Monday, July 19, 2010

7/19/10 Midevening Report: Stocks higher as earnings more highly anticipated than the last thing that wound up disappointing everyone

The market sagged today like a droopy catenary with a very low value of "a" or Uma Thurman on vacation, before gaining some steam in the afternoon.  With earnings season started, macro data was lighter than Ben Stein's reputation as an economist or sales of Liberace's last book: "How not to get AIDS and die."  Homebuilder confidence dropped to it's lowest level in over a year as The National Association of Home Builder's index slipped to 14, with readings lower than 50 meaning more respondents said conditions were poor, and readings lower than 20 meaning we're completely fucked.  At blame for the drop was the governement tax credit running out, foreclosures continuing to increase, and pessimism proving to be higher than if Arthur Schopenhauer were trying to sell a mansion in Detroit at full price.

Alternatively, some made up organization called the National Association for Business Economics (and Money McBags would love to see the charts and graphs they pull out of their asses) said hiring picked up in the economy with 31% of businesses increasing payrolls while only 14% decreased payrolls.  What they negelcted to say is that of the 82 businesses which they survey, 31% are in the reposession business and 55% are fictitious.   

Internationally, Moody's cut their ratings on Ireland from a little drunk to fucking sloshed as a result of a weakening banking system, increasing deficits, and way to much puke still littering the streets from St. Patrick's day.  The downgrade was a full notch lower to Aa2 which as always means absolutely nothing to Money McBags since he knows Moody's is more fraudulent than a Lou Pearlmen business venture or Jamie Lee Curtis's vagina and he has no idea what the difference is between Aa2, Aa1, and Baa other than that two of them are ridiculous and one of them is the noise Roseanne Barr makes when taking it from behind.

Now look, Money McBags is no Donnie Deutsch (and not just because he has no idea who Donny Deutsch actually is, but also because he's not completely full of shit), but it doesn't take a marketing guru to understand that if you are selling something, those buying it should assume it works and also understand what the fuck it is they are buying.  Since Moody's obviously has failed step 1, they can at least have their ratings be understandable.  Thus if Money McBags were in charge of Moody's, the first thing he would do is fire everyone, the second thing he would do is hire Ines Sainz as his personal assistant (actually, he would do that first and fire everyone second, but whatever), and the third thing he would do is get rid of the stupid rating system and only have three categories companies could fall in to:  No Problems, Shit is getting a bit scary, and Stay the Fuck Away.

And it's not just Ireland in the international news today, but Hungary is starving for attention as the government refused further austerity measures which caused the IMF and the EU to get their panties all in a bunch (which wouldn't be a problem if the IMF were Sofia Vergara and the EU were Jessica Biel).  The government's stance has apparently called off offers of further aid for the country from the EU/IMF which has led to yields on Hungarian bonds to shoot up like Chris Farley after reading a review of Beverly Hills Ninja.

In stock news, after being swallowed by Nokia and spit out as a JV, Siemens* is sticking to a deal to purchase a Motorola unit that makes telecommunications equipment.  The company hopes that upgrading their equipment will help the company grow and thus lead to a stronger, and perhaps better aimed and placed, Siemens' strategy.  Also, Apple continues to fall despite saying they will give iPhone 4 users a free case to correct the call dropping problem that happens when holding the phone with a bare hand (also known as phonetile dysfunction).  In order to plug the gap in the antenna, the case comes with plenty of lube and a lifetime supply of viagra.

In small cap news, JOEZ sold off again today and remains either cheap or expensive depending on if you think management can go against previous performance and figure out how to turn growing revenue in to something called profits.  One company that Money McBags would like to highlight is IBKR which has earnings later this week.  Money McBags has talked about IBKR a few times on this blog (just throw it into the search function) and has consistently brought up the statement from their CEO, who owns 80% of the stock, that the company has $2 of annual earnings power, which it earned in 2008.

The problem is that this company has been more of a value trap than Alyssa Milano's crotch and it has done nothing but go down since it went public in 2007.  The company has two basic businesses, they are a market maker for listed options and they have an online brokerage.  In the market making business, they take no counter party risk and in times of volatility also take no profits as when volatility is low, the bid/ask spread gets compressed with competition increasing.  This kills margins in that business worse than cheating on your cancer stricken wife, having a baby with the person you are cheating with, and then claiming the baby is not yours, kills a political career.  Margins in the market making business dropped to 7% last Q thanks to actual volatility coming in lower than implied volatility which hurts them since they are long volatility like Lexington Steele is long dongability.  So net income in the segment dropped from $118MM to $5MM which is a bigger drop than Mel Gibson's popularity after a few late night booty calls to his wife.

IBKR's other business is an online brokerage unit for daytraders that has had strong growth.  The business continues to grow accounts by 25%+ and grew net income from $45MM to $65MM last Q.  That said, no one really gives a fuck about this business yet because it doesn't drive the business.

Anyway, the reason Money McBags thinks this is an interesting company right now is that volatilty in the last Q has been spiking like KaKa's popularity in Brazil, and last year when volatility was this high, the company earned $.30 per share.  Check out the chart of the VIX below which Money McBags is using as a volatility proxy:

So look, Money McBags has no idea how to forecast this Q for IBKR since their quarters are lumpier than Dolly Parton lying on her back but the business is set up to perform well in volatile times and their earnings in theory should smooth out over the long run (which as Money McBags said in an earlier post, may be eons).

That said, they have proved that they can earn $2 per share and if they can achieve that again, they are trading at 8.5x that which is hella fucking cheap for their growth.  Plus, since the economy is teetering on the brink of shitting its pants for the second time, volatility should only increase in the long run and thus IBKR should start to grow their earnings power.  Anyway, if ever IBKR were going to put up a good q again, this should be it, so buying a few short term call options may not be the worst idea here.  Though to be fair, Money McBags has yet to meet a value investor who has not angrily urinated on their tattered copy of Securities Analysis while cursing Benjamin Graham's margin of safety after investing in IBKR, so buyer beware.

 *Money McBags knows it was Siemens Networks and not Siemens, but sometimes we must sacrifice for the joke.

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