Friday, June 29, 2012

A Buyout is RIMM's Best Hope for Survival

Research in Motion is the worst stock recommendation I have ever made. The company introduced one of the greatest technological devices ever invented, yet it squandered its market-leading position and it is now in danger of going out of business. Its demise is due almost entirely to mismanagement. RIMM was previously run by co-CEOs, a management structure that was doomed for failure. And while Apple and Samsung came out with generation after generation of new devices that wowed consumers, RIMM kept promising that it was working on something big. That promise is now ringing hollow.

Yesterday's (lack of) earnings announcement was extremely disconcerting. Revenues for the first quarter of fiscal 2013 plunged to $2.81 billion from $4.19 billion in the previous quarter. The company reported a net loss of $518 million or 99 cents per share. However, believe it or not, the subscriber base actually increased marginally and cash, cash equivalents, short-term, and long-term investments increased by more than $100 million during the quarter to $2.25 billion. That comes out to almost $4.30 per share.

RIMM is banking its future on the BlackBerry 10. Management said yesterday that this new platform will be available during the first calendar quarter of 2013. This announcement is being interrupted as a delay. After all, the company previously said that the BlackBerry 10 would be launched during the second half of fiscal 2013. The more important concern is whether the BlackBerry 10 will live up to expectations and, even if it does, will that make a difference. RIMM has demonstrated the device to developers, many of which were duly impressed; however, even if the BlackBerry 10 blows the iPhone out of the water, it may be too late to save the company.

It is becoming increasingly clear that RIMM's best chance for survival depends on it being acquired. In the past, the company turned down a number of offers. This time, it is actively seeking strategic alternatives. I would think that there are a number of companies that would be interested in getting access to RIMM's patents, international distribution channel, and its secure network. As always, it's just a matter of price. Given the company's cash horde and lack of debt, a 35% premium to the current market price would cost a potential acquirer only about $6 per share out of pocket.

Tuesday, June 26, 2012

More Evidence of Slowdown as Advisers Fear Obama Reelection

Last week we learned from the Philly Fed Index that manufacturing activity had slowed in the Third District, which includes most of Pennsylvania, southern New Jersey, and all of Delaware. Today, we got similarly disappointing news from the Federal Reserve Bank of Richmond. This report covers the Fifth District, which includes Maryland, Washington D.C., the Carolinas, Virginia, and most of West Virginia.

Once again, the evidence shows a slowdown in business activity. The composite index fell from +4 in May to -3 in June. It was +14 in April. There was significant deterioration in key individual components of the index as well. Shipments were down and backlog fell. The volume of new orders plummeted, as did capacity utilization and the average workweek. There was an increase in inventories. Input prices and prices for finished goods increased, but at lower rates than in May and April. Perhaps because conditions worsened,manufacturers expect (or hope) that future conditions will improve.

Today's report from the Richmond Fed adds to the evidence that the economy is worsening. Whether the slowdown has anything to do with the crisis in Europe is not entirely clear. Whatever the reason, it is apparent that there is a lack of confidence in how governments worldwide are addressing today's serious economic problems. Furthermore, InvestmentNews reports that 70% of the 450 financial advisers surveyed by Brinker Capital claim that their single biggest fear is another four-year term for the Obama administration. Financial advisers tend to cater to the affluent so this finding may not be surprising. Nonetheless, it does not bode well for an administration that needs the affluent to help finance its reelection campaign.

Thursday, June 21, 2012

Philly Fed Fuels Fears of Slowdown

The Business Outlook Survey, better known as the Philly Fed Index, came out this morning and the results were not good. The data comes from a survey of approximately 160 manufacturing companies in the Third Federal Reserve District, which includes most of Pennsylvania, the southern half of New Jersey, and all of Delaware. About half the surveyed firms respond.

The diffusion index plummeted to -16.6 in June from -5.8 in May, the second negative monthly reading in a row. A negative number indicates contraction in the manufacturing sector. A more negative number indicates an increase in the rate of contraction. In other words, business conditions were not good in May and they got worse in June.

The results also indicate that new orders and shipments fell from May to June as did unfilled orders, delivery times, and inventories. While the last three items might appear encouraging, they are not. They indicate a lack of business that could eventually result in layoffs. Ironically, the survey indicated that the number of workers actually increased from May to June; however, the average number of hours worked fell. Unless business activity picks up soon, many firms will conclude they are overstaffed.

The survey also has implications for inflation, or more correctly, the lack thereof. Both input prices and prices received for finished goods fell, which should give the Federal Open Market Committee more confidence in its accommodative monetary policy.

Keep in mind that business executives tend to be optimistic by nature. Indeed, the respondents said they expect business conditions to improve over the next six months. More importantly, however, they were less optimistic than they were earlier this year.

Although these results cover only a small part of country on a geographic basis, the Third District is densely populated and includes a large number of businesses. In other words, the implications for the entire economy are not good. The results are consistent with other data that indicate a general slowdown in economic activity. GDP forecasts of 1.0% to 2.0% growth are beginning to look too optimistic.

Monday, June 18, 2012

The Fed is Like a Drug Dealer

Investors worldwide were holding their collective breath over the weekend worried about the elections in Greece, Egypt, and France. Greece, of course, was the primary focus. Many investors feared that the left-wing Syriza party would win the election and hasten the country's exit from the euro. However, Syriza lost to New Democracy, a more conservative party that has vowed to stick with the nation's previously made bailout agreements. However, New Democracy's victory was not decisive. As a result, it is trying to form a coalition with the third-place finisher.

Initially, markets were relieved. U.S. futures surged, indicating a strong open. But the gains fizzled out as investors began to realize that the election solves nothing. Greece is still in trouble. There is still a good chance it will abandon the euro, only later rather than sooner. Furthermore, Spain and Italy present even more serious problems.

The big mystery is not why the markets opened flat, but why they are holding up so well. The explanation has to do with the Federal Reserve. Investors seem to think that bad news is really good news, and that really bad news is even better. They reason that the worse things get in Europe, the more likely the Fed will come to the rescue by dishing up more stimulus. One concern I've had for a long time is that stock market rallies are being fueled not by improvements in the economy, but by Federal Reserve stimulus. The Fed, however, is like a drug dealer delivering a temporary fix. The Fed cannot address the real problems in the economy. That will require Congressional action. For example, a complete overhaul of the tax code would help matters tremendously. Congress could start by simplifying the tax code. It should eliminate deductions and reduce tax rates. But with an election just months away, it's a sure bet that Congress won't do anything.

We'll hear more from the Fed on Wednesday. Some investors are betting that Ben Bernanke will extend "Operation Twist," the Fed's attempt to bring down long-term interest rates. Unfortunately, the economy's troubles have nothing to do with high interest rates. Nonetheless, the markets may rally in reaction to whatever action the Fed announces. Stock market rallies are nice, but they won't solve the real systemic problems in the economy.