Focus Media Paints Nasty Picture of Chinese Economy

Beijing has been taking steps to avoid a post-Olympics slowdown, but you wouldn't know it reading these comments from Focus Media's (FMCN) third-quarter earnings conference call:

"We saw a hugely challenging advertising environment towards the end of the third quarter, early in the fourth quarter. The recent global financial turmoil and the slowdown in consumer demand in the US and European markets have had a significant negative impact on the Chinese economy, as well as on the mindset of the corporate decision-makers in China. The market we are facing is the most severe in the recent history of the Chinese advertising industry."

"And back in September, our Analyst Day, we did have some visibility for the upcoming quarters, and we have worked hard with our sales team. Normal year, we do have – we always have slow fourth quarter in the last three, four years. This year, since the economy changed so much dramatically, it started from late September; we have experienced some delay, postponed on our current contract with customers."

It is typical for any economy to suffer from a post-Olympics hangover as growth slows from a period of artificially-inflated economic demand. After all, you can only use so many stadiums. Unfortunately, the whole world is screeching to the halt right now, which doesn't bode well for the Chinese economy. If advertising budgets are being cut, then don't expect China to bounce back anytime soon, because a lack of confidence can be absolutely toxic.

The fact that the Chinese government is getting so aggressive to hold up its economy should be considered to be bearish, not bullish. Governments and large bureaucracies intervene only when they're freaked because things are awful. For parallels to the Chinese government's activities, look at all the US government's done to prop up the financial sector this year, and OPEC's desperation to hold up oil prices. How did those turn out? The world moves in cycles, and you can only influence them so much.

On a positive note, the Chinese online gaming sector remains in relatively good shape. Perfect World (PWRD), a stock I own, reported pretty solid Q3 results on Monday morning, showing that not all of China is croaking. I'd add to my position, but I'm pretty worried about ongoing multiple shrinkage.

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$2 Trillion In Loans... ...Can We Get Just a Little Transparency?

I thought the haunted house I went to in Elysburg, PA spooked me, but it's nothing compared to what I'm feeling as we learn that the Fed is refusing to disclose details on $2 trillion worth of emergency loans issued to financial institutions.

This story isn't garnering nearly as many headlines as it should, and we should all give kudos to Bloomberg News for filing a Freedom of Information Act to force disclosure of exactly who the heck is getting all this money, and what kind of collateral they're putting up. Taxpayers should know how their money is being spent! Especially when the dollar amounts have hit the trillions with zero guarantee of a successful result.

I have an idea. Let's take one measly billion out of these bailout plans, and use it to get some homeless veterans off the street. At least we'd have something to feel good about.

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WWE Falls on Q3 Earnings - Time to Buy?

Way back in the late 1990's, I was a huge wrestling fan. In those good old days, WWE (WWE) superstars like The Rock, Stone Cold Steve Austin, and Mankind made Monday Night Raw one of the funniest and most entertaining shows on television. So when a LongShortTrader.com reader asked what I thought about WWE the stock, my interest was more than piqued.

So is WWE the most electrifying stock in sports entertainment? Let's see.

The biggest attractions of WWE are the following:

1) Phenomenal intellectual property
2) Little meaningful competition (sorry TNA fans)
3) That big fat juicy 10% dividend yield

That's all good and nice, but I am very worried about the effects of a slowing global economy on WWE's live event and pay-per-view businesses. I suspect that pay-per-view buys won't get particularly bad since many people chip in for them, but it's safe to say that fewer people will have the money to put up money to buy PPV's.

On the live event side, I'd be very shocked if this business didn't see some negative impact from weaker consumer spending, and the stronger dollar will likely put a damper on international growth. This is especially true when you consider what the company says about its foreign-exchange risk.

In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our results of operations. Our foreign currency exchange rate risk is minimized by maintaining minimal net assets and liabilities in currencies other than our functional currency.

So don't expect hedging gains!

Plus, WWE's balance sheet is starting to weaken a bit. As of the end of Q3, the company had $204 million in net cash, down from $263 million a year ago. The WWE stated that it is cutting costs and that it is committed to maintaining its dividend, but in my eyes, the fundamentals have more room to weaken, and the declining cash balance will provide less of a cushion to the stock. And even if WWE continues to support the dividend, it certainly won't be raising it any time soon.

And in any case, if one is looking for high dividend yields, one option is the BlackRock Dividend Achiever Trust (BDV), a closed-end fund with a 9.3% yield that is trading at a 9.7% discount to its net asset value.

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U.S. Dollar to Herbalife: You're Just Another Victim Kid!

Herbalife (HLF) is getting hit after hours as the "you call it Ponzi scheme, we call it multi-level marketing" powerhouse issued lower-than-expected fourth-quarter and full-year 2009 guidance, which looks especially stinky considering that the company actually CUT its tax-rate outlook.

The culprit? That lousy, stinking, cheating, rising dollar! Let's look at this excerpt from the press release:

The company’s initial diluted earnings per share guidance range for 2009 is $3.00 to $3.20 on volume point growth of four percent to five percent and net sales flat to up one percent compared to 2008, respectively, reflecting late October foreign exchange rates coupled with an effective tax rate range of 27.5 percent to 28.5 percent. In addition, currency movement of minus 10 percent to plus 10 percent on all of our currencies compared to the U.S. dollar, from late October levels, would have a negative seven percent to positive seven percent and negative 21 percent to positive 21 percent impact on net sales and earnings per share, respectively, compared to our full year 2009 ranges provided above.

