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A "ZERO" SUM GAME By Mike Gasior Occasionally I am struck by stories, which I find quite prominent; yet seem to be delegated to the back pages of newspapers and magazines. This is particularly troubling when I come across the same story covered by different media outlets, since this illustrates that a couple different reporters found the story important. The primary focus of this month's newsletter will be on one of those stories. There have also been many significant economic statistics released this month and other economic stories breaking, which are worth mentioning, and I will tackle them first. AUTO SALES One would have had a hard time predicting this after the events of September 11th, but the month of October just past was the biggest month EVER for auto sales in the United States. As difficult to believe as it might be, more Americans went into car dealers across the country last month and purchased more cars than in any other month in history. Needless to say, much of this was driven by the 0% financing offers being touted by manufacturers as well as rebates, but an impressive month none-the-less. We can understand the reasons behind the push by automakers to want these sales: The economy was in a serious stall prior to September 11th and could only be expected to get worse and worse. Pushing these financing and rebate offers cleared inventory off of lots and kept factories humming and employees working. This strategy actually seems to have worked wonderfully in this regard. As always seems the case, I manage to find the dark cloud rather than the silver lining of a story. I think we will find that the automakers may very well have cut off their nose to spite their face by pushing for these near-term sales. Yes...they did dramatically increase sales in the near term, but they did so by offering reduced prices (and profit margins) and by offering non-economic, and sometimes long term financing. The fact remains that people only buy a certain number of new cars and every car bought in October is a car that WON'T be bought in some future period. Another concern is that in a deteriorating economy like the one we are clearly in, people tend to hold onto their current vehicle for longer periods of time, which should seriously impact future auto sales. In summary, I think the future looks fairly bleak for this major U.S. industry, which is another indication that this recession is worse than anyone suspects. THE STOCK MARKET This will be brief. The current rally will ultimately prove to be a cruel lesson to the last few people without broken kneecaps. A daily review of the front page of the Wall Street Journal and Financial Times reads like an obituary column, except of course the story of how the stock market had rallied the previous day. All I want is for you to know that I warned you all that it will decline further from here before any earnest rally or new bull market begins. Period. Paragraph. If you wonder why I'm so negative still, it's because I remember a classic Wendy's Hamburger commercial, which seems as the perfect metaphor for the current stock market. "Where's the beef?" Remember that one? Where the little old lady looks at the teeny, weenie hamburger on her bun and asks that perfect question: "Where's the beef?" Well that is what I want to know about this current stock market. What are the reasons for the upward move? What is all the good news? I just don't see any beef. Enough said. AMAZON.COM In the two years that I've been writing this newsletter, I have only once before singled out a particular company on which I had a negative opinion. That company was Priceline.com and that was well over a year ago before that stock collapsed. I was troubled by Priceline's business plan and prospects, and I didn't think they could ever produce the financial results sufficient to justify their outrageous stock price and market capitalization. Ultimately, there ended up being lots and lots of people who agreed with my viewpoint and Priceline.com continues to limp along on their way to the dustbin of the Internet Age. Recent reading I have been doing has brought on similar worries from me about Amazon.com. I will confess that I actually think very highly of Jeff Bezos, their founder and CEO and that I have shopped their website many times. The troubling thing is that seem to have no consistent approach to how they plan to EVER become profitable, and that their only profitable division (book sales) currently seems to be contracting. The stock has recently risen in response to outwardly mediocre news about the beginning of the holiday selling period. I just want to be on record that I have come to the suspicion that Amazon will not make it as a going concern. I believe that they will ultimately be run out of business or acquired sometime prior to that, but the summary opinion is that they don't make it. With economy in severe retraction, I would not even give them two more years. Amazon is done...you can put a fork in them. WHEN ZERO ISN'T LOW ENOUGH I have now read several stories about this next topic in various media outlets and I find the topic more significant and deserving of more coverage. In the late 1990's there was some heavy issuance of a new type of hybrid bond, and the issuance of these bonds seems to be continuing at break-neck speed. These bonds are a simple enough zero-coupon bonds which are convertible into the company's common stock. The premise is easy enough to understand: Rather than pay investors interest in cash, the bonds are instead bought at a discount from their face value and then grows in value over time and the bond matures at it's face value and the investor receives all the interest at maturity. The beauty for the issuer (borrower) is that there is no current interest expense for the company. The seemingly smart move was to make the bonds convertible. With stock values at such depressed levels for so many companies the likelihood was that their stock values could, and would, only grow from the current levels and that bondholders would "convert" these bonds into common stock. Not only would the company