2/23/10 Midafternoon Report: Consumers are very confident in the economy getting shittier

The market has hit a speed bump today as consumer confidence fell to its lowest level in 10 months.  Consumers are now less confident than a slightly overweight 16 year old girl with bad acne and a spastic colon on her first day in a new school.  The confidence index dropped to 46, which is below the 56 economists were expecting, and Money McBags has no idea what 46 means but he is confident it is not good in the same way he is confident having one's ladyfriend say "we need to talk" is also not good.  While the consumer confidence index is a forward looking metric (and if you really want to look forward, just tape a picture of Kate Bosworth to your glasses), the measure of present conditions came in at its lowest level in 27 years.  Wow.  That is not an exaggeration.  People are not only finding jobs harder to get, but growth in the job market seems to be more stagnant than Bobby Jindal's political career (and as an aside, Money McBags doesn't give a fuck about politics because they are all the same person, just a different suit, but has any politician ever had a faster and bigger fall than this Bobby Jindal guy has had without mismanaging a war, getting caught in a crack house, or banging Peggy Eaton?  Jeesh, that guy has disappeared so fast he was on the back of my milk carton this morning).  Anyway, the point here is that investors are now worried that retail spending will be weaker than expectations with the drop in consumer confidence providing a swift kick to the nuts.  In slightly positive macro news, home prices declined but the annual pace of decline slowed from "holy shit" to "is it hot in here?"  The decline was .2% and was worse than the flat expectations, but only by a rounding error.  Interestingly, 15 of the 20 metro areas saw price declines and that sound you just heard was Money McBags throwing up in his mouth.  Ugh.  The market is now teetering after such a nice totter last week, but that is why this is called an inflection point.

In stock news, Home Depot followed competitor Lowe's strong quarter yesterday with solid results of their own including their first increase in same store sales since 2006.  Of course the comps for same store sales were much easier due to the fact that the only people buying anything at Home Depot in Q4 last year were repo men and the guys who strip empty houses of their copper wire, but still, a 1.4% increase is positive.  Home Depot also gave fairly rosy guidance and said they gained 100bps of market share which was likely a result of their November promotion "buy two shower heads, and we'll throw in a golden one for free."  In other stock news Barnes and Noble is down after posting an inline-ish quarter after they announced same store sales were down 5% and then blamed it on something called the fucking internet.  Sorry guys, but the classic brick and mortar book selling business is about to go the way of video rental stores, address books, and civility.  Sure Barnes and Noble had strong growth in their online business, but that is a fraction of their sales.

