Q4 GDP Analysis

Q4 GDP grew at an annual rate of 5.7% from the third quarter of 2009, according to the advanced estimate released by BEA yesterday morning. Some interesting observations:
- Overall, PCE (Personal Consumption Expenditure) constitutes 71% of GDP. This is a chicken and egg problem. PCE will not improve unless unemployment comes down, and businesses will not start hiring unless they see an improved economy.

 

- Out of 5.7% annual growth, Change in Inventories contributed almost 3.39 percentage points, or roughly 60% to the overall growth. While a lot of economic experts and pundits do not think this as a real growth driver for obvious reasons and I tend to agree with them, but I am also cautiously optimistic that this trend and growth in inventories lead to businesses confidence and may lead to hiring of workers, which can then led to higher PCE, thus breaking the chicken-egg problem. Also, noteworthy is the fact that despite a 60% contribution to overall GDP growth, the inventories actually fell a further $40bn in the quarter.But the drop in this quarter was much less than the record liquidations that happened in Q3 2009. This suggests me that there is a lot of scope for inventory restocking and that the change in inventories might still continue to add positive momentum to Q1 and Q2 2010 GDPs.

 

- Within the PCE Goods contribution of 11% to the growth, most of the growth is coming from Non-durable goods such as food, beverages, clothing etc. Durable goods consumption such as motor vehicles dropped from Q3. Motor Vehicles consumption was expected to see a drop because of the much criticized but extremely successful "cash for clunkers" program. Motor Vehicles and parts contributed 0.81 percentage points to the 2.2% growth in Q3, while it subtracted 0.57 percentage points from the 5.7% GDP growth in Q4. Assuming Cash for clunkers borrowed sales from Q4 into Q3, this event led to a drop in Q4 GDP. .If not for cash for clunkers, Q4 GDP would have grown by 6.3% assuming no change in motor vehicles consumption from Q3 to Q4.

More analysis on the report later..

Chicago PMI - Jan 2010

While most of the media today focused on the lagging Q4 GDP report, little attention was paid to the foremost leading indicator Chicago PMI, which was also released today as expected on the last business day of the month. The Chicago Purchasing Manager's Index strengthened significantly in January and jumped from 58.7 in December to 61.5 in January. Most noteworthy change is in the employment index which entered into the expansion phase (>50) for the first time since November 2007 and is now at its highest level since April 2005. Given Chicago PMI's 91% correlation to the ISM report, it would be interesting to see how this report impacts the upcoming BLS Non-farm payroll no.s and the unemployment rate.

SHOR - A Long Term Opportunity

In the last week’s sharp selloff, Shoretel (SHOR), a leading SMB IP telephony provider has declined almost 8%. I think this is a great buying opportunity for both short-term as well as long-term investors. As can be seen in the chart below, the stock’s downtrend ended in November and since then, the stock has been on an upswing. If the stock further goes down to under $5.5 levels, it should be seen as a stronger buying opportunity in my opinion.

Although SHOR competes with giants such as Cisco, Avaya, Nortel and Mitel, it’s a long term play for various reasons:
-  Superior distributed architecture:  To do research on SHOR, I visited various VOIP forums, where IT administrators discuss their PBX issues. I didn’t come across a single forum, where IT admins were pissed off with SHOR, whereas there were complaints about other competitors. Every single forum agreed on the superiority of SHOR solution over other established firms. Finally, the firm has been gaining market share consistently and is already the #1 SMB IP provider.
- Extremely strong balance sheet: Cash per share of $2.5 and no long-term debt.
- Nortel bankruptcy: The industry recently saw the bankruptcy filed by Nortel Networks. SHOR stands to gain from this development as it’s a great opportunity to attract Nortel’s re-sellers and customers.
-Stock Ownership: As per the proxy filed in October 2009, the insiders own around 8.4% of the stock and roughly 53.5% of the stock is owned by VC firms including Crosspoint and Foundation. Although, VC ownership can cause some trouble but I don’t see that happening till the stock price is less than the IPO price of $9.5.
- Cheap Valuation: With EV/Rev ratio of 1.0x, the stock is extremely cheap compared to its peers.


The company is scheduled to announce its Q2 results this week on Wednesday, and while the short-term response is hard to predict (as can be seen with other technology names such as INTC, GOOG, SKWS all of which have been sold despite solid quarter results), I remain bullish on the long term prospects of SHOR.

Disclosure: Long SHOR
The article was first published here: http://seekingalpha.com/instablog/527966-sgrover/45299-shor-a-long-term-opportunity

Personality Negative Premiums

Following up to my original post of Personality Premiums it seems like Real Networks (RNWK) is celebrating the news of Rob Glaser stepping down as its CEO. The stock is up more than 17% jumping from $3.86 to $4.50.

Happy New Year 2010

Here's wishing everyone a very happy and prosperous new year 2010!