Equity Fund inflows/outflows

 

Keeping track of the money can provide some insight to the equity markets on a macro basis.

Including ETF activity, Equity funds report net cash outflows totaling -$7.606 billion in the week ended 2/13/08 with Domestic funds reporting net outflows of -$6.795 billion and Non-domestic funds reporting net outflows of -$811 million;

Excluding ETF activity, Equity funds report net cash outflows totaling -$332 million with Domestic funds reporting net outflows of -$4 million and Non-domestic funds reporting net outflows totaling -$328 million;

Exchange Traded (Equity) funds report net outflows of -$7.274 billion with the largest flows:
-$7.694 Bil from the SPDR Tr Series I fund;
$1.385 Bil to the iShares Russell 2000 Index fund;

Excluding ETF activity International funds report net outflows of -$204 million;

Excluding ETF activity Taxable Bond funds report net inflows totaling $1.248 billion;

Money Market funds report net cash inflows totaling $19.627 billion;

Municipal Bond funds report net cash inflows of $383 million.

Then this [latest] week;

02/20/2008

Including ETF activity, Equity funds report net cash outflows totaling -$4.197 billion in the week ended 2/20/08 with Domestic funds reporting net outflows of -$5.853 billion and Non-domestic funds reporting net inflows of $1.656 billion;

Excluding ETF activity, Equity funds report net cash inflows totaling $167 million with Domestic funds reporting net inflows of $141 million and Non-domestic funds reporting net inflows totaling $25 million;

Excluding ETF activity, Real Estate Equity funds report the fourth consecutive week of net inflows for the first time since 2/28/07;

Exchange Traded (Equity) funds report net outflows of -$4.363 billion with the largest flows:
-$3.43 Bil from the SPDR Tr Series I fund;
-$1.158 Bil from the PowerShr QQQ fund;
-$997 Mil from the iShares Russell 2000 Index fund;
$963 Mil to the iShares MSCI Emerg Mkt Index fund;

Excluding ETF activity International funds report net inflows of $138 million as net inflows are reported in all Emerging markets regions and net outflows are reported in Europe (-$15 Mil) and Japan (-$11 Mil);

Excluding ETF activity Taxable Bond funds report net inflows totaling $523 million;

Money Market funds report net cash inflows totaling $18.282 billion bringing assets in the sector to a record $3.4 Trillion;

Municipal Bond funds report net cash inflows of $182 million

Thus, you would have to conclude that currently there seems to be little interest in the purchase of equities at current valuations.

 

Collection ratio comparisons

Lehmans Collection ratio of 0.76 was a bit of a surprise, as it was pretty bad. Normally you would be looking for a ratio of 0.95+

As a quick comparison then;

Company………………………………………Ratio

Morgan Stanley…………………………….1.05

Goldman Sachs……………………………..0.95

Merrill Lynch……………………………….0.61

So two far better, one, even worse.

 

Quick and dirty analysis for Lehman [LEH]

LEH has been pegged as one of the worst Investment Banks for exposure to CDO’s and other woe’s currently.

Therefore a quick and dirty analysis of LEH.

Line Entry………………………2007………………………..2004

Receivables……………………..+54%, +29%, +15%, +22%

L.T debt…………………………+51%, +50%, -4.5%, +30%

 Accts Payable………………..+46%, +29%, -13%, +28%

 Accrued Expenses…………..+9%, +34%, +3.3%, +14%

Operating Income…………+1.8%, +22%, +37%, +38%

Current ratio…………..0.54

Collections ratio ……..0.74

Thus Lehman is on very shaky ground. Operating Income growth anaemic, while the Current liabilities exceed Current assets by almost 2:1 necessitating further borrowing. This business is already leveraged higher than is prudent, and with the poor collections on Receivables, further cashflow problems are likely.

That the banks [and brokers etc] are rallying currently, on bailout news, or other, certainly makes the market seem a tad irrational.

 

National Health Investors

 

Some further analysis.

The long term debt is at variable rates of interest. Thus swings in the interest rate will effect a swing in cashflows due to interest paid. Thus the paying down of debt reduces the gains/losses to this variable.

The largest customer [NHC] who lease 41 properties, reached agreement to extend the leases through 2021

Increased diversification through customer base; this is important as when this REIT was started in 1991, NHC was the sole customer and constituted 100%. Currently NHC constitutes 14.1% of the portfolio.

Hidden value. When the assets were purchased [transferred via non-taxable exchange] the properties were valued at net depreciation book value, after 20+yrs of depreciation. Thus the actual values [land] will have appreciated at 4% compounded to provide increased [undervalued] assets.

No value is provided, but we can use some arbitrary numbers;

Assume $10 Million Book value in 1991 depreciated @ 5% but actually rising in value by 4% compounded we then have a starting value of $26.5 Million in 1971 with a value circa $104.5 Million today. These figures are not actual figures, so it is not yet possible to ascertain whether the value is recognized and priced in, or unrecognized, and thus represents some hidden value.

 

National Health Investors [NHI]

Today saw a sizeable decline in the price.

Capitalization of this common stock has improved with a larger % coming from equity, and the long term debt declining from a 5yr average of $150.7 to currently $113.5. In the current credit environment and generally, this is a positive.

Expenses have increased. This is not really what you want to see. They are reflected primarily in two areas; Cost of Goods, which would be properties purchased, increased by 15% reflecting the high real estate prices and SG&A which is management, increased by 117%.

The increase in property costs [to purchase] is unfortunate, and definitely hurts results. The huge increase in management costs I shall look into more closely.

