Promises, Promises; Markets Move on Draghi: Best of Kass

NEW YORK (Real Money) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

This past week, Kass wrote about how the European Central Bank is jolting the markets and Monitise is looking more shaky.

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Markets Move on Draghi

Originally published on Thursday, Nov. 6, at 1:34 p.m. EST.

Thursday morning, European Central Bank President Mario Draghi presented no change in the ECB's interest rate targets. The main refinancing rate stood unchanged (0.05%), as did the marginal lending rate (0.3%) and the deposit rate (-0.2%).

In the press conference, he re-emphasized that the ECB is targeting the balance sheet at 2012 levels, the same thing he said in his Washington speech in October.

The markets took Draghi's comments as incrementally dovish, as the euro dropped, peripheral yields declined and equities have rallied from the morning's lows. The surprising statement was that, in light of the Bundesbank's objections, Draghi said the ECB was UNANIMOUS in stating that if more stimulus was needed it would come forth.

Bottom line, Draghi said nothing incremental or new that he hasn't said last month.

The markets seem to disagree.

Position: None

Promises, Promises

Originally published on Friday, Nov. 7, at 9:44 a.m. EST.

"Oh, promises, their kind of promises
Can just destroy a life
Oh, promises, those kind of promises
Take all the joy from life
Oh, promises, promises, my kind of promises
Can lead to joy and hope and love, yes, love."

--Dionne Warwick, Promises, Promises

As I wrote Thursday, European Central Bank President Mario Draghi said little further to account for the positive market response he saw then. Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in an interview Thursday, "As far as verbal intervention by central bankers is concerned, Mr. Draghi has no equal.... Yet the reality is that the only thing that changed today is the market's perception of the ECB."

But the October-to-November market remains forgiving, having ignored anything that might have tempered its optimism.

My two research trips this week have continued to bear fruit -- and they have spurred two interesting new long ideas that are almost completed.

As it relates to Monitise (MONIF) I am still inconclusive of view. (Here is my last write-up.)

Remember, Monitise has provided little new public information on its subscription adds to investors -- so we have to try to analytically connect the dots based on more of an anecdotal research approach. While this is somewhat understandable, given the potential competitive implications for the company's customer base on disclosure, it leads to a tough analytical assignment.

The company's London meeting this week yielded nothing new. Nevertheless, recent meetings with current and prospective customers have roused some additional concerns about Monitise's ability to meet its subscription and average-revenue-per-customer targets for 2018. While I suspect most of those concerns are currently discounted in the low share price, some may not be -- because, despite the pullback, the company's market capitalization still exceeds $1 billion.

It is almost certain, however, that the previously optimistic share-price targets by myself and others -- and the promise of a multiple return on our investment -- are no longer attainable.

Monitise has guided, for 2018, to 200 million subscribers; margins of 30% on earnings before interest, taxes, depreciation and amortization (EBITDA); and average revenue per customer of nearly 2.50 British pounds. Goldman Sachs, as an example, has already taken down these targets to 160 million subscribers; EBITDA margins of 22.6%; and average revenue per customer of about 2.06 pounds. This would produce positive EBITDA and free cash flow in fiscal 2016 and 2017, respectively. I am fearful that Goldman might still be a bit too optimistic.

I remain somewhat skeptical of Monitise's ability to ramp up subscribers quickly over the near term -- because signing up a large bank client, such as Banco Santander (SAN) , does not immediately result in additional subs. It is a process.

Any further disappointments in subscription adds could place Monitise's shares in a near-permanent penalty box.

Moreover, as previously discussed, it remains uncertain whether Monitise's back-end solution to mobile payments and banking will yield the average revenue per customer that the company has forecast. Some of my conversations over the last few weeks seems to suggest that the company might be offering "deals" in order to ramp up sub counts. If that's correct, Monitise's revenue and profitability targets could very well be compromised over the near and intermediate term. That said, the fall in the shares is basically already saying as much.

