Another tech company, that has been down and out for year, but started a sustained turnaround in 2015 is MRVC. With the sale of their last Euro-zone service business, MRVC will have about $40 million in cash or about $5.70/share. Sales for 2016 should be $90-$100 million so sales/share will be about $12.85. So, with the stock about $10.70, the business sells for .4 PSR for an attractive business building out the metro and data center markets.
So "attractive' that last year INFN bout out Transmode, and CIEN bought out CYNI-both at about 3X sales/share. Yesterday JNPR bought out BTI Systems-no terms given. It is my view that MRVC will get bought out in the next 12-18 months. They have a large 30%+shareholder, so they are not going to let the company go cheap.
I've owned MRVC off and on for years-through several mgt changes and business changes. The current strategy has been formulating for the last 2-4 years and with the sale of the last EZ service business MRVC will be focusing on the data center and metro edge markets that are in the process of upgrading and setting up new architectual approaches to handle broadband growth.
ERIC had some interesting results/commentary today. Brazil, Russia soft, but China, Mexico, India, Indonesia strong and that NA and EZ hardware shipments were up. Wireless operators adding more capacity increases the potential that they will need PCTI's scanners to evaluate their networks.
Additionally, ERIC will roll out 5G in parts of Europe in 2018. Although 2+ years away, when next generation networks are released, PCTI's scanner sales jump for a couple years thereafter.
In summation, I expect PCTI to grind out higher sales and earnings y/y for the next several years with the potential that EPS will be up 50% y/y starting 2018 through 2021. Someone may try to buy PCTI on the cheap, over the next year, just before 5G rollouts offer a huge catalyst to upside sales and earnings.
VZ, T and S have all reported good results with 2016 capX guidance flat to higher for 2016. With government CAF II spending also ramping along with expectations for public safety LTE build out over the coming years and you have a good backdrop for wireless infrastructure spending. Good for:PCTI, ADTN, MRVC,WSTL, FNSR, OCLR, VIAV LITE
When MIFI bought Feeney in March of 2015, there was another $25 million potential earn out depending on results. $15 million of that was to be paid in early 2016 through stock issuance-at the time it was calculated to be about 3.2 million shares. $15/3.2=$4.69/share. Since the stock is nowhere near that price, the amount of share to be issued would have been extremely dilutive. An deal was made for MIFI to pay out $15 million in cash over 4 years, instead of issuing stock.
My take. Glad to know that mgt was not "give" out stock when it is extremely cheap, however the "market", I'm assuming by selling off the stock, is worried that the company will be financially stressed by the payout schedule-especially since the convert bond will mature in 2020. I'll speculate that the arbs bought the bonds and shorted the stock-putting downward pressure on the stock.
The stock fell easily, given the market backdrop, and the generally poor macro-economic industrial environment. However, I don't think the stock price drop reflects the company doing poorly. Recent press releases suggest otherwise, the fact that the Feeney payout was due suggests the Feeney part of the business is doing well. Comments from prior CCs, suggested that mobile computing will be up 20% this year. Digicore operations are out of South Africa, given the very weak currency any mfging done there will have a very low cost base. If fact, the company is suppose to be closing Texas plant suggests the mging footprint will be lower cost going out into the future that in has been. Also, OpX, for the 3rd Q came in below guidance, while sales met guidance.
So, around $1.00, the stock is a buy. If sales estimates for 2016 are met, given the 56 million shares outstanding, the PSR will be around .2-very cheap for a growing business in attractive markets.
I'm going to speculate that KTCC is dropping them as a customer or will not be doing any new products. For the Sept Q, "core" KTCC sales were up 20% y/y, even with SMT, so it may just make sense for mgt to purge this client and all their production problems to free up resources to pursue more profitable business.
To the rescue, a bevy of central banks:
1)PBOC injects $61 billion on 1/21
2)Draghi "hints" at more easing
3)BOJ "hints" and more easing
4)FED M2 up $137 billion a huge increase-takes 10 week annualized rate from 3.9% to 7.4%. Also, monetary base was up $216 billion-a huge increase
From the FED, this is the same playbook as last August-when markets took a hit from China's currency devaluation. So we know the FED is listening and responding, but I expect once equities finish their bounce, they will turn lower because the FED's response is still not enough and won't be of long enough duration as the DXY is going to up again this week as it was last week. Not until the DXY heads lower-gets below 95 sustained and then below 92.50 (resistance area) will the FED be adding enough liquidity to get the US and world economy out of its deflationary situation.
As the FED dithers, 1/18, the DXY rallies from last week's close of 98.95 to 99.20. Euro-zone banks sell off in Europe trading as deflation fears spread. As evidenced by me and a few others, the FED has been tightening since 9/14-my view is 8/14. The FED is fighting the wrong war, "inflation", the world macro-econ issue is deflation. Massive defaults by government entities, companies and individuals would be more deflationary as bank losses will lead to M2 and loan constriction-setting up a self-reinforcing negative loop.