Cashflows have remained positive, and reflect hidden value from the reported Net Profits. This understated income has been utilized to pay down long term debt. This is a major bonus as no further Equity was required to be sold. In point of fact, common stock was reduced, also from cashflows. Cashflows have weakened, but are still showing a surplus that has not filtered through to Net Income.

Cash has increased, not unimportant with the coming problems anticipated in commercial real estate and thus impacting commercial REIT’s.

CapEx is a further cost that has been absorbed by the strong cashflows. Again, this is a little added value.

Revenues have been static. This represents the inability to raise rents. Of course the major concern would be leases renegotiated at lower rents going into the future, which would seriously impact Revenues and overall profitability. Again, leases will need to be further investigated.

All other operating ratio’s are and have been consistent, thus no immediate red flags have been thrown up.

Dividends have been consistently paid, with an approximate 6% compounded increase. Currently the dividend seems secure. This of course is the major concern. Should a serious recession strike this [healthcare] sector, can Revenues be maintained high enough to preserve at current levels the dividend? That there are some hidden cashflows that provide some cushion is positive, but, not conclusive.

Valuation: Currently, overvalued. I have an intrinsic value range from $16.50-$22.39 and with a current price circa $30, we would be paying a premium. However, current Yield is circa 7% this is not an insubstantial factor if as mentioned, this dividend is relatively secure.

NHI Increases Dividend to 55 Cents

February 5, 2008 4:31

National Health Investors, Inc., NHI announced today that it will pay a first quarter dividend of 55 cents per common share to shareholders of record on March 31, 2008 and payable on May 9, 2008. This is an increase of five cents, or 10% over last quarter’s dividend.

This 55 cent dividend reflects the company’s continued success in managing its portfolio and confidence in its future cash flow.

NHI specializes in the financing of health care real estate by purchase and leaseback and first mortgage transactions.

A little further analysis required, but potentially, this common stock is moving in the right direction for a longer term investment.

 

Oil via XOM & Gold via GLD

Statistical arbitrage traders trade this one;

Of course what we are really looking at is inflation. The loss of purchasing power of the US dollar via commodities, in this case oil, and the alternate currency, Gold, pricing this also to the US dollar.

 

Cardica Inc. [CRDC]

This is a speculative, or story stock. So, what is the story before we examine the financial statements.

This company manufactures equipment for performing anastomotoses on both venous and arterial tissue.

The later designs are still awaiting FDA approval in the US. They are however being sold in Japan and Europe. The later generation models failed the FDA based on lack of significant data within the research protocols.

The two trials that the FDA “failed” had respectively; 55 patients, 54 patients. The latest trial due for re-submission in 1Q 2008 has 220 patients.

This limited data is a real problem. Not only in the clinical trials, but in the real world where the limited sales of product are actually being used. Doctors [surgeons] are very conservative, and will adhere to the recognised “Gold Standard” treatment. Thus data gathering is both critical, but very difficult and represents a significant risk.

Within their Financial Statements the company identify alternative treatments. They have listed;

*Pharmacological intervention; Platelet adhesion inhibitors, cholesterol inhibitors

*Stents & Drug eluting stents

*Coronary angioplasty

I shall add two more that they have ignored, both of which are increasingly being utilized, the first by primary physicians, which is prevention via diet, exercise, lifestyle, and the second which is actually where the future of curative/pallitative medicine lies;

*Stem Cell technology http://www.vescell.com/

There are a number of further serious risks;

*The main competitors to this company are J&J and Abbott Labs. Both dwarf this company in any metric you care to utilize. That this company is going against these two head-to-head must give pause.

*One significant customer, which is “Century” located in Japan. Whenever a company with weak revenues, which this is, is tied to a dominant customer, this adds significant risk.

*Weak R&D spending. This is a “research” based company supposedly. Well their R&D spending has increased by a tiny 2.5% compounded. This is the smallest increase on their Financial Statements. The next smallest spend is on CapEx. at 5%. This company certainly isn’t spending like a company looking to stretch the envelope.

*Losses are large and growing at a 17.2% compounded. Far from gradually improving, this company is going backwards. Losses currently are [-$81.83] million.

There are no earnings, nor have there ever been any earnings. All the cash has been raised via selling of various forms of debt and equity.

The major source of expenses that has grown at 19% compounded is SG&A which is the primary method of marketing via a direct sales team.

Cost of Goods actually exceeds Revenues. This is dangerous in that Fixed costs are not even being recovered, never mind Variable costs.

An alarming development is the reduction in CapEx to below the Depreciation rate, most likely to try and reduce losses, however, the message management is sending is of even less growth going into the immediate future.

Costs have also been capitalised. While not illegal, it is aggressive accounting. On a 5yr average $0.97 million were capitalised, and in the most recent statement this rose to $1.18 million.

Per $1.00 of assets the company is earning on a 5yr average $0.08 and in the last Financial Statement $0.17 This does not include any adjustments and is based on Revenue. This is clearly unsustainable.

*Burn Rate; at the current rate, the company can remain in business for 18mths. After this point [or prior] more cash will need to be sourced.

In addition, there are some 1.3 million Options outstanding, 730K Warrants with common stock at 110K. This means, should either warrants or options be exercised in excess of the treasury shares, open market purchases would be required, further depleting cash assets.

Part of the “Cash” assets are held in the following form [as per last statement]

*$5.8 million in Auction Rate Securities

*$1.2 million in Commercial Paper

*$1.8 million in Treasury Paper

Interesting as currently all three markets are in turmoil, thus the company liquidity may not be quite what their CFO was expecting.

Patents; currently 50 US Patents, 62 International, with life between 2018-2024, and a small number currently in application.

Inventory is accounted for via FIFO. This has some interesting consequences, which I shall cover as an update.