In small cap news, EBIX is getting a case of the dropsies again while ISLE crapped out on another quarter as people don't like gambling in run down casinos.  And yesterday, long time Money McBags reader and ninja assassin (and Money McBags loves any word with two "ass"es in it) Matty McSacks put up some solid thoughts on LOV in the comments section.  Matty treated the comments section like he was two girls and it was one cup with his mancrush on LOV.  Apparently he loves LOV so much that he is lobbying for them to start intrinsicvaluedate.com, where investors can go to WACC off while getting their shorts squeezed.  Anyway, Money McBags knew nothing of LOV until yesterday but he spent some time last night reading their 10Q, playing around on their site, and watching some Tori Black videos on Spankwire (and you may be asking what the Tori Black videos have to do with LOV, and the answer is absolutely nothing).  LOV apparently runs about 30 online dating sites with their crown jewel being JDate which accounts for 50% of the company's subscribers.  Now Money McBags lights the menorah but he never understood the appeal of JDate as he prefers his ladies to be over 5 foot 2 and without what I believe is referred to in medical circles as the "nag you to fucking death" gene.  Other sites LOV runs are Blackchristiansingles.com, Singleparentsmingle.com, and Canadwarfgetatabledance.com (ok, one of those is made up).  They also run a delicious dating site aimed at weight challenged people called Moretolove.com which Matty claims is their fastest growing site and Money McBags only hopes that the pun was completely intended.  And while Money McBags loves this concept, he would have named it either Cushionforthepushin.com or Dinnerfor3.com.  Anyway, Matty values this stock at at least $5 based on $8MM-$10MM free cash flow per year and some brand value for JDate.  Hmmmmm.  Let's see.  They earned $.05 per share last Q and while there may have been a sequential lift in subscribers (unclear if that was seasonality), JDate still had a 6% decline on a year over year basis in lonely Jews and those who are looking for some gifelte fish on the side.  But here's the weird part, revenue declined by 16% in that segment which is more than subscribers declined which means they are either discounting more or are losing their premium clients (and it's unclear what their premium clients get, perhaps a chance to date the one Jewish girl who swallows, and again, Money McBags is a yid, so he can make those jokes).  Not only is their revenue dropping faster than they are losing subs, but their marketing cost went up as a % of income by 300bps.  And here is another red flag, industry sources have the online dating industry growing 10% to 15% a year (though that industry source is Piper Jaffray, so buyer beware as one should never trust anything from a person who chooses to live in Minnesota).  But let's assume that the number is directionally correct.  So the market is a moderate double digit grower and yet this great affinity site JDate is losing subscribers.  Something doesn't smell kosher.  The company claims to have had $8MM of adjusted EBITDA in the first 9 months but there was also $1.7MM of income from a legal judgment which I believe they included in that number.  So really closer to $6MM of EBITDA or an $8MM annual run rate.  That puts the company with it's very marginal balance sheet at a run rate of around 7.5x EV/EBITDA to go along with their 15x run rate p/e.  So the multiples aren't too high, but the investment in this company really has to come down to whether or not you think it can actually grow, especially with increasing competition from Facebook, Twiter, and the completely NSFW Guesshermuff.  JDate has been around for several years already and given that it has grown through word of mouth and the Jewish population is closer knit than a purl stitched willy warmer, there probably isn't much more free growth left.  The point being, 99.95% of Jews already know about JDate and if they haven't yet signed up, they are not going to do so.  As for the Jews just reaching dating age, they are simply using twitter and the like and not dropping $40 a month or whatever in order to have a mitzvah.  So I am very skeptical that the drop in JDate subscribers is just the economy and also very skeptical that they will be able to keep their spanktastic margins in that business because marketing costs simply have to go up.  You can only rely on word of mouth for so long, unless that mouth belongs to Faye Reagan and the word is "enter."  Anyway, having the stock 45% owned by a PE shop certainly doesn't hurt because we know PE funds rarely make mistakes (just ask Warburg Pincus about their MBIA investment), but the fundamentals of the business still remain weak.  Matty did a nice job on NLS last time so he does get mad props here for his calls on companies who are sucking and have yet to show things are getting better, but LOV just doesn't have the margin of safety to make Money McBags comfortable and he fears their business is going to continue to face headwinds.  If the company were to show some growth and get to an industry growth rate, then sure, Money McBags could see it trade up to $4 or $4.50 but until then, a $.20 eps annual run rate company with no growth and few barriers to entry should probably trade closer to 10x which would make this a $2 stock and thus leave us with 33% downside.  If you really want to invest in a shitty internet affinity play, why not just buy INET who at least has exhibited solid business growth?  Money McBags will monitor LOV, but he'd rather own a company like KITD right now that is trading at like 7x EV/EBITDA and growing 60% a year with 17% EBITDA margins.

1/25/10 Midday Report: Bernanke likely to get bipartisan support despite claiming he doesn't swing that way

The market is trying to rally after last week's sell off which was caused by Obama letting Paul Volcker threaten to open up a can of whoop ass on the banking system, the senate seemingly hedging on reaffirming Ben Bernanke as Chairman of the Federal Reserve proving once and for all that the Senate is as good at making decisions as NBC is at handling their prime time schedule, and something called "data" which showed that unemployment remains higher than Brittany Murphy on the morning of 12/20/09.  Money McBags has been saying this for a while, but we are at an inflection point.  The market has rallied back to above a fair value based on earnings, so either earnings are going to have to be strong, or the market is going to have to do a very public walk of shame and re-trace some of its steps.

The news today is that the Senate has defied all known human physiology and started to think with their asses (because that is where their brains appear to be) and is likely going to reconfirm Ben Bernanke as Fed Chairman.  This move is said to largely be a result of the Senate's other top choices, Bernie Madoff and Raj Rajaratnam (or Raj-squared for short), currently being a bit indisposed (though to be honest, Money McBags highly approves of Mr. Rajaratnam's hiring practices and only wonders if he would have hired Mrs. Brosnan to cover large cap stocks or some woman named Heidi Montag to cover plastics).  InTrade is betting there is a 95% chance Bernanke stays as Fed chair which are exactly the same odds of the US highest income tax rate being above 38% in 2010 and Hilary Clinton being a man.

In macro news, US existing home sales plunged 17% which was the biggest decrease since they started keeping records in 1968 (thus after both the Great Depression of the 1930s and the scratch and sniff paint fad of the 1940s).  The drop in home sales was driven by the end of government tax incentives for first time buyers, continued unemployment, tougher lending standards, and not being able to find a carpet to match the drapes (a problem which Jenny McCarthy can sympathize with in this very not safe for work image).

