Thursday, July 1, 2010

7/1/10 Midafternoon Report: Market sucks again, swallows investor gains

It was another volatile day in the market as initial jobless claims came out and were much worse than expectations which is not surprising to anyone except for those who make those expectations.  Claims were up by 13k to 472k while analysts had guessed that they would drop to 452k which means on average they couldn't even get the 50-50 directional guess right.   And as usual, claims were part of the weekly we suck at math derby (also known as "Numbers Manipulation Thursday") as last week initial claims were 457k, so if they grew by 13k this week, that should have made claims 470k, but of course the (No) Labor Department wants to try to mitigate the fuckawfulness of the economy so they always release a slightly better number and then revise it worse when no one is paying attention.  So last week's claims were revised up to 459k and thus we get the true mathmatical equation 459k + 13k = Holy shit we're fucked (or 472k, potato, puh-tato).  The good news is that people claiming extended benefits dropped by 376k, the bad news is that number fell because the government voted to stop paying them, so um, welcome to the double dip (and not the kind where you only get bacteria), make sure you are properly supplied with canned foods, matches, and plenty of viewing material because this could get interesting.  And to reiterate, Republicans filibustered a bill to continue extended unemployment benefits which is the first time this has ever happened with an unmeployment rate above 7.5% during a recession and it immediately cuts off 1.5MM unemployed people from cash flow they may need.  If ever Money McBags wanted to lose an election, that is exactly what he would do, fuck the people who need help in the midst of the biggest recession in history.  What wasn't reported was that Republican Senators also filibustered dignity and common sense while proposing legislation to have unemployed people serve as speed bumps on Pennsylvania Avenue to keep drivers from going to fast.

In other US macro news, pending home sales also hit the shitter (and hit it with the force of a taco bell bean burrito slathered in extra hot sauce and Ecoli) which surprised analysts but shouldn't have surprised readers of WGP.  The pending home sales index fell to 77.6 from 110.9 because the first time home buyers tax went away which is only something that has been known for months.  The 30% drop in the index dwarfed the 12% drop analysts had guessed once again proving that past performance is no indication of future performance in regression models when we live in a fat tailed economy.  Finally the House passed a financial overhaul bill which will now go to the Senate for a vote on what should be sweeping changes but has been watered down more than Christina Hendricks in a wet t-shirt contest. 

In addtion to macro news that was so bad not even Chris Dodd could have done something to make it worse, Goldman was further questioned by the FCIC today on their derivatives trading as relates to AIG (and as usual Money McBags would love to have the FCIC's Heather Murren question him about the exposure of his long derivative).  CFO David Vinnar was nice enough to constantly conflict himself by telling the commission that Goldman doesn't have a "derivatives business," but when questioned on how Goldman can call themselves a "top five derivatives dealers in the world," he acknowledged that Goldman's derivatives business is "a very big part of what we do."   Money McBags guesses that kind of logical fallacy or semantics masturbation is bound to happen when one talks out of their ass.  Anyway, this whole thing is just theatre since if the government really wanted to shut themselves, I mean Goldman, down, it would take about 3 minutes of actual investigation.

Internationally, China is showing more signs of slowing down than Robert Byrd, as new data shows the second derivative of their manufacturing sector is likely abating.  Two indexes (indices?  indi? indiyouknowwhatthefuckimean) came in below analyst guesses, though still showed expansion (but that expansion is now more like from flaccid to quarter chub as opposed to full pitched tent).  Tao Wang (not to be confused with Tiger Wang, Dong Wang, Peter Wang, or Wang Chung)  an economist at UBS China said “economic growth is strong but momentum has peaked” and if that is true, the global recovery may need another shot of stimulus or else it could flatline worse than Gina Lee Nolin's acting career.  In other intentational news, Spain was able to sell 3.5B of 3 year Euro bonds after promising not to default on them and promising to have Rebecca Ronda personally deliver them to all buyers along with a refreshing spanish milkshake.   The fact that Spain was able to get their bonds out and not at a too exorbitant yield is a positive, though Moody's  has now placed Spain’s credit ranking on review for a possible downgrade, citing “deteriorating” growth prospects, challenges in meeting deficit targets, and the fact that no one in the country works.  That said, Money McBags cares what Moody's has to say about as much as he cares about Donald Rumsfield's thoughts war strategy, Chuck Klosterman's opinion on pop culture, or Aristotle's view on the heliocentric universe.

