Thought of the day "Eco-virus"

Unlike past modern day recessions which were a system-wide response to A) Industrial overcapacity and or B) Excess inventory, the current crisis is very similar to a computer virus that infects one nod of the system and then spreads like a plague.

I think the critical elements of the Eco-virus are:

• Fundamental Failures of Market Structure Due to the Rapid adoption of trading technology
• Regulations like SOX, SHO,NMS, FASB 157 and 123 that have closed capital markets and have destroyed value though system wide chain reactions.
• The inability of regulations burdened by the new rules to fundamentally regulate.
• The failure of the US Treasury Department to fund the TARP program which would serve as a firewall to other ABS securities and allow market values to approximate intrinsic values.

IACI and EPS Outlook

IACI Revnue inline as revnue is impacted the advertising market depression.

• IACI reported EPS Yesterday of $0.18 per share versus the $0.20 first call estimate and my expectation was $0.18 owing to the weak media advertising market. Clearly the recession continues to take its toll on corporate results and the lives of investors and workers.
• IACI posted 4Q:08 revenue of roughly $351 million which was significantly lower than the Wall Street Estimate of $373 million and my estimate of $365 million. Clearly the Internet sector of the advertising market is starting to feel impact of the recession. While traditional media such as TV Radio and Newspapers have been challenged by the economy since December of 2007 (the beginning of this recession); interactive media such as the Internet and video games have been in part immune to the Eco-virus created by the collapse of the housing industry in the US.

IACI results still support our long term investment thesis.

• We continue to recommend IACI share to Investors as we think the restructured IACI is positioned to benefit from an improved Advertising market in 2H:09 and an increase in market share as Yahoo (NASD: Hold) is challenged by its own reorganization and its bricks and mortar competitors such as the newspapers and business directories are irrelevant in the digital media universe.

• However we think given the challenges presented by the economy and IACI's ability to cut costs that the 4Q:08 are acceptable given the economic environment and taking into account that IACI is completing its corporate and business unit restructuring. CapitalIQ also thinks that IACI's recent redesign of its ASK.com website may have also contributed to the revenue miss. When Internet companies redesign websites legacy linkages to are often broken thus sights experience a decline in traffic and revenue.

• We like the optionality of the ASK.com website. ASK.com generated operating income of $10 million in 4Q:08 and EBITDA of rougly $18million. While we expect Ask.com's revenue to improve with a recovery in the economy; we think the opportunity exists for ASK.com to pick up market share from Google GOOG and YHOO. Despite good name brand recognition, ASK.Com is a small player and we think ASK has room to grow in the search market. According to Net Application (an industry trade website) ASK is currently ranked the 5th ranked search engine with just 1% of industry market share as compared to 81% for GOOG and 10% for YHOO. We think recent improvements to Ask's search algorithm's combined with new alliances with NASCAR and Symantec should attract new users. We think a significant EPS upside would result with just a 50bp improvement in ASK's market share and perhaps more if Ad agencies are serious about supporting viable alternatives to GOOG in the paid search market.

We think IACI's Service Master and City Search franchises will also benefit in an improved economy.

• While the current economic down turn seems like it will last forever we think an eventual recovery in the global economy fueled by lower energy prices and aggressive fiscal policy will likely improve conditions for consumers. However given our long-term investment thesis -that deleveraging will have a profound impact on corporations and their ability to growth- we think the relative health of balance sheets is a major factor in determining the ability of a corporation to capitalize on growth opportunities.
• IACI's competition for ad dollars in a recovery are newspapers and business directory publishers, both businesses are challenged by the current ad depression and poor financial decisions resulting in excess printing capacity as well as a high degree of financial leverage. Capital IQ thinks that deleveraging in the local advertising means that most newspapers and business directory publishers will need to re-organize or liquidate. Therfore the opportunity for Serivce master (an ad site dedicated to matching consumers with contractors) and City Search (a local search portal) will be able to capture the roughly $5 to $10 million in local advertising dollars that will transition from physical media forms like business directors to digital ad platforms that provide a value proposition (inour view) to consumers and advertisers.

We like IACI's strong balance sheet

• At the end of 4Q;08 IACI had roughly $1.9 billion in cash and marketable securities on its balance sheet and a net cash position of roughly $1.8 billion or over $10 per share in cash. We think IACI will use is ample cash reserves to buy Internet businesses at attractive valuations and growth its top and bottom line. While the company has also told investors that it may buy back stock we think many profitable Internet business can be purchased at steep discounts to their intrinsic value.

We think IACI shares are worth $25 - $30 in an economic recovery.