Monitise shares are now selling at an enterprise value of only 1x sales estimates for fiscal 2018. This multiple is quite low, considering the company's strong market position as a back-end solution to mobile payments and mobile banking. It's also low given the minimum expectations of compounded annual growth in users (45% to 50%) and user-generated revenue (65% to 75%) over the next five years.

For now, in light of my expectation that 2015 sales and subscriber growth will remain subpar, I am holding on to my tag ends of Monitise holdings. (My three-to-six-month "rough" targets are upside of 65 cents and downside of 40 cents.) I would add to my position back near the year's lows for the stock.

My tentative conclusion is that, despite fundamental skepticism expressed by the markets and by me above, there is little risk in Monitise shares right now. But upside potentially is limited, too, given continued pressures from tax-loss selling and the uncertain ramp in subscribers. Remember, it's not until 2017 that sales growth is estimated to accelerate rapidly.

For the time being, the year-ago promises of higher price targets are being shelved, as Monitise may have now become a "single" or a "double" rather than a "home run." That's in the wake of two guidance downgrades, the announcement that Visa (V) would reevaluate its stake in the company; and the likelihood that the company will fail to meet its sales, cash flow and profit targets. Given the company's potentially higher level of cash burn on lower forecasted results, it could be forced to raise capital in 2015 and 2016 on less-than-favorable and more dilutive terms ("the short case").

Moving on to this week's portfolio moves, I recently mentioned that the price of oil has fallen to levels below its 40-week moving average, an area that has historically resulted in some price-mean reversion back higher. Based on this, late Thursday I took small starter positions in Exxon Mobil (XOM) , Chevron (CVX) and Devon Energy (DVN) . I picked these large-cap stocks because of their relatively strong balance sheets, which would be able to endure further reductions in the price of oil. On further oil-price weakness, I would consider adding some new names.

I have covered, for nice gains, most of my short positions in auto names, and I am looking for a chance to re-short on strength. IBM (IBM) also has been a great short, and I have covered that position. I have replaced these shorts with a new short position in Consumer Staples Select Sector (XLP) (more detailed reasoning here).

As for the U.S. stock market: Anyone who had said they had known, three weeks ago, that the S&P 500 (SPY) would rise by 200 points in the next three weeks (in a straight line) was a liar or trying to sell you something. It's the same for those who would have said the S&P would ultimately stand at 2,030 as the 10-year U.S. Treasury yielded under 2.40%.

There is little doubt that price-momentum-based strategies and high-frequency trading have been exacerbated the sharp climb since mid-October. And, as the Captain Obviouses note in the business media on a daily basis, the seasonal bias favors further strength. A bull market in optimism and self-confidence remains in place. Nevertheless, while it appears a bottom has been put in, the 20-day market rise has eroded the reward-risk ratio for the S&P index during this bull market for complacency.

Tuesday's U.S. midterm elections were well received by the markets. But, as expressed in my Wednesday opening missive, more gridlock -- considering the depth of our fiscal problems -- and partisanship may not be viewed positively by the markets in the year ahead.

From my perch, speculation continues to run amok in social-media stocks. Still, increasingly, some shares -- e.g. those of Facebook (FB) and Twitter (TWTR) -- have recently been pressured by some disappointing user metrics and sales-and-profit results.

Finally, the recent and vigorous market advance might have taken away from the normal year-end seasonal and bullish behavior in the weeks ahead.

I remain net short based on the prospects for slowing global economic growth, and on the structural headwinds to that growth. I also base this on the message coming from the fixed-income markets; on the imbalanced and exclusive cycle of prosperity; on rising geopolitical risk; on the growing ineffectiveness of central bankers' monetary heroin; and on the risks to and quality of corporate profit (read: financial engineering).

On the last point, "normalized profit," adjusted for some normal mean reversion in margins, yields high price-to-earnings ratios relative to historical levels.

Thus far I have been dead wrong. Market promises have led to joy and hope, and fear and doubt have left Wall Street.

Position: Long MONIF, XOM, DVN, CVX. Short SPY, XLP, GM, F.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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