7/30/10 Midevening Report: GDP goes down again, claims it likes the taste

The big macro news today was that GDP slowed to 2.4% growth in Q2, that is until it's revised down next Q to keep up with the administration's "hold the shock and hope for no awe" strategy.  This strategy was further evident in today's release as GDP from the past 3 fucking years was revised downward because apparently the Commerce Department is still figuring out how to properly use the "solver" function in Excel.  The peak to trough decline is now seen to have been a 4.1% decline instead of a 3.7% drop, which officially makes this recession the worst since the 1940s which was so long ago that Abe Vigoda had only been dead for a decade and muff guessing still referred to fashion designers trying to figure out the latest in hand warming trends.

Surprisingly though, and in direct opposition to the downward revision strategy,  last quarter's GDP was revised up to 3.7% from 2.7% which makes today's number even worse.  It also goes against every fucking rule of manipulating data since, you know, the whole point of manipulating data is to use it to your advantage but apparently the new guy at the Commerce Department must have missed the memo while he was busy figuring out how to put a cover sheet on his fucking TPS report.

So GDP was below guesses of 2.6% growth and was mostly hurt by a trade deficit growing wider than the Octomom's cervix with imports spiking up 28% which is the largest jump in 25 years since the run on french cookies in the mid 1980s, consumer spend slowing to only 1.6% growth after growing 1.9% last Q, and a renaissance of common sense.  The one bright spot Money McBags could find was Jasmine Waltz, and the one bright spot he could find in the GDP report was that the equipment and software category grew at an annual rate of 21.9% as businesses need to buy a bunch of shit to do what people used to do.  The slower GDP growth comes a day after Fed Bank of St. Louis President James Bullard published an academic paper warning of the potential for the US economy to hit a period of deflation and turn in to Japan from 20 years ago which would be bad for everyone but the bukakke industry.

GDP is now slowing down, the economy has lost 8.4MM jobs, and Christina Hendricks still has not agreed to make a late night Skinamax movie, so any hopes of a speedy, stimulus driven recovery are becoming slimmer than Amy Fisher's parents hopes and dreams. Money McBags is sure the Fed will announce something soon to try to kickstart the economy, but based on the fact that they have been in existence for 100ish years and still haven't figured shit out (largely because economics is a more full of shit field of study than proctology), he's not holding his breath (though he would gladly hold anything of Hayley Atwell's).

In other US macro news, the University of Michigan's consumer sentiment index fell to 67.8 which is the lowest level since November and 10% below the 76 number it registered last month (though to be fair, it registered such a high number last month because it had put the thermometer next to the heater in hopes of being able to stay home from school).  As always, Money McBags has no idea what the difference between a 67.8 and a 76 is other than 8.2 so while market seems mildly happy that the 67.8 came in at .8 better than analysts' guesses, Money McBags is pretty sure an 8 point drop is worse than a .8 outperformance, even if it were measured on some weird logarithmic scale.

Finally in macro news, the Chicago PMI defied all common sense, data, and laws of supply and demand and rose by more than guessed for the month of July.  The PMI jumped from 59.1 to 62.3 while economists had guessed it would fall because, well, because we're in a fucking recession.  Interestingly enough, readings above 50 signal expansion so despite GDP slowing down and consistently high rates of foreclosures and unmeployment causing the midwest to be bleaker and more run down than Warsaw in 1945 or Barbara Walter's vagina, Chicago area manufacturing continues to grow.  It is as perplexing as the 9 dimensions needed for string theory to hold or the Lifetime channel. 

Internationally, Moody's cut Iceland's rating outlook to negative, said they they could cut it to junk, and warned Iceland that they better "check themselves, before they Reykjavík themselves, because fucking with foreign currency loans is bad for yo' health."  Iceland defended themselves by properly pointing out that Moody's is a bunch of asshats and by saying they are a long way off from defaulting on any debt payments.  When asked what a "long way" was, Economy Minister Gyfli Magnusson simply replied that he'd like to buy a vowel before quickly mushing off on his dogsled.

In the market, MRK's profits fell 52% due to merger and restructuring charges associated with buying Schering-Plough and redoing the company cafeteria.  Without those one time charges the company beat analyst eps guesses by $.03 and earned $.86 on the Q but the stock dropped as the company trimmed their full year guidance due to price cuts on drugs from European governments and slowing sales of vaccines and Singulair.  A company spokesman said they would do their best to continue to promote bad and unhealthy behavior in order to boost sales of their products.

