Market Buzz – Debt Back in Focus in Volatile Week
For Toronto’s main index, this past week was anything if not uninteresting. The TSX began on a solid note, posting two strong days of gains only to fall off a cliff on Thursday, losing 2.3 per cent and finally touching a three month low on Friday before rallying late on what appeared to be a short-squeeze and ending up on the day and virtually flat for the week.
Thursday was the day to remember as the TSX notched its steepest percentage drop since early October as investor confidence was shaken by intensifying concerns about sovereign debt in some euro zone countries. Investors rallied to the relative “safety” of U.S. Treasury bonds and the greenback, which also took flight on lackluster U.S. jobs data.
For investors, the debt issue appears to be back in focus. As we have stated for two year now, the “Great De-leveraging” that must occur is not something that can happen overnight and will take years, if not decades, to get truly under control. As the markets rebounded from thoughts of financial Armageddon last March, this issue was largely pushed aside, but as valuations creep higher, it remains the elephant in the room and a long-term challenge within the U.S. and many European countries.
This is not to say there will not be growth opportunities, but investors have to set their expectations for growth more realistically in 2010 and moving forward, as countries, corporations, and citizens tackle debt levels that got out of control in the excess of the past couple decades.
Growth opportunities will present themselves, but we must be mindful of the risks and use a patient, disciplined approach.
This coming week, KeyStone Financial (www.keystocks.com) will release our annual Micro-Cap Survey for 2010. The survey is a bonus report for our valued Level II & Level III clients and is also available for purchase ($109) for non-subscribers. The Survey begins with 500 Canadian companies with market caps of under 75 million and, based on several criteria including profitability and growth prospects, is narrowed down to 50 select micro-caps which are compiled in a statistical fundamental analysis. From here, we select 5-7 individual stocks for which individual reports are released on with specific recommendations. The companies are also added to our model Micro-Cap Portfolio.
Additionally, we will be updating Migao Corporation following the release of the company’s fiscal 2010 third quarter financial results for the period ending Dec. 31, 2009. The results are due out Thursday after market close and will be followed by a Friday conference call.
Finally, early last week, MOSAID Technologies Incorporated (MSD:TSX), from our Small-Cap Universe, announced that it had signed a worldwide, non-exclusive wireless patent license agreement with Sony Corporation of Japan.
The deal is a non-exclusive wireless patent license agreement granting Sony a fixed-payment term license under its wireless technology patents, covering all Sony Wi-Fi enabled products. This is the first time the company signed any company of size in the gaming console space. There are a couple of heavyweights in the gaming space and there is more room for additional players to be signed here. Having a name like Sony licensing the company’s patents is always a positive, but the impact in terms of revenues at this point is difficult to assess until management provides some sort of further clarification.
Looniversity – Don’t Get Burned by the Burn Rate
Burn rate refers to the amount of money a company spends from month to month (money burnt) in order to survive. Thus, a burn rate of $100,000 would mean the company spends $100,000 a month above any incoming cash flow to sustain its business.
Keeping a sharp eye on cash flow, which is a company’s life-line, can guard against holding a worthless share certificate. When a company’s cash payments exceed its cash receipts, the company’s cash flow is negative. During a bull market, unprofitable companies can finance cash burn by issuing new shares and investors are more than happy to cover cash burn – look no further than the junior mining boom we recently saw end. But when a bear hits, companies can get stuck living on their bank balances or scrounging for unfavorable finance terms and if the cash dries up, go bust. For investors, it’s important to follow a company’s available cash, evaluating how long it will last and what will happen when it runs out.
Particularly in times of turmoil, pay close attention to cash on hand (limited debt as well) and examine the company’s cash burn rate. If a company burns cash too fast, it runs the risk of going out of business.
Put it to Us?
Q. On BNN and CNBC, I keep hearing market gurus use the term “accumulation” or “accumulate” in what seems (to me at least) like different meanings. What’s up with that?
– Phil Walters; Edmonton, Alberta
A. Well Phil, like a massive snowball gaining momentum down a slope, the term accumulation seems to be “accumulating” more and more connotations within the financial arena – leaving the average investor “a snowball’s chance in hell” at understanding its true meaning. Okay, this may be stretching it a little, but its varied usage can be confusing.
There are three basic references to accumulation in the investment world.
In the context of corporate finance, it refers to profits that are added to the capital base of the company rather than paid out as dividends.
In the context of investments, it refers to the purchase by an institutional broker (or big investor) of a large number of shares in a company over a period of time in order to avoid pushing the price up.
In the context of mutual funds, it refers to the regular investing of a fixed amount while reinvesting dividends and capital gains.
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