Rally!!!!!!!!!!  With the war in Iraq over, manufacturing data around the world showing more buoyancy than Archimedes’ “principle” in a bowl of jello, and warts finally shown to be unrelated to herpes (which means Paris Hilton now needs to look for two culprits as opposed to just one), the double dip has apparently been averted and the market should be back to 1,600 any day now.   Whew.  That was a close one but Money McBags is glad it is all over and he can get back to analyzing stocks that trade on fundamentals (not so fast DGIT, KITD, or WGO), using the tools he learned while getting his BA (though it clearly should have been a BS) in Economics and MBA in Finance to analyze quaint and outdated macroeconomic indicators, and guessing muffs to his hearts content.  That is until Friday when we remember that no one is fucking employed and people are getting less employed by the day.  But let’s not dwell on that after this day of hope and enjoy the rally while it lasts, like finding an oasis in the Saharan desert or a nip slip in a Jessica Simpson red carpet appearance.

The big news today was that the ISM manufacturing report came in at 56.3, above last month’s 55.5 and above analyst guesses of 52.8 and remember, anything above 50 signals expansion while anything numeric signals made-up.  Manufacturing was driven by strong demand from overseas, a continued restocking of inventory, and Heidi Montag‘s massive need for collagen and botox.  The other positive from the report was that managers’ desire to increase jobs reached 60.4, the highest since December 1983 and that should bode well as long as desire is more than just an unrequited emotion.  Unfortunately, it wasn’t all lobster tails and taint tickles in the manufacturing report as new orders sunk to their lowest in over a year but why let forward looking data get in the way of a good rally?

In other US macro news there were mixed reports on the employment situation with some people thinking things look worse than Mayim Bialik on Blossom and others thinking things look worse than Mayim Bialik after Blossom (and you may have to adjust the brightness on your computer screen on that last one to either pitch black or off).  ADP reported that 10k jobs were cut in the private sector last month which was much worse than the 13k gain analysts guessed but is consistent with the stumbling economy and analysts not quite figuring out how pluses and minuses work.  ADP also revised the 42k job gains from last month to 37k saying they were just fucking around with people and didn’t expect to be able to carry it this far.  That said, outplacement firm Challenger, Gray & Christmas reported that job cut announcements fell by 17% from July to the lowest level since the year 2000 as companies only plan to send ~35k more people this month to the government payroll where they can soon be longterm unemployed and have their hopes and dreams for prosperity destroyed like Money McBags’ belief in cougars. So more people lost their jobs than expected, fewer are expected to lose their jobs going forward (though there are obviously fewer jobs to lose), and according to the ISM, factory managers are looking to hire.  Recession over (and yes that is sarcasm).

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And it wasn’t just the US that put up good manufacturing numbers today as China produced the fuck out of some shit to ease fears that their economy was slowing down faster than Michael J. Fox’s motor skills.  Two measures of Chinese production including the official PMI and HSBC’s PMI both registered above 51 and also above readings from last month and show that China is still the best at manipulating data, Money McBags means running a growing economy.  While South Korea and Taiwan showed softening manufacturing, those two are merely the scallions in China’s wonton soup so as long as China is relatively healthy (that is if one doesn’t dig too deep and care about real estate bubbles because we all know real estate bubbles have never caused any harm), that bodes well for Asia.  Finally, India and Australia both showed minor declines in manufacturing but both economies continue to grow as they mostly avoided Greenspan’s folly.

In market news, sales for automakers declined precipitously from last August when “Cash for Clunkers” spurred sales and there was still some hope for an economic recovery.  GM sales were down 25%, Ford sales were down 11%, and Toyota sales were down 35% as people become pickier about where they spend the money they no longer have.   AAPL was up today after holding an event to showcase updated iPods, Apple TV, and plans for world domination (there’s a reason the new Nano has front and rear facing cameras, and it’s not just to make masturbating on chatroulette easier).  The Apple TV update is the most interesting as they will be teaming with Netflix to stream videos and Money McBags continues to maintain that Netflix is a hella interesting stock as they keep innovating and finding new ways to deliver content.

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Other stocks moving today included Burger King which was up ~15% as rumors are that private equity firms are interested in buying them out, Amazon which was up 6% as they have become the 12,000th company to propose some kind of web based TV application (newsflash, Money McBags will start using his computer for TV when the NSFW Spankwire is shut down and his screen grows to 52 inches, though he could just buy Apple TV or something but whatever), and BAC which was up 6% as they reached a settlement for being such colossal asshats.

In small cap news, every high beta company that had been getting clobbered whether rightly (WGO) or wrongly (CRUS, KIRK) bounced back today.  KITD led the charge up 8.5% no doubt as a result of the brilliantly insightful interview with KITD CEO Kaleil Tuzman on the award winning When Genius Prevailed yesterday which may be more of a career limiting move for Mr. Tuzman than going for a hike on the Appalachian trail, yet seems to be working out ok so far.

That said, not every small cap stock was up today (and don’t think Money McBags is overlooking you SFSF, but we’ll get to you another time) as ISLE continued to sell off after a bad Q yesterday.  Money McBags has broken this stock down many times including after last Q when he told you all the rise was likely just a temporary short squeeze and this Q they didn’t fail to disappoint (which of course is good for those of us who expected it).

In the Q, revenues were down 2% (and both gross revenues were down while promotion costs were up, which is a neat trick and means their marketing team is really applying what they learned in their business school classrooms), net income from operations flipped from mildly positive to negative, and they missed analyst guesses (analysts were guessing the company would earn $.11 per share and instead they lost $.08 including the $.05 tax benefit they received).  Also, EBITDA declined 11% thanks to worse gaming revenues, an attempted equity offering (so they didn’t just try to screw the shareholder by potentially diluting them worse than a network TV showing of Animal House, but they did screw them by having to pay >$1MM for that threat of dilution), and higher expenses due to the acquisition of Rainbow Casino and buying a shit load of disinfectant to try to get the old man smell and puke stains out of all of the carpets.

The company has $65MM in cash and $1.3B of debt (just read that again) which means their balance sheet is uglier and has more unwanted liabilities than Shawn Kemp.  Their interest expense this Q was $24MM and it is now greater than their non-cash depreciation charge which can’t make their cash flow statement happy and their enterprise value is ~$1.5B with an EBITDA run rate of $172MM so they are trading ~8.5x EV/EBITDA, which means the company still isn’t cheap.  The business is flat with costs rising and the story remains that they are in shitty parts of the country where the economic outlook still remains bleak (Mississippi, Missouri, Lindsay Lohan‘s pants) with old and run down casinos and the only plan to get out of it was to RAISE MORE MONEY (which by the way didn’t work, though it did cost shareholders an extra $1.1MM in costs so hooray for that).  Look, if you shorted it after last Q, you’ve done well enough that you should take some profits here but things remain ugly and if we are now at a new run rate of negative earnings thanks to higher interest expense (even ex. the one-time fee to raise equity) and moderating revenue also causing declining EBITDA, there is more down to go.  Money McBags doesn’t see why ISLE shouldn’t trade closer to 6x EV/EBITDA since they have razor thin margins to be able to service their debt so there is still at least 25% more to be made here.  That said, it’s never good to be too greedy so trade appropriately.

But hey, the economy in the middle parts of the country could come back, people could prefer run down casinos to nice ones, and Lisa Ann could ring Money McBags’ doorbell any minute and ask if he would like any baked chicken, so perhaps ISLE can turn it around.  That said, Money McBags finds that scenario unlikelier than Smurfette being a lesbian (and not just because there were no other female smurfs, but also because Papa Smurf was hung like a badger) so do with it as you will.

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