In other earnings news MET insured the fuck out of some shit and beat analyst guesses while Amgen also beat guesses despite lower revenue and profits as  both investors and osteoporosis sufferers bend over backwards with excitement over their drug Proli.  Also in the market Disney sold Miramax for $660MM to better focus on making shitty vapid films for kids to buy shittier vapider toys off of and C paid a $75MM fine for a little something called misleading investors about the amonut of subprime loans they held on their books.  C claimed they only had $13B of exposure when they had $50B but Money McBags is sure the $75MM fine will make up for the billions investors lost by believing any of the publicly audited financial statements C released.

In small cap news, TSYS sold off by 17% after their net income fell by 50% in another quarter more confusing than the ending of a Kafka novel.  Remember a couple of weeks ago Money McBags told you TSYS would make an interesting short term trade and on this past Tuesday he said:  

"TSYS was up 4% plus and remember on 7/9 Money McBags said it was too cheap and would make a nice short term trade and it's up just under 20% since then so good for you if you picked up some shares but don't get too greedy as news on the company remains thinner than OJ's alibi and it has traded down for a year for a reason."

So hopefully you didn't get too greedy and took your profits and went home because we were given more reasons for its shitacular performance this year.

That said, on the surface, the quarter wasn't horrible, as revenue was an alltime high $92MM, though pretty much flat with the first two quarters of the year and gross profit of $33MM was also up a bit sequentially.  EBITDA of $15MM was down a bit sequentially and barely up from last year when revenue was $25MM less so they are clearly having margin/expense issues with gross margin dropping from ~45% to ~36% from last year's Q.  Not really what you'd like to see out of a supposedly growing business.  Money McBags is a firm believer in not owning businesses with negative operating leverage unless they are in the start-up stage, so that is a huge red flag, especially for a company that has relied on acquisitions for much of their growth.

That said, the biggest problem seems to be that they saw their text message licensing business slow down and lead to fewer sales of pepetual licenses which was what Money McBags thought was a big growth area for this company.  People like the fuck out of texting so it was always a bit confusing why this company's revenue didn't scale faster with that and why that is now slowing down for them.

Money McBags hasn't had time to listen to their call yet as he has been busy trying to solve the Riemann hyopthesis (he thinks the answer is zero) and looking for more pictures of Sofia Vergara, but he's sure the call would have been as confusing and unilluminating as ever as this management team has overpromised and underdelivered more than an M. Night Shyamalan film.  That said, he's not sure if they are still guiding to $80MM-$85MM in EBITDA as they are only at ~$30MM half way through the year with one of their growth segments slowing and margins getting squeezed like Ines Sainz' ass in an airplane seat.

The company currently has an EV ~$280MM so it's pretty cheap if you think that they can double their EBITDA in the second half of the year but as Money McBags needs a fucking forensic accountant, a strategy consultant, the Amazing Kreskin, and a fuckload of luck to understand their press release and the different parts of their business, he's going to stay the fuck away.

Hopefully you all made a nice short term profit and perhaps their call explained a lot, as this company seems way too fucking cheap for what they claim to do.  That said, the market isn't usually this wrong when selling something off over this long of a period of time, so Money McBags will remain happily uninvested.  That said, if anyone can clearly and concisely explain their business in two sentences or fewer, Money McBags would be interested to understand.

Enjoy your weekend and don't forget, When Genius Prevailed is on Facebook and Twitter.

3/30/10 Midafternoon Report: Market rests today after spending all night trying to find the afikomen

Before we get to the market news, today marks an important achievement for mankind (perhaps an even more important achievement than Brooklyn Decker) as the Hadron particle collider is finally working sending two protons smashing in to each other at 99% the speed of light.  Results hope to answer some of the Universe's most essential questions such as the existence of the Higgs Boson, the presence of dark matter, and who the fuck the people are who actually watch American Idol.  So planet changing discoveries aside,  the market is flat today as international concerns temper the moderately better than expected US macro data.  Consumer confidence jumped thanks to the new health care bill, which has made it easy for people to buy deliriants.  The index reached 52 today, easily besting the 46 from February, which would be all the more impressive if we actually knew what a difference of 6 points meant.  Additionally, Home prices rose in the 20 city Case-Shiller index (named of course for "Hot" Karl Case and Bob Shiller) from "take this fucking thing off my hands" to "take this fucking thing off my hands but I am keeping the toaster."  The index was up .3% sequentially and down .7% from a year ago which is the smallest y/y decline in two years.  However, on an adjusted basis the index was down .4% sequentially due to the initial petering out (and yes, I said peter) of the government first time home buyer's tax credit and the realization that monopoly money is not a valid subsitute for cash or a claimable asset to mortgage guarantors.  That said, there was some really interesting news that tax receipts are now expected to rise in the 15 most populous states by 2011 which would be huge for the economy (no joke, it would literally be bigger than Manuel Uribe at an all you can eat taco bar.  Ok, maybe a little joke.).  California has already taken in 3.9% more in taxes than forecast since December while NY is $129MM above budget.  This is largely the result of higher sales tax receipts from increased consumer spend likely as a result of this rise in consumer confidence and the hiring of Jeffrey Skilling to audit all state tax records.

