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Archive for August 19th, 2009

more weak July data

Posted by WARREN MOSLER on 19th August 2009

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>   (email exchange)
>   On Wed, Aug 19, 2009 at 9:38 AM, Morris Smith wrote:
>   Really lousy economic data continues about July

Yes, looking awful from a lot of angles.

This latest govt. attack on bank capital, especially small banks, might be biting deeper than the media is on to.

Amazon (AMZN-Hold)

Yesterday, comScore released July online retail data, showing total online spending falling by 7% y/y including a 5% y/y decline in non-travel spending. This data, combined with soft July retail and same-store-sales (SSS) and a weak outlook from Wal-Mart (WMT-Not Rated), reinforces our opinion that consumer spending may be slower to recover than anticipated. We reiterate our Hold rating on Amazon (AMZN) and our $83 per share price target.

comScore reported that July non-travel spending declined by 5% y/y, a sequential deceleration from the 1% y/y decline experienced in June and below the 4% y/y decline witnessed in May. Key category results were somewhat soft, with only Books & Magazines growing by 4% y/y and Consumer Electronics up 5% y/y.

eMarketer released data from the National Retail Federation (NRF) at the end of July indicating that nearly 50% of participating consumers were cutting spending on back-to-school supplies. Additionally, only 22% of respondents said that they would purchase back-to-school supplies on the web, down from 25% a year ago, with 75% opting to shop at traditional discount retailers.

July SSS fell 5% y/y, with the large majority of retailers posting greater than expected declines. The US Census Bureau reported that July total retail sales were flat sequentially but down 8% y/y, with sales down 9% y/y from May through July.

We now estimate that the impact on US eCommerce sales will be a 4% y/y decline in 3Q09 versus a 2% y/y decline in 2Q09, with low single digit growth in 4Q09. Ecommerce spending may decline by 1% y/y in 2009. This lack of consumer demand recovery represents a bit of an overhang on stocks like Amazon.

Amazon’s stock carries a premium valuation to other ecommerce, retail, Internet stocks and the S&P 500 Index, trading at 50x 2009E EPS and 21x 2009E OIBDA. The S&P 500 Index trades at 16x 2009E EPS of $60. Our ecommerce peer group averages 23x 2009E EPS and 10x OIBDA. Using a PEG ratio of 2.0x or 50x our 2009E EPS of $1.65, which equates to 21x our estimated 2009 OIBDA of $1.7 billion, our price target is $83 per share. We rate a Hold.

Orbitz (OWW-Buy)

We are reiterating our Buy on Orbitz (OWW) and raising our price target from $6 to $8 per share. We anticipate that Orbitz will be able to grow EBITDA by 20% y/y in 2009 and could nearly triple free cash flow through increased transaction volume growth and a sustainable cost savings program.

Transaction volumes improved 22% sequentially in Q2, helping to offset the removal of bookings fees on single-carrier flights, resulting in a better-than-expected gross bookings decline of 12% y/y. The removal of booking fees has stimulated consumer demand and shifted share from airlines to online travel agents (OTAs) like Orbitz. We expect further improvement in Q3, forecasting gross bookings to decline by 10% y/y. Q4 may only show a mid-single digit y/y decline in gross bookings, given an easier comparison and some potential price stabilization.

Despite the capacity cuts made last September, all of the major airlines have increasingly turned to the OTAs to shed excess inventory and generate revenue. Given the poor outlook published by the International Air Transport Association (IATA) for the global airline industry ($5 billion in losses, and normal traffic growth not returning until 2011), we anticipate that this trend will continue and may be very difficult to reverse.

Looking forward, Orbitz has committed to expanding its under-indexed hotel business globally. We believe that both Europe and Asia remain growth opportunities for Orbitz. Despite both Priceline (PCLN-Buy) and Expedia (EXPE- Buy) already establishing meaningful franchises on both continents, Orbitz should be able to capture a fair share of the rapidly growing international hotel market.

The cost savings program implemented in 1Q09, reducing expenditures by $40 million to 45 million annually, has driven EBITDA growth of 28% y/y through 1H09. Debt leverage has fallen from 5x to 4x based on our recently raised 2009E OIBDA of $160 million. Interest coverage has improved from 2x to 3x. Free cash flow is also forecast to nearly triple from $0.31 in 2008 to $0.88 in 2009.

Orbitz trades at 10x our 2010E EPS of $0.50, below a market P/E multiple of 14x. Our domestic e-Travel group reflects an average 2010E EPS trading multiple of 14x. Using a PEG of 1.1 or 16x 2010E EPS of $0.50, our 12-month price target is $8 per share. We rate Orbitz a Buy.

Yahoo (YHOO-Hold)

Recent data support our concerns about a sustained slowdown in online advertising. We continue to believe online advertising will remain muted in the third quarter as there has been no evidence of an advertising recovery to date. Yahoo remains vulnerable to declining fundamentals and a long complex integration process with Microsoft. We maintain our Hold rating.