What we have is a character test, do Yellen and other FED leaders have the content of character to fess up they were wrong to raise interest rates last month, lower liquidity since 8/14 and continue to talk that same game for the rest of 2016?
The longer the FED dithers, the greater the odds the S&P 500 sell off drives the index down to the important technical level of 1576-the October 2007 high.
Just some monetary data from the FED:
1)Monetary base down 7.4%
2)Bank free reserve held at the FED down 15.1%
3)Balance sheet down 1.1% (pretty steady)
The FED has been tightening for awhile-it is my view since 8/2014.
They may have to "ease" quicker than just after two bad jobs reports. Quietly, the Dallas FED has told banks with high energy loan exposure to not "mark-to-market" those loans. Why? Because so many of those loans are impaired, that if the losses were recognized, it would put those banks is violation of not having enough Tier 1 capital. So what we have now is the FED worried about low oil/NG prices causing a bank "scare". One of the best ways for oil to go up is for the FED to get the DXY down. I look for FED injections of liquidity to start next week.
In all the excitement last week, the DXY was up from 98.45 (1/8) to 98.95 on 1/15. China and Saudi Arabia maybe exporting deflation, but the FED is the cause for:
1)World GDP slowing
3)Increasing financial instibility
Have a nice trip, be careful-you have been there a few times so of course you know what you are doing.
Perhaps on your return, you could comment on what the folks there think is going on in their part of the world and how China's slowdown is affecting them.
The good news is that there is all sorts of "capacity" in the US and the world.
This is nothing, that I can think of that is in short supply. So, there is lots of room for:
1)Fiscal stimulus-especially since central banks are buying much of this debt
2)Monetary stimulus and both the PBOC and FED have lots of room to ease
Therefore, when the PBOC and the FED start working together, the world economy ramp to stronger GDP growth could last 18 months to 3 years depending how fast inflation becomes a problem. During that "expansion", I expect the S&P 500 to cross over 3000.
In the interim, there is a technical floor of the S&P 500 around 1820-the Oct 2014 low before Bullard made QE4 comments and at the very end of QE3.
Pick any data you want today, Retail sales, industrial production, Empire index, business inventories-they were all soft. Top it off, Dudley said in a speech today, it is business as usual at the FED in so many words with strength in the labor markets. That reinforces my view, the FED is going to wait for 2 or more soft jobs numbers before reversing course-they want to make sure that there is "slack" in labor markets.
So, the FED by believing the BLS's inflated jobs numbers is going to induce a recession or nearly so-depending how fast they ease. Much of the chatter on CNBC is about deflationary concerns looming in the US and about the world. I'm still looking for S&P 500 to get to the 1600-1800 range as deflationary forces continue taking down sales and earnings estimates and put more and more companies in danger of default along with a few government entities.
It does appear the FED has started to listen, although sometimes the weekly data is tough to interpret because there are large seasonal swings this time of year. In the latest week, the balance sheet was up $13 billion, reverse repo was down $270 billion, free bank reserves were up almost $200 billion and M1 velocity has been creeping up in recent weeks from all-time lows.
The problem is that M2 was down for the 2nd week in a row, only up 3.9% annual rate the last 10 weeks and just about flat the last 6 weeks.
The balance sheet, free reserves and reverse repo are actions the FED can take "directly", whereas M2 is bank based as they must make more loans to increase M2. Loans were down last week (data comes out after the close on Fridays) and may just decline again this week. So what were have is the FED "easing" but banks are not making new net loans-perhaps many of their customers are using Christmas sales to reduce inventory, pay off loans, only to carry lower inventory to see what happens the rest of winter. Commercial paper-also used to finance inventories-outstanding fell the past week as well, but is higher than early Dec, which suggest net/net inventories are still too high.
Still, the FED has to add massive amounts of liquidity to:
1)Get the DXY down-it was up today to 99.10
2)Get M2 growth to 9%+ annualized
3)Balance sheet up $15-20 billion/week for months
4)Monetary base up similar amounts as the balance
This is all a multi quarter process. A few weeks of added liquidity, like the FED did after China devalued their currency last August, will not be enough to stop the negative loop going on in the real economy-although it will be enough for stocks to rally a few weeks for as long as the "juice is coming but won't be enough for a sustained advance to new highs.
Yahoo seems to be having difficulty picking up posts today-I'll try my deflation theme again.
Import prices for Dec came out today down 3.4% x-fuel. With fuel down 8.2%. Import prices have been down 17 months in a row. Import prices from China were down 1.7% a low since 2009.