In stock news, it's still earnings season and most people are eagerly awaiting Apple's earnings tonight after the bell.  If they beat estimates, will they be able to rise or will the market sell the news like they did to GOOG, INTC, and Jay Leno on prime time?  Haliburton announced earnings today and profits were down 7%. The company cited weaker drilling activity and the fact that Dick Cheney is no longer vice-president.  And Ericcson will be cutting 1,500 jobs due to an 82% drop in profits.  However, the drop in profit does disprove Tiger Woods theory that Swedes don't go down.


In small cap news, HAFC continues it's fall from a silly rally as it shows that the book value depends on the book (you hear that Peter Cooper Village?), and ZAGG is also taking it in the yingus as the market realizes that no one wants to pay $30 for an iPhone cover (and honestly, this might have been the easiest short since Bridget the Midget).  In fact on 12/31/09, Money McBags said this in the comment section of this very blog while debating with a reader: "In fact I will wager 1 share of ZAGG (and that is funny because ZAGG is going to $0)."  Just a few months ago, ZAGG was trading at a multiple greater than 30x, despite the fact that they sell one product which is overpriced, don't even own the technology, are in a market with low barriers to entry with a lot of competitors coming in, and it is easier and less time consuming to get Artie Lange off drugs than it is to apply their ZaggSkin product.  Plus management was talking about building ZAGG stores for all of their future products instead of figuring out how to make their current product easier to apply and cheaper.  They are now trading at around 14x 2009 expected earnings of $.20 per share, a number by the way which has maintained stagnant despite top line growth (which happens when you have to distribute products to more expensive channels and you pay more for shipping than you receive).  The easy money has been made on this short, but it is unlikely their ZaggBox sells even as well as Rosie O'Donnell's box and their App Store or marketplace or whatever they want to call it is more commoditized than fake boobs at a casting call for Van Wilder 3: The Rise of My Pants.  In other small cap news, MED pre-announced a good quarter today of 75% growth and EPS to be $.17 to $.20 in this Q.  The company has great ROEs, is growing faster than a steroidal weed, and is trading at only around 20x 2010 earnings and estimates will likely move up after today's pre-announcement.  Money McBags would ordinarily like a stock like this, especially after it's big recent sell-off, but there is something about multi-level marketing that feels oh so dirty to him and apparently others agree.  MED could be a big winner, but Money McBags is going to sit this one out.

12/23/09 Midday Report: Consumer confidence rises enough to spur consumers to still not buy new houses

Another day and more mixed data so Bulls and Bears can both rejoice (Yay!!!  Things are getting better and Yay!! Things are staying crappy.  See we can all get along, you hear that Israel and Palestine and Tiger and Elin?).  US consumer confidence rose to 72.5 according to the Michigan Consumer Sentiment Index, though it was down from the preliminary reading of 73.4 just over a week ago.  It's good to see even Michigan is adopting the Commerce's departments' "downward revision" strategy which Money McBags outlined for you yesterday.  In addition to Consumer Sentiment rising to some undefined number, personal spending and incomes were up (though less than forecast) as the second derivative of unemployment has slowed and the economy has been stimulated from flaccid to almost semi-erect with all of the dollars the government has printed and strategically placed into their g-string.

But Bears don't worry because in contrast to the stronger consumer (though not as strong as estimates, Magnus ver Magnusson, or the odor from a Mickey Rourke corn shit), new home sales fell to a seven month low and dropped 11%.  I'm no Robert Shiller (for fucksake I'm not even Karl Case) but when home foreclosures are at a record, why the fuck would anyone buy/build a new home when they can get an existing one for 70% of the price (and backing this sentiment up was the news from yesterday that existing home sales were up)?  But fear not everyone, because Timothy Geithner says there will be no "second wave" financial crisis and we all know how good Treasury Secretaries have been with their predictions.

In stock news, newspapers are moving up (and that is not an error as bizarre as it seems, so there will be no retraction necessary) as a Wells Fargo analyst upgraded the sector from "underweight" to "equalweight" after sniffing four packages of glue, downing a fifth of Jack Daniels, and revving up the flux capacitor in his DeLorean and travelling back to the 1980s, thus forgetting about this little thing called the interfuckingnet.  Along with that report, the analyst also predicted that New Coke will soar, Ishtar will revolutinize the movie industry, Teddy Ruxpin will be the best selling toy in history, and AIDS will be but a fleeting virus and thus he also downgraded CHD.

Tommorrow is a half day on the markets so get your trades in while you can and then enjoy your day off.