Yesterday, comScore reported that July e-commerce non-travel spending declined 5% y/y and 6% sequentially. This was the largest monthly annual decline in 2009. We do not believe this bodes well for an online advertising recovery in the third quarter, particularly when combined with the University of Michigan’s preliminary consumer confidence sentiment number for the month of August, which showed a continued decline from July.

Yahoo continues to experience a continuous search market share loss in the US. According to comScore, Yahoo’s US search share stood at 19.3% in July, which represents a consistent monthly decline from 21.0% in January.

Data suggests Yahoo’s search ad coverage is down significantly y/y and dropped materially month/month in July. Ad coverage data coincides with a poor July e-commerce report.

This news does not bode well for Google, which also experienced a sequential decline in ad coverage during July. Google also saw a slight US search market share loss to Bing in July to 64.7% from 65.0% in June.

Our channel checks and the comScore data do not support Yahoo’s commentary at last week’s investor conference, where the Company remarked that it saw “green shoots” in ad sales and saw near-term ad budgets coming back. In addition, this commentary is inconsistent with Yahoo’s weak third quarter guidance.

Yahoo continues to battle departures amongst its executive team. Last week, Yahoo’s VP of West Coast sales announced his departure after three years at the Company. Yahoo also recently lost its VP of sales in New England and Canada.

We maintain our cautious view of the online advertising space as we forecast no growth in online advertising during 2009. Yahoo trades at 7x 2009E OIBDA, which is fairly valued in our view, particularly given expectations of a long drawn-out integration process with Microsoft and our concerns about Yahoo’s strategy and growth.


Posted in Banking, Equities | 5 Comments »

Beyond mark to market

Posted by WARREN MOSLER on 19th August 2009

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An additional measure was taken a few months ago that just struck me one of the possible reasons for the current economic setback.

This is best illustrated first by an example.

My (very small) bank holds securities in its ‘hold to maturity’ account.

If these securities become ‘impaired,’ as defined by regulation, they are marked to market and capital adjusted for that loss.

But recently an additional measure was taken by the regulators.

If they are downgraded to below ‘investment grade’ they are not only marked to market for net capital calculations,

but also treated as a ‘charge off’ for capital ratio purposes.

For example, if we have $1 million security that is downgraded below investment grade and has a current market value of $500,000,
we reduce our stated capital by $500,000, as had previously been the case.

But now, even that $500,000 remaining value, is, for all practical purposes, counted as 0 for purposes of determining our capital ratios.

The capital ratio is the important calculation as it determines how many assets a bank can carry for a given level of capital.

This means, for example, that if a bank had securities that were below investment grade with a market value equal to all its capital
it could not carry any other assets or deposits.

They call this ‘super risk weighting’ or something like that. More details to follow, and any additional info welcome, thanks!

Meanwhile, this has resulted in a sudden drop in the all important capital ratios,
and with every downgrade below investment grade by the ratings agencies, a much larger capital reduction takes place than under previous rules.

And, equally important, all banks holding any securities are at risk of losing all ‘credit’ for even the fair market value of their securities
for purposes of determining their capital ratio compliance.

Additionally, this can force sales of these securities as the proceeds of a sale at least add that much capital back to the capital ratio determination.

And the forced sales, of course, drive prices down below even today’s depressed market values.

This provides high yielding securities with little or no risk at the now lower prices for unleveraged buyers, at the expense of the banking sector.

Banks are public private partnerships, and it looks like the public partner is shooting itself in the gut contrary to any notion of public purpose.

Regulators have told is there is no chance for this rule to be altered.

And as an aside, we have a security that was simultaneously downgraded by one ratings agency and upgraded by another. Interesting how after all the criticism of
ratings agencies our govt has increased its reliance on them for purposes of public policy.


Posted in Banking | 11 Comments »

Germany – Credit Crunch II

Posted by WARREN MOSLER on 19th August 2009

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Yes, interesting to see if the Eurozone national governments are able to run their deficits as high as projections indicate without themselves having liquidity issues, even with the indirect help from the ECB. Looks to me like all the support measures add to the deficits of the national govts.

On Tue, Aug 18, 2009 at 4:57 PM, Russell wrote:

Regardless of your view on the economy, you have to at least consider the possibility that the financial crisis isn’t over, that we may just be in the eye of the storm. There are all the smaller (but still big) banks failing, as well as the lingering concerns over mortgages, commercial real estate and the national debt.

According to The Telegraph’s Ambrose Evans-Pritchard, the German government is laying the groundwork to head off a second coming of the credit crisis:

“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.

“We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy,” he said.

Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove “very difficult”.

State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). “If this service fails, we are going to see dozens of credit collapses,” he said.


Germany braces for second wave of credit crunch

Germany Prepares For Credit Crunch Part II


Posted in ECB, EU, Germany | No Comments »