Internationally, S&P cut Iceland's local currency credit rating from BBB/A-2 to BBB/A-3 (and if Money McBags were rating Iceland, they would always be rated "frosty.).   And yes, those are the actual fucking ratings S&P uses which are about as helpful as chopsticks to a leper.  I mean really, BBB/A-2?  Even Heidi Montag's singing career and Poncaire's Conjecture are less confusing (especially if you are tone deaf or Grigori Perelman).  Money McBags hasn't seen anything so contrived since Ricky Martin acted straight in one of his videos.  That said, the downgrade made Magnus ver Magnussen, a man so important they named him twice, pick up a giant boulder and crush the S&P's entire Iceland office.  Anyway, Money McBags scoffs at any rating, no matter how confusing, by any rating agency due to the inherrent conflicts of interest and the piss poor track record of those ratings agencies (see US financial markets circa 2007). Of course this downgrade has caused investors throughout the world to not just try to locate Iceland on a map, but to learn for the first time that Iceland actually had credit ratings. In other international news, an auction of 1B euros of 12 year Greek bonds garnered interest in only 390MM euros worth of them which caused the offering to be more undersubscribed than Bernie Madoff's new investing magazine (tentatively titled, MisFortune).  The lack of interest in the bonds (well, technically the interest is actually quite high at 5.9%) has caused the yield spread between Greek debt and German debt to double.  Investors continue to worry about Greece's ability to fund themselves while Money mcBags bets in 1 year no one will remember any of this.

In stock news Apple is up on reports that they are designing an iPhone to be CDMA compatible thus potentially giving iPhone users a choice of carriers and not restricting them to AT&T.  AAPL allowing competition is a bit like North Korea alowing photographers or Ellen Degeneres allowing penetration, but it should be positive for consumers and thus positive for the stock.  In related news, RIMM announces earnings after the bell tomorrow and is limping in to that announcement.  While Money McBags likes owning the number two competitor in a market about as much as he likes country music, RIMM is cheap for its growth trading at less than 20x earnings estimates.  Money McBags is an owner of RIMM and will be holding it through the quarter because this should really be at least a $95 stock.  That said, if they miss, look out below because RIMM will go down faster than Hillary Duff after getting an engagement ring.

In small cap news, CRUS seems to be riding the news of the potential newly designed iPhone and is up 6%+.  Money McBags is an owner of CRUS (he mentioned he was buying in his 1/29 Midday Report where he said he "did dip his toe into the CRUS waters yesterday (and it was delightfully stripper piss warm))."  The original analysis of CRUS was done on 1/12/09 but the company basically produces ICs for two sectors, audio and energy.  In the audio market they won a chip in the iPhone a few quarters ago as their IC delivers better sound quality and as a result, that segment grew 83% last quarter and was 72% of sales.  In the energy market, their business was hit harder than a bottle of Mad Dog by Betty Ford in the 1970s as sales dropped ~40% in the downturn.  Their main energy segment involves selling chips that go into power meters and their biggest customer is Itron and Itron sales were up 10% last Q, so that could be a good indicator of this business coming back.  Of course a better indicator is that they have had two sequential up quarters in the energy segment after bottoming out and that segment is what delivered their positive earnings surprise last Q.  Money McBags thinks the company can earn ~$.65 in the fiscal year ending 3/2011 and that assumes just 10% growth in the audio segment (and remember they just grew 80% and could be getting more business if the Apple news from today is true) and 20% growth in the energy business.  The 20% energy business growth is a bit aggressive because it has been down so much, but that growth assumes $18MM in revenue per quarter and before the downturn they were regularly doing $20MM-$24MM.  The company has $2 in cash on it's balance sheet and is trading at ~13x Money McBags estimate (which may now be too low) including that cash.  They could also earn ~$50MM in EBITDA in this next fiscal year and thus are trading at only ~8x EV/EBITDA.  This stock is cheap and has a nice cash cushion (while Jessica Biel has a nice ass cushion).  Money McBags doesn't like to own cyclical companies, but CRUS is in the spanktasitc part of the cycle so it is worth owning at these levels.  In other small cap news, RICK continues to tumble (and remember, Money McBags sold last week, so phew) while KITD had their quarterly call and didn't disappoint.  Money McBags previewed KITD's Q yesterday but will break it down for you tomorrow.  Let's just say he found it titillating and is looking to add to his holdings.