out while listening to the smooth adult contemporary sounds of Sade".  Ok, Money McBags made part of that up but that's not the point, the point is, Bernanke is hedging on this recovery like he just bought FAZ in his IRA.   While he says the economy won't likely have a double dip recession, he did not say it wouldn't have a single dip recession followed by a falling off the cliff depression, so it's merely a matter of semantics.  Bernanke also dusted off his Phillips curve (though it wasn't as curvy as Kimberly Phillips) and added that the central bank would raise rates before the economy returns to full employment, which should be any century now.  That's great, but Money McBags would like to know what the full employment rate is?  Is it 4%, 6%, or whatever proof the whiskey was that Milton Friedman was drinking when he came up with NAIRU (seriously Milt, you couldn't have come up with a catchier name than the Non-Accelerating Inflation Rate of Unemployment?  Really?  That name could put Ritalin out of business because just reading it has to make even the most hyperactive person drowsy.)?  The point is, the full employment rate is a bogus hurdle as there is no set rate so saying rates will rise before we reach that level is as helpful as saying you'll stop running when you catch the horizon.   With the stimulus funds coming to an end over the next few quarters and the economy already starting to show signs of coming down from its stimulus induced bender where it got drunk off of bail outs and hand outs and now finds itself waking up in a pool of its own spending while dry humping Greece's Aegean coast to the sweet whisperings of Benjamin S. Bernanke and and his magical money making machine, the economy is in a precarious position (though not as precarious of a position as Kirstie Alley's girdle).    

Internationally, the new government in Hungary has announced a set of austerity measures aimed at solving their debt crisis.  The austerity measures include cutting public wages, overhauling the tax system, banning mortgage lending in foreign currencies, and stopping free cookie day at the National Assembly.  Also, the European Union's finance ministers met in Luxembourg with the most important outcomes being an agreement to allow tighter oversight on countries suspected of falsifying economic data and an agreement that Ginger Spice was the hottest of the Spice Girls.

In stock news, AAPL introduced a $199 iPhone which has a front facing camera that should now allow users to masturbate on chatroulette wherever they may be.  The new iPhone is slimmer than the previous version, has better picture quality, and doesn't insist on cuddling when you are done with it.  In other stock news, MCD had better than guessed at growth for the month of May of 4.8% worldwide thanks to the fact that they sell cheap shit and people can only afford to eat cheap shit.  The company announced the falling Euro would impact yearly earnings but announced that to make up for those lost earning they are forming a partnership with American Heart Association to get a portion of the profits from all angiograms caused by eating their food.  Finally, analysts were busy today with INTC downgraded by SIG to neutral because the analyst had to do something to try to drum up trading business for SIG and Dick Bove, who never saw a financial stock he didn't like and didn't understand, cut his price target at JP Morgan from jizztastic to just ballticklingly good.

In small cap stocks, Money McBags favorite KITD continues to get pounded like Alexis Texas on payday.  With ~70% of their revenues coming from Europe, topline should be impacted by the 15%-20% drop in the Euro with investors seemingly betting on worse.  Given that, it is difficult to come up with a short term valuation for KITD as the Euro appears to be falling off worse than proper grammar or Britney Spears' top.  Last Q, the $/Euro exchange rate was somewhere around $1.38 and this Q, it's likely going to be around $1.25, and after that, who knows?  So lets take a worse case scenario where we assume the exchange goes to parity.  So that would be a 28% drop in the exchange rate from last Q.  Money McBags thinks at the high end KITD can do $150MM of revenue next year, but let's call it $130MM because of the global uncertainty.  The thing is, that number was derived off of the old $/EU exchange so if we knock 70% of their revenue (their EU exposed revenue) by 28%, revenue decreases by ~$25MM.  So insted of $130MM, a worst case scenario yields revenue of $105MM and at 20% EBITDA margins, that is ~$21MM EBITDA.  The company currently has a market cap of $210MM but they have somewhere around $30MM in cash after their last deal so they have an enterprise value of roughly $180MM and thus are currently at a worst case scenario of ~9x EV/EBITDA and topline growth in that scenario would still be ~20% (and dollar euro parity is almost as bad a scenario for the financial markets as having your daughter bring home Jordan Van Der Sloot for Thanksgiving Break).  Of course all of this assumes that their costs and revenue are tied together so if the euro drops by 28% the associated costs with that will drop by 28% and thus margins will remain intact.  The point is, Money McBags still likes this company longterm as they are in a rapidly growing space that is going to continue to grow for several years, but there are certainly short term currency issues.  However, they are diversifying their revenues in to the US and Asia so as to become less dependent on Europe so while things look bad now, in the long run this company should be fine.  With uncertainty comes opportunity and it is getting to the point where this company is just getting stupid cheap.


Anonymous said...

When I first started seeing you post on the KITD Yahoo board I thought you were just another Yahoo (no pun intended) shamelessly promoting your blog. But I've come to really enjoy your financial commentary. Keep up the good work!

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