Here's another one that Kingpin pointed out to me. Looks like we can blame it on Long Term Capital.
Wrong! Tactics and Strategies: CLECs on the Junk Heap
By James J. Cramer
10/12/98 9:00 AM ET
Did Long Term Capital destroy the competitive local exchange carriers?
Talk about an ugly group. Here was a raft of stocks all involved in the space-age business of providing state-of-the-art voice and data. They were the great hope for the growth stock pickers. I know I bit, riding down ICG (ICGX:Nasdaq) for about 15 points before I was mercifully stopped out by common sense and some puts with a 25 strike.
What happened? How did this group go from promising, filled with prospects for revenue growth and takeovers, to downright hideous, wrecking the portfolios of every manager they touched?
The bond market did it. Blame the bond market.
These companies are huge consumers of cash. They have to buy all that equipment from all those telco companies that were also once darlings of the stock market: You know, the Nortels (NT:NYSE) and the Nokias (NOK.A:NYSE ADR).
These companies were the stock market for one brief, shining moment. They had the products, the revenue momentum and, most important, the charts.
But what they needed more than anything was financing. They needed a hospitable junk-bond market. This market was so hot this spring that it allowed even the worst CLECs to raise as much money as possible. It gave billions of dollars to these operators.
At the same time, most of the debt was convertible into common stock. So what arbs like Long Term did was buy the bonds and sell the stocks. They would get the high coupon, the short interest rebate on the stocks, and if the market tanked they would do better than if they owned the common stock.
Hundreds of firms put these trades on. But my understanding is that Long Term was the king of this stuff. They would take down anything and short the common. Of all the things they did, this was probably the most intelligent trade they put on.
But now the appetite for junk paper is shot to hell. And the guys who do this convertible arbitrage, most glaringly the people in Greenwich, seem to have dried up as a force in the marketplace. Not one of these CLECs could raise a nickel right now.
So their stocks all bump along the 52-week-low list trading at multiples to plant that the analysts told you simply could not occur. No one would have believed you six months ago if you told them these stocks could trade as low as they do now.
And the funny thing is that you can't buy them until you see the corporate bond market for bad securities come alive again. Because, for the most part, many of these companies will run out of money without access to cheap bond market capital. No bank will want to lend to them. Their stocks are too low to do equity financing. The acquiring companies in this industry seem to know this. They hold back as if they are sure they can buy these stocks in bankruptcy, without all that high-yield debt.
What the market seems to be saying to me is, "Hold it, we made it too easy for a lot of companies out there to raise money. Those days are over."
If that's the case, I would rather not bottom-fish unless I can find a CLEC that somehow can raise money without the help of junk bonds.
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