never have paid these "lenders" any actual cash interest, they would ultimately never even repay the principal when the bond investor actually moves from being a creditor to being an owner of the company. Life just doesn't get better than that. The problem comes from another small feature the companies offered the investors in these bonds. Since there was obvious worry among investors about stock prices already, issuers offered the bond investors the opportunity to "put" the bonds back to the issuer if the conversion feature ultimately was not an attractive feature for the investors. The simple meaning of this is that if the company's stock didn't rise to a price, which made converting the bonds into stock a profitable situation for me, then I could sell the bonds back to the company and they HAVE to buy them back from me. This showed an amazing amount of confidence by these companies that their stock HAD to rise since we can clearly imagine that they were never expecting to have to buy these bonds back OR pay any interest on them either since everyone would be converting to stock. Needless to say, the rise in these stocks values has not occurred in many cases, and now these companies are staring at HUGE amounts of cash that will now be necessary to retire this debt. Of course, the troubling state of the economy and sales has left lots of these companies VERY short of cash. Depending upon the source you listen to the amounts that will be coming due imminently ranges between $60 billion and $100 billion. Any figure within that range strikes me as a very significant number and it's coming due at a VERY inopportune time. Consider the following list of companies with the amounts that they will owe in the next two years: Tyco - $3,500,000,000 What you may find more interesting (and more important than the raw numbers) is that only four out of the ten companies listed currently have enough cash on hand to retire these debts. Make note of the word "currently" too. In an economic climate like we are currently in companies tend to burn through their cash reserves pretty quickly and some of these companies won't be retiring these debts for a year or two. Those smart Alecs among you will already be thinking, "Mike, they won't be paying off these debts with cash. They'll just issue new debt!" Perhaps that's true, but the assumption there is that there will be someone at that moment willing to lend them the money. For some that will be true. For others it will not be true. No matter how you look at it, I find this story difficult to interpret as "good news" in an already difficult moment in financial history. At this point you should also remind yourself of a statistic I have shared with in previous issues of this newsletter, which is that American corporations doubled their debt load. The combination of events currently occurring has the potential to dampen the markets much further than many economists are currently forecasting. ANOTHER DIFFICULT TO MEASURE PHENOMONAN I write this to you as someone who travels by airplane around 100 days per year and flies somewhere in the neighborhood of 150,000 miles. I have flown through most major U.S. airports since September 11th and have experienced the new security measures first hand. I even flew through JFK in New York on the business trip that I am currently on and if you are considering flying through JFK yourself sometime in the near future, do this instead: Stay home and rip out all your fingernails with a pair of pliers instead. You will find this to be much more fun and gratifying than flying through JFK. If you're thinking of flying through LaGuardia, throw yourself off a bridge instead...much more painless. My point, however, is this. If you take ALL the people that fly in the U.S. every single day and multiply that times an extra hour they must spend because of all the new security measures, what is the total effect on the productivity of U.S. workers? Don't know? Good, because neither does anyone else, but for the sake of very round numbers I'll bet the number is LOTS!! But how do you factor that into any measure of economic slowdown? I don't know, and don't buy any crap from anyone who claims to have the economy all figured out. There are just too many moving parts in this machine, and we won't understand the true, and profound, effect of September 11th until sometime maybe far into the future. FINAL ECONOMIC INDICATOR I saw on CNN this morning that lipstick sales to women has increased in the most recent period. As I wondered out loud "Who cares?", Paula Zahn explained that this was another indicator that the economy was slowing because women will often increase their spending on lipstick if they don't intend to invest in any new outfits. Who woulda thought? NEXT YEAR I am currently working with my office to finalize next year's schedule of seminars and we hope to have that finalized in the coming weeks. The trouble remains in finding a location in New York for the 2002 programs. The remainder of the 2001 New York schedule will take place in Newark, New Jersey, but I fully intend to be back in Manhattan next year. You will be the first to know when this is finalized. For those of you trying to make training plans, it is our intent to offer AT LEAST the same programs in New York and Hartford next year as we did this year and at similar times of year. So if you'd like an idea of what will be offered and when, please visit the website and use the 2001 schedule as your guide at: IN-HOUSE SEMINARS If your organization would like to host an "in-house" program for your personnel, please contact my office at (860) 347-6568 and inquire. We will come to your site and present any program we offer (as well as customized programs) for as few as 10 participants. There is currently good availability, and my office will be able answer any questions you may have with regard to hosting your own seminar. Next month we'll review how Mike did on his predictions from last year, and of course, my predictions for 2002. Until then. Copyright 2001, Michael Gasior. All Rights Reserved. |
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November
2001 Newsletter