In other words, if you own Herbalife, you're making a pretty serious bet that not only will the company execute, but that the U.S. dollar will decline.

Assuming Herbalife opens tomorrow at $22, the stock is trading at about 7 times expected 2009 earnings with a 3.6% dividend yield. The balance sheet could be better, as Herbalife has about $177 million in net debt, but the company is a free-cash-flow machine. So I'm adding Herbalife to my watch list, but I'm going to see how the conference call goes before sticking my neck out.

P.S. The picture above is in fact a real Herbalife ad I found in a Brooklyn subway station.

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Ignore Takeover Rumors. NOW! (especially when Microsoft is involved...)

According to Briefing.com, there's a rumor goin' round that Microsoft (MSFT) is interested in acquiring beleaguered GPS device maker Garmin (GRMN). Please tell me that you're not falling for this drivel, because it is pure nonsense generated by:

1) Someone desperate to get out of GRMN, or
2) Someone trying to sound smart and important by pretending to be in the know

Let's look at some other MSFT-for-whoever rumors that have popped up on Briefing this year:

August 11, 2008 - INTU Aug 30 calls (volume: 3190, open int: 1540, implied vol: ~38%, prev day implied vol: 29%) -- the Sept 32.5 calls are also seeing interest as strength in the stock is attributed to a MSFT-for-INTU rumor.

July 18, 2008 - Akamai Tech pushes to session highs as renewed MSFT-for-AKAM rumor makes the rounds.

June 30, 2008 - VCLK Jul 17.5 calls (volume: 3120, open int: 4400, implied vol: ~67%, prev day implied vol: 59%) -- the Jul 15 calls are also seeing some interest as an earlier spike in the stock is attributed to a renewed MSFT-for-VCLK rumor;

May 27, 2008 - Reuters reports shares in Yell Group rose as much as 5.4% early on Tuesday as traders cited market talk of bid interest from Microsoft (MSFT).

May 5, 2008 - McAfee pops to session highs in past few minutes; strength attributed to rumor that MSFT could acquire MFE now that YHOO deal fell through (34.21 -0.04) -Update

January 11, 2008 - Limelight Networks: Rumor: MSFT to buy LLNW - Silicon Alley Insider (6.87 +0.88) -Update : Silicon Alley Insider story reports that lots of "Microsoft to buy..." rumors banging around these days, and here's another one: Microsoft is interested in buying content-delivery-network LLNW.

Now let's count up how many of these rumors were true. Yep, you've got it, not one of these rumors were true. And can anybody out there tell me why Microsoft would want to enter a terrible industry with shrinking growth and profit margins? Sure, Microsoft has made some goofy decisions with its money ($5 billion AT&T investment anyone?) in the past, but buying Garmin would top the list.

The moral of the story kids? Most takeover rumors are pure BS. Ignore them. Now!

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Financial Survivor Series: Watching Goldman Sachs

Lord knows I'm a fan of the likely survivors of the financial-market meltdown. I own Raymond James Financial and thinkorswim (SWIM), market-share takers with solid balance sheets that will survive and thrive longer term.

I'm willing to bet many disgruntled Merrill Lynch (MER) brokers will end up at Raymond James, and thinkorswim will keep on scooping up options traders in search of reasonable commissions and superior customer service.

I'm overweight financials, but Goldman Sachs is a name I'd like to eventually add to my stable of financial survivors. The near-term business environment for Goldman is pretty awful by any measure, but Bear Stearns (BSC) and Lehman Brothers LEH) have gone bye-bye while Citigroup has seen its reputation sullied. Merrill Lynch has even sought refuge with Bank of America, whose CEO Ken Lewis said last October that “I’ve had all the fun I can stand in investment banking right now.'

Along with boutique firms like Lazard (LAZ) and Greenhill (GHL), Goldman Sachs is clearly going to take market share in just about every institutional financial services category imaginable, ranging from M&A advisory to trading to prime brokerage - businesses that stink now but will eventually come back.

Taking all that into context, Goldman is trading down about $4 today on this news I caught off Briefing.com:

Goldman Sachs tgt cut to $80 at Ladenburg Thalmann; firm also cuts 2008-2010 ests, maintains Sell rating (91.37 -1.17) -Update : Ladenburg Thalmann cuts their tgt on GS to $80 from $140. The firm also cuts their estimates to the following: 1) the 2008 estimate is being reduced to $10.11 (consensus $12.03) from $12.57; 2) the 2009 estimate is being cut to $6.05 (consensus $13.01) from $15.30; and 3) the 2010 estimate is being reduced to $9.78 from $17.85. The firm says that the short-term outlook for the company is poor. The intermediate term outlook is challenging. The long-term outlook is good. They say the problem in the short run is valuation. Firm says the co has as a policy the purchase of distressed assets. In the past this has proven to be a very successful strategy generating an estimated $10 billion in revenues. Today, they say, this strategy is falling under the new mark to market accounting rules. Core businesses such as credit derivatives, private equity, prime brokerage, and international are suffering, says the firm. They say the intermediate term will benefit from the fact that competition is drying up. Longer term, they say many would argue that this is still the best place to do equity underwriting business. The firm says that one cannot ignore the possibility that GS might link up with a large universal bank. This, they say, would be a positive.

One must be extremely careful when buying stocks with declining earnings expectations, but Goldman Sachs is exactly the type of company I want to bet on for the next five years.

In fact, if I didn't already own RJF and SWIM, I'd be buying right now on this weakness.

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