Sunday, March 31, 2013

State-Wrecked: The Corruption of Capitalism in America (NYT)

A very good article, in our opinion. Whether you are optimistic or pessimistic regarding the market, we recommend inserting the word, 'cautiously', in there when describing your view and your decision-making process.

"In effect, the G.O.P. embraced Keynesianism — for the wealthy. ... The Democratic Keynesians, as intellectually bankrupt as their Republican counterparts (though less hypocritical), had no solution beyond handing out borrowed money to consumers, hoping they would buy a lawn mower, a flat-screen TV or, at least, dinner at Red Lobster."

Monday, March 25, 2013

Cyprus Banks Remain Closed ...

Cyprus Banks Remain Closed to Avert Run on Deposits ... "The president of Cyprus assured his people a bailout deal he struck with the European Union was in their best interests, but banks will remain closed until Thursday - and even then subject to capital controls to prevent a run on deposits." --

Notes & Performance Update for Week of 3/18 - 3/22

As if things could not get any worse for AVID, one of the stocks that we valued around $9/sh, the Company filed an 8-K on Friday saying that Nasdaq's Listing Qualifications Department notified it of a possible delisting.  This was due to AVID not filing its 10-K on time, for which the deadline was March 18.  This was expected but the stock continued its decline.  Besides the 8-K, the Company has not provided any additional information on any progress made in the review and evaluation of revenue recognition of some of its services.  

If there is anything positive about this stock right now, it is that while declining, its volume has also been declining a bit.  We also note that the stock still has not reached its 52-week low of $5.85.  If the Company finally files its 10-K before the May 20 deadline, depending on the outcome of its accounting review, the stock could move significantly higher or lower (yes, this sounded just like a regular broker).  With this in mind, a May or June $7.50/$5.00 strangle may work.  We were certainly pleased when the stock hit $8.00 on Valentine's Day, up 17%+ since we initially discussed it.  But again, there has been nothing but negative news since then.  With a 'glass is half-full' mentality (not necessarily recommended at this point), one could still hope that given the decline in the stock, the Company could get acquired and/or taken private.  The new CEO, Louis Hernandez Jr., did sell his last company, Open Solutions, to Fiserv (FISV).  Then again, what a CEO has done in the past does not always indicate what he's capable of doing going forward.  This was certainly the case with AVID's last CEO, the so-called 'turnaround CEO', Mr. Gary Greenfield.  Going back to the hope of getting acquired, the premium (if any) in an acquisition price (if any) is still dependent on the outcome of AVID's accounting review. 

While AVID has been a disappointment, the other names have done ok compared to our benchmark, S&P 500. 

It appears that a bailout deal regarding Cyprus has been reached.  Then again, we think there is still a potential of the 'contagion effect' once the Cyprus banks actually open.  They have been closed for a week as the government feared many people would quickly take out their cash to avoid the bank levy proposition 'offered' last week.  Some believe the banks will re-open on Tuesday.  It remains to be seen whether that fear in many bank account holders has been reduced or not.  Fear and/or frustration in Cyprus became apparent after an explosion at one of Bank of Cyprus branches on Sunday.  Various reports say that the explosion was very small, and thankfully no one was hurt.  But again, it does indicate increasing anger which could spread to other parts of Cyprus and the Eurozone.

The latest bailout deal has pushed the S&P 500 futures up around 0.40% indicating stocks will likely be up when the market opens on Monday.

Monday, March 18, 2013

Notes & Performance Update for Week of 3/11 - 3/15

With what appears to be negative news again coming out of Europe, combined with the 'bullish' movement in the US equity market since the start of 2013, and our concern that we discussed briefly a couple of weeks ago, we thought to review valuation of the S&P 500 index again. 

Based on 2013 EPS projections, a 10.58% 5-year projected annual EPS growth (as provided by S&P), and our belief that this market's fair value would be at a forward P/E that would generate a PEG of 1.0, we think a P/E of 10.58 would be a good start to get an idea about S&P 500's fair value.  This would give us 1176.53, 24.6% below where the index closed at on Friday.  Of course this appears too low, which could be due to the fact that our P/E multiple does not take the index's dividend yield into account.  So, with a dividend yield of 2.15%, 12.73x 2013 EPS could also be used.  This gives us a value of 1415.76 for the S&P 500 index, 9.3% below Friday's close.  We could take the mid-point within this range, 1296.14, which is 17.0% below Friday's close.  Right now the S&P 500 is valued at 14.03x 2013 EPS estimates, representing a PEG of 1.33 without dividend yield and 1.10 including the dividend yield. 

Of course, the Fed's continuing QE policy does create some type of premium on the value of this index.  However, given the latest higher than expected CPI (even if it was the headline CPI), improvement in the labor market but the still stagnant wage growth, the Fed is likely beginning to work on an exit strategy.  It will certainly give the equity market a 'heads-up' before putting such strategy into action, hoping to minimize any negative reaction in the market.   

As of 2:15am (EST), the S&P 500 future is down 1.35%.  Whether the US equity market will react this badly to the news out of Europe after it opens, remains to be seen.  In addition, some important real-estate numbers are scheduled to be released this week.  Any positive surprise could help lower impact of the dilemmas faced in Europe on the equity market.  On Wednesday, the Fed will not only release its FOMC meeting notes, but also its first official forecasts this year.  Given the mostly better than expected economic data during the last couple of months, the Fed's projections could please the market.  However, even if all of this upcoming news turns out to be positive, we continue to believe the market has gone up too much and too fast, as we mentioned a couple of weeks ago. 

Tuesday, March 5, 2013

Friday's Upcoming Employment Situation Report ...

The official Feb. employment report will be released on Friday (3/8).  The Street is expecting an increase of 171K in the NFP figure.  Our model generated a figure slightly below that, 165K.  Improvements in weekly initial jobless claims appear to have stalled a bit as the Feb. numbers were slightly higher than Jan.  ISM's employment sub-index also declined slightly in Feb.  We used the Street's ADP estimate of a 173K increase for Feb. in our model.  As the S&P 500 is again approaching the 2013 high of 1530, we think a miss will likely drag down the market, unlike the January miss.

Monday, March 4, 2013

Performance Update for Week of 2/25 - 3/1

As shown below, our numbers do not look as good as they did the prior week.  In fact, after AVID surged nearly 18% to $8.00, the announcement of internal review of its revenue recognition method and postponement of Q4 earnings release, dragged down the stock more than 13% in one week.  We are still trying to get more color regarding this issue, but have not yet gotten our hands on additional information.  Performance of our other names has also not been very impressive.  But we must note that BCOR and IACI are value-plays, which means it may take some time before the market can recognize what we believe to be their fair values.