• We see limited down side and we think IACI shares are worth $22 to $24 per share in an economic recovery. We expect IACI to earn $0.60 to $0.70 per share (on a continuing basis net of interest) and derive our target range be applying a 20x multiple to our EPS estimates to derive a $12 to $14 per share enterprise valuation for IACI core business which we then ad to IACI's ample cash position.

Negative Article on the NYT and its pension

By Lynn Cowan
Of DOW JONES NEWSWIRES

There have been warnings for months about the severity of U.S. corporations' pension underfunding, but this week's round of earnings reports showed just how badly retirement plans will weigh on the companies that operate them.
From the furnaces of United States Steel Corp. (X) to the newsroom of publisher New York Times Co. (NYT), the effects of 2008's crushing market on pension assets was laid out in year-end earnings in recent days.

On Tuesday, U.S. Steel revealed it sees total costs for pension and other benefit plans for 2009 at $360 million, up nearly 60% from 2008. New York Times disclosed Wednesday its pension is underfunded to the tune of $625 million, an amount that it will have to begin paying down in 2010 if markets don't magically reverse course and repair the damage this year.
The pair join a wide range of companies hit by pension problems. On Monday Kimberly-Clark Corp. (KMB) said it won't repurchase stock this year because of a sharp increase in pension costs. For 2009, the company expects pension expense of about $295 million across all company defined benefit plans, an increase of $200 million from 2008. Cash contributions to the plans in 2009 are expected to be about $530 million versus $130 million in the previous year. The maker of Kleenex tissue said the increase in its pension expense in 2009 amounts to about 34 cents a share.
Investors have been expecting food companies to benefit from lower prices for raw materials like grain and oil. But higher pensions costs could dash those hopes.

Hershey Co. (HSY) said Tuesday that higher pension expenses will more than offset the benefits it will see from falling commodity prices. The candy maker is projecting a year-over-year increase in 2009 pension expense of about $70 million, or about 20 cents a share.

In coming weeks, as companies report their earnings, there could be more such warnings. A Credit Suisse analyst on Wednesday cut its 2009 estimates for Kraft Foods Inc. (KFT) and Kellogg Co. (K) on expectations of higher pension expenses. The analyst cut his Kraft estimate to $1.97 a share from $2.00 and the numbers on Kellogg to $3.13 from $3.15 based on new assumptions for pension expense.

The pensions' losses couldn't have come at a worse time. With the worldwide economic slowdown, some companies' operating businesses are already under pressure; New York Times' debt was recently downgraded to junk.
"The economic factors last year were so significant, and so broad-based, that few sectors that have these plans will be unaffected" by pension grief, said Cynthia Mallett, a vice president in MetLife Inc.'s (MET) corporate benefit funding group.

There's no doubt there will be more ahead as companies lift the curtain on their year-end earnings in the days and weeks ahead. The combination of declining asset values and higher interest rates' upward nudge to retirement liabilities is unlikely to leave many companies smugly looking at a fully-funded pension.
While some firms, such as Times Co., will have some breathing space before they have to start making up the funds' shortfalls, many others will have to start pumping cash into their retirement plans in 2009.

Studies that estimated the level of pension underfunding last year all pointed to a similar downturn. Standard & Poor's in late December forecast that S&P 500 company pension funds would be short by $257 billion, easily surpassing the record $219 billion underfunding set in 2002. Mercer said at the beginning of this month that S&P 1500 companies' pensions suffered losses of an estimated $469 billion over 2008, causing an aggregate surplus of $60 billion at the end of 2007 to be replaced by an estimated aggregate deficit of $409 billion at the end of 2008. The study by Mercer also showed that pension expense is likely to increase from $10 billion in 2008 to an estimated $70 billion in 2009.
Earlier this week, pension consultant Watson Wyatt Worldwide Inc. (WW) calculated that globally, pension balance sheets deteriorated by about 29% in 2008 and fund assets in 11 major markets shrank back to below 2005 levels.
While the various forecasts measure different groups of companies, they all hew to the same directional trend, say pension consultants. The initial earnings report revelations in recent weeks indicate the predictions are mostly on target - pension plan underfunding will likely turn out as forecast, no better, no worse, says Alan Glickstein, a senior retirement consultant with Watson Wyatt.
"I don't think there's been any great level of unexpected revelations in the funded status than we had been predicting," said Glickstein. "So far, things seem very consistent with what we forecast, and very sad."

MEG EPS

Things still look challenging for the Newspaper Industry. Cut dividend yet again I hope they survive.