In stock news it's uglier out there today than it was in Barbara Streisand's bridal suite when James Brolin went out for a smoke.  One stock moving nicely up though is Ford as they announced a 13% rise in sales for the month of June led by the Ford Focus, their Super Duty F1 series, and pure luck.  That said, the company announced a $4B buyback yesterday so has had good news two days in a row which currently qualifies it for the award as greatest stock ever.  In other news, financials continue to sputter because there is currently less faith in the financial system than there is in Norse mythology.  The Treasury department has been reducing their holdings of C which is good because the government shouldn't own public companies, especially ones going $0.

In small cap news, ZAGG is unsurprisingly selling off after it hit $3 for no reason the other day and Money McBags broke down why the stock was at least $1 too expensive.  One sector that Money McBags has liked but is getting destroyed today like a college senior's hopes and dreams is the home health care sector.  Small cap names AFAM and LHCG have been solid performers as they offer a service that is both cheaper than hospital stays and better for patients as home recovery rates are better than hospitalization recovery rates.  The problem is these companies rely heavily on medicare funding and their billing practices have always been questioned.

Well today, the SEC announced they are launching an investigation in to AFAM and AMED around the companies billing more home visits to medicare than they actually made.  That news is less good than waking up next to an unshaven Kathy Bates.  As a result the sector is down 10% today and rightfully so, in fact if Money McBags owned any of these companies he would be puking them out like a bulimic with a vomit fetish.  That said, LHCG does not seem to be part of the investigation so it could be a good time to try to pick this up on the cheap once things settle.  Money McBags has always preferred LHCG in this group because they are a bit more rural than the others and therefore face less competition.  That said, the market is enticing as it is growing 10%-15% a year as the population ages and home health care becomes a more ready solution.  It costs medicare $132 per home health care visit vs. $6k for a hospital stay and as mentioned before, recovery rates are better at home because patients aren't around so many fucking sick people all day.

LHCG earned $.64 a share in Q1 and gave guidance for $615MM to $625MM in full year revenues and $2.75 to $2.85 eps.   With the sell off today the stock is trading at only 9x this year's eps guidance and yet the market is growing by double digits.  Revenue was up 17% last Q and guidance does not take in to account any de novo branches which only take a year to reach full margins.  The company has ~$13MM net cash to still make acquisitions and the market is ripe for continued rolling up as the top 4 players are only ~10%-12% of the market.  The problems are the reliance on medicare funding and the government's ability to slash that at any time, the need for continued acquisitions, the uncertainty of any future medical liability issues (as with all health care providers), and the current SEC investigation on competitors.  Still, this is a growing market and is a cheaper alternative for medicare and insurance companies that ultimately provides better service and better results so why not buy this for 9x earnings when you can?  As he said, Money McBags would let this settle because the last time fudged billing fears struck the industry, these stocks got pulverized even though none of the public companies were found to be complicit.  So bide your time but put this on your buy list.  And to reitirate for those of you new to WGP (and if you're new, don't forget to join WGP on Facebook), Money McBags' buy/interesting list consists of KIRK, KITD, TMRK, CTGX, CRUS, QCOR, NTRI, EPAX and now LHCG among others.  Many of those are getting to be pretty washed out (KIRK, KITD, CTGX) and yet have nice earnings streams and solid longterm businesses so once the market is done dying, those are companies that should see positive momentum.  And while the market drops, there is always WGO and ZAGG to short, or just buy TWM and watch Wall Street burn.

1 comment:

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