- A Strong Case Building to Term this a Depression later in 2009
- Redline at $0.30 provides discounted cash and $40 Million in Revenue valued at Zero
Obama's $819 billion economic stimulus bill only requires Senate approval but its too early to break out the party hats. The problem is... The Congressional Budget Office (CBO) revealed that it will take 19 months for 64% of the money to make its way into the economy. The red tape of government will inevitably result in delays and abuse.
There is a common theme emerging amongst many analysts and economists - the world's economies need to go through a painfull period of extreme "write-downs" (across many asset classes). Asset Values and Debt could not be sustained at current levels and now we must pay the price of having the global financial system cleansed of years of excess.
It was inevitable this would occur. People felt it was "normal" to carry $1/2 million mortgages on homes or condos, and do so with 40 year mortgages because their wages couldn't keep up with the payments. This housing issue was a common scenario in cities around the world and it created artificial wealth. Whether Obama creates a stimulus plan or not, we are too deep into this mess to get out. The system (in whatever fashion we are seeing) needs to purge the "excess". If that takes 1 year or 3, it needs to be done.
This is likely how a "depression" scenario may play out. Fortunately (unlike the 1930's) North America now has social support systems to help people financially (to an extent) but most other countries have no such structure in place. It is going to create a lot of financial hardship and social unrest over the next few years.
Few want to use the D-Word, but recently Merrill Lynch's top economist, David Rosenberg, did. He made reference to the following:
- $ 6 trillion - The amount of private sector debt that needs to be eliminated
- $ 1 trillion - The amount of excess capacity in the US economy.
- $13 trillion - the cumulative loss of household net worth at the end of 2008.
Albert Edwards at Societe Generale (a skilled veteran analyst) recently said the United States' economy looks likely to enter a depression and China's could implode. He is predicting that sometime this year the S&P 500 index could be set for a fall of around 40% from recent levels.
Right or Wrong, all of this leads to one simple conclusion. Avoid debt and with smallcaps or microcaps, focus on companies with strong balance sheets and cash.
A couple very good cash rich stocks from our core group that we bottom fished in December are languishing. One in particular is Redline which remains at the November price. I believe this is well worth the time to follow up on.
Redline Communications (RDL.T $0.32)
The company's net cash and receivables after paying out any debt should be close to $10 million (approx. $0.58/share). With the stock near $0.30 this still means the cash is dramatically discounted. In addition, almost $14 million in inventory is valued at zero and the business itself (generating over $40 million in annual revenue) is deemed worthless. This includes important FCC licenses which the company has obtained over the past year.
None of this makes any sense but it does make for excellent low risk speculation.
December 3rd the company also announced plans to cut costs by $10 million annually. Right now their technology and client base (which is very significant) is worth something to someone - market valuation down here means the cash alone isn't even worth the paper its printed on.
Lurking in the background is also a disclosure from November in which Vecima Networks (VCM.T $6.90) announced that they have been accumulating RDL in the open market and their ownership went to 11.37%.
Vecima is a very well run (20 year old) technology company with 900 employees. Their annual sales are in the range of $120 million and they are profitable. The company designs, manufactures and sells products that enable broadband access to cable, wireless and telephony networks.
In addition, they have a WiMax division but its very possible their technology cannot compete with Redline and they recognize this. Redline has one of the best Wimax technologies on the planet right now and I suspect "someone" will recognize this value soon.
The economy will impact the growth of WiMax, but it will be strong in emerging and underserved markets (overseas in particular). Industry experts also expect to see consolidation within the industry during 2009 - this is what we hope to take advantage of with RDL. To understand the strength of Redlines technology, one only needs to review their news releases over the past year.