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There has been a bloodletting frenzy in the past two weeks. Virgins have been sacrificed, gods have been appeased and there has been full throttle raging in the jungles.
The people I’m talking about are the perma-bears, members of the cult of wine-drinking, house-renting pessimists who are convinced the prices of gold and the Dow are going to cross each other within the next five years.
Here is the bear argument in a nutshell:
Everyone’s mortgage payments are going to double once they go from adjustable-rate mortgages to fixed within the next year.
Businesses cannot pick up the slack because their interest rates are going to go through the roof as well. Not to mention that everyone uses oil every chance they get – it’s like an addiction – and the price of oil will soon be higher than T. Boone Pickens’ age.
The trade deficit, along with the worry that everyone is going to start buying oil with euros, is going to send the dollar into a death spiral and we’ll be taking $100 bills in wheelbarrows to the shops to buy bread.
I addressed these issues in previous columns. So let’s change the subject to when times were really bad. Whatever happened to the Cybers? Wasn’t there a bunch of large public companies with the prefix “cyber-”? Such as Cybernet Internet Services, which provided internet connectivity services. In 1999, it did a $150m high-yield bond offering led by Morgan Stanley and Lehman Brothers. Now it has traded 580 shares for 1.9 pennies a share. Where did that $150m go?
How about Cyber Digital Inc? Being “cyber” wasn’t enough, you had to be “digital” too. The company, at 32 cents a share and with a $5m market cap, recently said it valued its CTSX System at $103m. It did an analysis based on a comparable transaction and J.C. Chatpar, president and chief executive, concluded: “We believe that our CTSX system could be valued at $103m. Yet our current market cap is only $5m, based on about 22m shares outstanding at the current stock price.” Fascinating.
As part of my research for this column, I was perusing an online site from October 1999 called “VC Buzz”. That day, October 6, 1999, $211.4m worth of venture capital deals were announced. And that was a slow day. Just in case they missed something, at the end of the article they asked: “Do you think YOUR cool company ought to be featured in a VC Watch column?”
So, where have all the cool companies gone? At present, coal is the new cool. All the hedge funds are flocking to coal companies such as James River Coal, which activist fund Pirate Capital is trying to push into selling itself. Pirate, which has barely had a down month since it started in early 2003, began buying shares when they were close to $50. James River now sits in the mid-$30s.
Then there is Massey Energy, where Dan Loeb, a Third Point portfolio manager, is running for a seat on the board. In a recent filing he criticised poor management guidance, high chief executive compensation and a delayed stock buy-back programme as among his reasons for running. He also refers to “Massey’s Air Force” – a reference to corporate jets – dealings with relatives, and other corporate governance issues as reasons for the sluggish stock price.
And finally, Carl Icahn just announced that he owns 1.36m shares of Consol Energy, a company that mines, prepares and sells steam coal. With all three of these companies, the bull case involves putting a value on the coal under the ground. Particularly with oil in the $60s, that coal could be worth more than the market caps of the companies. While nobody in my high school days would have accused me of being cool, I have a stake in all three of these companies.
Which brings me back to the perma-bears. What makes this market different from the last bear market is that these speculative companies, which are attracting the best hedge funds as investors, are different from the cybers of yore. They have real assets, real cash flows and, ultimately, provide a buffer to any serious pullback.