The problem is ZERO
There are still regular equity market commentaries about patience, having a longer term time horizon, and waiting for the shorts to cover and the huge amount of cash earning almost no interest to begin to edge back in. I would like to believe these views, and share them to some extent, but the problem is that equity prices continue to decline.
Patience is not well spent on a stock that goes bankrupt. Zero is final and if the majority of the market eventually comes back, a zero stock never does. Bankruptcy is one way that this is happening, and more and more companies are on that precipice. Forced mergers of troubled companies at historically low prices is almost as damaging, wiping out most equity of the company acquired. This has happened obviously with Washington Mutual, Bear Stearns, Wachovia and other financial companies. It will soon begin to happen in the commercial and industrial sector, not likely to be forced by the government or regulators, but as a decision by managements that the last chance of survival for their communities, employees, and what they have created is to accept a low low offer from a stronger company. A final way to get to almost zero is what we'll call deconstruction. AIG and Citicorp are financial examples and Ford as a survivor is an industrial one. Looking at AIG, it has many sound insurance businesses in the U.S. and in Asia. If the company can ever get to the bottom of paying off counterparties in the CDS market(and if they have stopped making markets in the CDS market, which is a bizarre thought but no longer beyond impossible), they will be so indebted to the government and so damaged in image as a corporation that a sale of assets is highly unlikely to reward current shareholders at all. If Citi keeps surprising with its unending trove of bad assets and Merrill continues to undermine BofA, there is no reward. They can continue as ongoing concerns, they can be broken up into smaller pieces of their finest assets, but the chance for current shareholder reward is almost zero. It's strange in the extreme to be now thinking thoughts like "if Citicorp gets to 50 cents is it time to step in?" or "if Ford breaks a dollar is it a worthwhile bet?"
Bankruptcy, forced combinations, and deconstruction, all ways that an equity investor can lose all of their money. Patience is not rewarded in these cases with recovery. This real point of this comment, however, is not about the companies mentioned or those that may be on the verge of some type of zero resolution. This is about companies that don't seem in trouble at all but whose stock prices slip most days. It's about comparing those companies to ones that were no cause for worry at all just a few months ago and are now slipping toward a possible financial crisis. Is patience a virtue or an attack of vertigo. Are comments like this indication of a market bottom finally arriving or an indication that market adages of the post WWII years are evolving into myths.
One thing is certain. This time it's different. The folks in Congress who badger, ridicule, and verbally torture corporate executives today will likely be staggered in a couple of years when they see the billions made by a relatively small group of hedge funds on the short side of everything, who are using the CDS market and other tools to propel everything downward. They are going to look back at those bank executives, auto executives and others in traditional market segments and wish that they were back making their millions and employing hundreds of thousands of people, rather than seeing firms with 10 traders around screens making billions.
That's enough of this rant. Almost time for dinner. What a decision, do I go pick up a couple of burritos, or fajitas, and a salad at Gonzos, a two shop "chain" nearby that has reasonably priced great food and a personable owner to boot, or do I scrape up some leftovers for everyone here and instead buy 30 shares of the largest retail financial services franchise in the world, operating in over 130 countries.
Patience is not well spent on a stock that goes bankrupt. Zero is final and if the majority of the market eventually comes back, a zero stock never does. Bankruptcy is one way that this is happening, and more and more companies are on that precipice. Forced mergers of troubled companies at historically low prices is almost as damaging, wiping out most equity of the company acquired. This has happened obviously with Washington Mutual, Bear Stearns, Wachovia and other financial companies. It will soon begin to happen in the commercial and industrial sector, not likely to be forced by the government or regulators, but as a decision by managements that the last chance of survival for their communities, employees, and what they have created is to accept a low low offer from a stronger company. A final way to get to almost zero is what we'll call deconstruction. AIG and Citicorp are financial examples and Ford as a survivor is an industrial one. Looking at AIG, it has many sound insurance businesses in the U.S. and in Asia. If the company can ever get to the bottom of paying off counterparties in the CDS market(and if they have stopped making markets in the CDS market, which is a bizarre thought but no longer beyond impossible), they will be so indebted to the government and so damaged in image as a corporation that a sale of assets is highly unlikely to reward current shareholders at all. If Citi keeps surprising with its unending trove of bad assets and Merrill continues to undermine BofA, there is no reward. They can continue as ongoing concerns, they can be broken up into smaller pieces of their finest assets, but the chance for current shareholder reward is almost zero. It's strange in the extreme to be now thinking thoughts like "if Citicorp gets to 50 cents is it time to step in?" or "if Ford breaks a dollar is it a worthwhile bet?"
Bankruptcy, forced combinations, and deconstruction, all ways that an equity investor can lose all of their money. Patience is not rewarded in these cases with recovery. This real point of this comment, however, is not about the companies mentioned or those that may be on the verge of some type of zero resolution. This is about companies that don't seem in trouble at all but whose stock prices slip most days. It's about comparing those companies to ones that were no cause for worry at all just a few months ago and are now slipping toward a possible financial crisis. Is patience a virtue or an attack of vertigo. Are comments like this indication of a market bottom finally arriving or an indication that market adages of the post WWII years are evolving into myths.
One thing is certain. This time it's different. The folks in Congress who badger, ridicule, and verbally torture corporate executives today will likely be staggered in a couple of years when they see the billions made by a relatively small group of hedge funds on the short side of everything, who are using the CDS market and other tools to propel everything downward. They are going to look back at those bank executives, auto executives and others in traditional market segments and wish that they were back making their millions and employing hundreds of thousands of people, rather than seeing firms with 10 traders around screens making billions.
That's enough of this rant. Almost time for dinner. What a decision, do I go pick up a couple of burritos, or fajitas, and a salad at Gonzos, a two shop "chain" nearby that has reasonably priced great food and a personable owner to boot, or do I scrape up some leftovers for everyone here and instead buy 30 shares of the largest retail financial services franchise in the world, operating in over 130 countries.
posted by John Borden at 4:26 PM
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