Wrong! Tactics and Strategies
The Bond Guys Hold the Key
By James J. Cramer
1/17/01 12:00 PM ET
URL: thestreet.com
Right now, the key to your $3 stocks going to $4 or $5 can be found, not on the stock trading desks, but on the bond trading desks around the country. Most of the stocks that are battling in the low single digits have balance-sheet problems. They have taken down too much debt and they need to have that debt refinanced.
If this seems like gibberish, just consider these folks as homeowners with 14% mortgages. They want desperately to refinance, to borrow at lower rates, and to make it so a gigantic amount of their revenues don't go toward paying their onerous mortgages.
Until the Fed eased, these folks didn't have a chance in heck to refinance. But the immediate effect of the easing is that the bond markets of the country get revived. What might have been closed to these desperado borrowers may now be open. The problem is twofold: We don't know how long the opportunity will last and we don't know whether your particular borrower is credit-worthy enough to take advantage of the more bullish environment.
The issuers who have come to market so far, the Charters (CHTR:Nasdaq)and the McLoeds, are pretty good borrowers, meaning that they have excellent businesses but need more cash to complete their build-outs. These are kind of classic lower-grade credits, meaning they have to pay more than big blue-chips but less than those that are flirting with bankruptcy. They are the types of paper that bond market salespeople love to sell because all of the junk funds, plus individual borrowers, are always willing to take a little more risk to get a little more reward.
Now, we are about to find out how deep this market really is. We are about to see if some of the problem telcos, almost all of which are in the shoes of the high-rate mortgage borrower looking to refinance, can get the money they need to stay in business.
Let's take the very important case of PSI Net (PSIX:Nasdaq), which many of you speculated in during the ISP heyday and some of you may have revisited at the urging of the Motley Fool (via the very well-reasoned piece by Bill Mann called "On the PSINet Bandwagon," as part of the "Fool on the Hill" series.) When the stock was at a buck and a half, Mann reasoned that the data hosting sector wasn't going away and that its core business is better off than people think. Now the stock has doubled. Do you take the profit, knowing that you have just hit a home run? Do you take the loss, if you have ridden it down, because PSIX may not make it?
Oddly, it may not even depend on PSIX's business as much as it depends on the ability of the junk bond market to absorb more paper. Ironically, if the economy stays cool and the Fed continues to ease dramatically, even though PSIX may do poorly as a company because of the weakening economy, it will make it because it will be able to refinance. The Fed's actions make the bond market bullish, and remember, PSIX's fate is with the bond market, not the stock market.
The corollary is also true. In many ways I don't care if PSIX's net hosting business is going gangbusters or not. If the Fed doesn't keep easing, the window may not stay open long enough for PSIX to refinance.
Remember, there are probably 50 companies in the same tight spot that PSIX finds itself in, and the queue to do these deals extends as far as the eye can see. Not everyone can make it. Northpoint (NPNT:Nasdaq) filed for bankruptcy today, so it won't be one of them. Covad (COVD:Nasdaq) and Rhythms (RTHM:Nasdaq) both need refinancing and are in the same boat as PSIX.
That said, I think if I were long PSIX I would hedge my bets and take off half of it, right here, betting that the market won't stay robust enough to get that financing. That way, if it happens, you will still win big, but if it doesn't you won't ride it back to zero, where it will go if it can't raise the cash.
By the way, if you think Web hosting is going to stay strong, I would go for Exodus (EXDS:Nasdaq), which has a much better shot at making it big than PSIX. But then again, it's at $23, not $3, so it is much less tempting. Unless you consider that it once traded at $90!
Random musings: Don't forget to join Dave Kansas and me at Borders in the World Trade Center at 1 p.m. for some book signings. Remember, the book does answer many of your basic questions about what to do in this market.
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James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for the network of TSC sites and serves as an adviser to the company's CEO. Nonstaff contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send comments on his column to james.cramer@thestreet.com.
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