It has been my analysis that the US has been importing deflation in the area of 3% (x-fuel) for close to a year now. Since the FF rate is .25-.50%, the real interest rate is 3.25-3.50%, so with the 10yr at 2.10% the yield curve is inverted. This view explains:
2)Slowing US and world GDP growth
4)Falling earnings estimates and stock prices from spring of 2015 highs
5)Falling commodity prices
6)Increased odds that the US goes into recession
Although I have not seen yet, confirming views, written or verbal, Steve Liesman of CNBC did come out today with the comment that, "Who is going to blink first? The FED or the economy." This mirrors my theme that the FED is playing "chicken" with the US and world economy. Art Cashin of CNBC has been saying for weeks that he expects 0% interest rates before 1% for the FF rate.
Until the FED "gets religion", the above trends should continue.
For the week end 1/9 auto shipments by rail were 13,276 carloads up 10.6% vs last year. Coming weeks will be more telling as they will not have holiday distortions. Otherwise, DLPH and BWA auto suppliers warned this week. I don't follow this sector too closely, so there may have been others, but I expect more in the coming months as production cuts will have to be made to reduce high inventories.
Within the ATA monthly trucking reports has been commentary most all of the last half of 2015 that high inventories has been and will continue to slow trucking activity. It should be no secret that the Dow Transportation Index has been leading stocks lower since last spring. That index made another 2+ year low today.
In the meantime, market measure of inflation and future inflation continue to tumble:
1)DXY is higher
2)10yr -2y=116 is an eight year low
3)5y5y FORWARD SWAP is under 2% for only the 3rd time in history-other two were Lehman 2008 and Sept FED no rate hike of last year
4)Even the Euro-zone 5Y5y down from 1.91% to 1.63%
Deflationary forces still rule!
World consumers are getting a "tax" break with oil prices. Oil prices could double and be net/net stimulative to the world vs a move from $60 to $90 would become a "tax". World grain and hence most food prices are cheap-another "tax' cut for consumers.
Fiscal policies by most of the Euro-zone countries has turned from "austerity" to stimulative-with the ECB buying government debt there is lots of room to continue to be stimulative. US fiscal policy has turned stimulative-given the budget deal of last month-as both Dems and Repubs look to pander to their respective constituencies.
So, if the FED would become neutral to accommodative:
1)DXY trends lower
2)M2 up $20+ billion to become up 9%+ y/y growth
with interest rates already low, stocks will become more attractive.
The wildcards? China continuing to drive the Yuan lower-which has been coming in waves-August was a wave and so was Dec/early Jan so far this year. The Saudis, as they are the oil price predator.
China, Saudis and a tightening FED are the main deflationary forces damaging the world's economy and financial systems. "Knowing" what they will do and then you will know when stock's downside risk is minimized and when the march to S&P 500 to 3000+ starts.
It is my view that since import prices have been falling about 3%, most of 2015, that the US is in a 3% deflationary environment. So when the FF rate is at .25-.50%, the real rate is 3.25-3.50%. With the 10 yr at 2.20%, the yield curve is inverted.
Yes, the CPI show positive inflation, but much of it is higher rents and health insurance and other related costs. No one want to spend more on housing and health related items-higher spending there is deflationary as it takes money away from spending in other areas. This is very similar to when oil prices are very high, it feeds the CPI higher, but is deflationary w/r to spending in other areas.
The FED has been "tightening" since August of 2014 w/r to the monetary base, its balance sheet and the wind down of QE3. As further "evidence" the DXY started its climb from the mid 70s to over 100 in July of 2014.
Bottom line, nominal interest rates are still low, but short term real rates are high as the US is in a deflationary environment of about 3%.
Free markets want to "clear":
3)Allocate resources efficiently
Creative destruction, but very deflationary!
Just the opposite, governments and central banks want to perpetuate the current status quo-economically and politically. Both have, governments and central banks, gone to great lengths- with deficit spending and easy monetary policies in these aims. Potentially very inflationary.
However, since 8/14 when the FED's balance sheet and monetary base started shrinking and the QE3 program was getting close to its end the FED stopped feeding the world the supply of $s it was use to feeding off of. That reduced "juice" has tilted the world balance towards deflation. In addition, because of government's resistance and interference they has been retarding the cleansing "clearing" dynamic of free markets-supply destruction has been slow. China especially is keeping alive vast industries that cannot operate based on economics alone. Saudi Arabia and others continue to produce oil at rates that drive prices lower than replacement costs.
So it all gets back to the FED. How much pain, some of it the good creative destruction kind, will occur before they intervene? Until they do, deflationary forces will continue to win out:
1)World GDP estimates will continue to fall
2)The ability of governments, businesses and individuals to service their $ denominated debts will get tougher
3)Debt overhang at all private and public levels absorb cash flow, leaving less for investment
If you have the answer to when the FED does their "reversal" and to what extent they begin to ease-then you will know, within days, when the reflation trade begins. Until then, its 1600-1800 for the S&P 500.