A RUINOUS NEW RALLY By CHRISTOPHER BYRON
GETTING LICKED:
There's a sucker born every minute. That must be why retail investors are scooping up shares of duds like Sirius Satellite Radio and Qiao Xing Universal Telephone.
July 7, 2003 -- DON'T you just love how folks keep insisting that the Federal Reserve's 13th straight rate cut in the last two years is finally going to turn the economy around and make everything terrific again?
I particularly like the evidence that gets cited: that the stock market has been going up since April, and that now even long-term interest rates are starting to firm up.
Taken together, these moves are supposed to show that a lot of smart investors see a recovery coming and are cleverly buying stocks while prices are still cheap - even as smart businessmen are rushing to take out business loans for new investment before interest rates climb any higher.
In fact, these arguments are the same nonsense that stock-market bulls have been spouting ever since the tech bubble popped in the spring of 2000, when Wall Street began periodically twitching with post-bubble bear-trap rallies.
We've had six such rallies already in the current downturn. And with each one, the response has been the same: a lot of excited "buy now" table-pounding by people and institutions that have collectively lost trillions in the slide and are desperate to get at least some of it back.
The patsies in this process always turn out to be the same - the stock market's individual retail investors - and they're being set up for a hosing all over again in the current run-up.
Recent days have brought an explosion of retail investor interest in stocks, along with all the predictable cheerleading from the sidelines by institutions that are simultaneously heading for the exit doors in one stock after the next.
The latest example is Sirius Satellite Radio Inc. - the New York-based outfit that has so far racked up nearly $1 billion in losses in an effort to create a viable business out of "pay radio."
When we last dropped in on Sirius nine months ago, the struggling company's stock had already collapsed from $65 to barely 75 cents per share, and the outlook seemed bleak.
For one thing, the company's ability to create a market for its service - to be priced at $12.99 per month - was totally dependent on sales of "Sirius-ready" radio receivers.
And although most radio listening takes place in cars, Sirius had inked deals to offer the radios in new models with just two - and the weakest two, at that - of the nation's leading automakers: DaimlerChrysler and Ford.
BY last autumn, the company had signed up just 40,000 subscribers, bringing in revenues of barely $75,000, and making Sirius arguably the most misbegotten consumer product since Sony Betamax or perhaps New Coke.
With cash draining away at a rate of close to $120 million per quarter, the company badly needed to stop the bleeding, and this led four months ago to a recapitalization.
Sirius' creditors agreed to swap more than $400 million of debt in return for nearly 550 million new shares of stock in the company, and to buy $250 million of additional stock outright - thereby plumping up the balance sheet with fresh cash while removing most of Sirius' interest payment burden.
All in all, the arrangement added nearly $1.3 billion in equity to the ledger, which has bought the company another couple of years to make its business plan pay off before the money runs out all over again.
But does this make Sirius any better an investment than it was before the recap?
A casual glance at the company's stock price - which has climbed 150 percent, from 75 cents per share to a pre-Fourth of July closing of $1.84 per share - would suggest as much.
These are the kinds of gains the entire spring rally on all Wall Street has been made of - big, surging jumps in price as investors scramble to hop aboard that train to El Dorado as it begins chugging from the station.
But dig more deeply and it turns out to be the very institutions that helped bail out the company in its March recap that are now selling the shares they acquired.
One key cut-and-runner: the market-savvy Blackstone Group money management firm, which three weeks ago unloaded 57 million shares of the stock it held in Sirius, cutting its stake in the company by more than half, to roughly 4.4 percent of the fully diluted equity.
Another big institutional seller was Loral Space and Communications Ltd., which acquired a 6 percent stake in Sirius in the recap in lieu of unpaid money due to Loral in various satellite-launch deals, and has by now sold at least 25 percent of its stake.
SO who's doing the buying? Hedge fund traders on Wall Street insist the buyers are pretty much all retail customers.
In Sirius they see a stock that once sold for more than $65 per share now rising from the ashes, and they hear Wall Street's sell-side voices of wisdom repeating over and over again that now is the time to get in there and buy, buy, buy. (Of course, if it were indeed that time, the big institutions wouldn't be right there ready to sell, sell, sell!)
This kind of mindless momentum investing is once again spreading throughout the length and breadth of Wall Street. Consider a Nasdaq tech stock bearing the name Qiao Xing Universal Telephone Inc.
This Guandong, China-based company, which is in the business of making cordless telephones, has soared from $2 to $12 since early April, making new highs on rising volume on an almost daily basis - a sure sign of a stock in the grips of "big mo."
NOW, the Qiao Xing Universal Telephone company may make the best darned cordless telephones on earth, or they may be the worst. The problem is, there's no way to know.
Not only is the company based in the People's Republic of China, but its corporate headquarters are in the British Virgin Islands, which makes it a so-called foreign filer.
As such, Qiao Xing Universal Telephone is not required to file quarterly financial reports to the Securities and Exchange Commission at all - and its annual reports aren't due until six months after the close of the company's fiscal year.
Last week, the company filed a delinquency report to the SEC stating that it wouldn't be able to get in its latest annual filing - known as a 20F -until July 15. Meanwhile, the entire run-up in the stock has been based upon financial information that is by now 18 months out of date.
Does this company even exist anymore? No investor will know for sure until next week, at the earliest. But that hasn't stopped investors from chasing the stock upward by 500 percent in the last three months.
There are plenty more stories like these in Wall Street this summer, and the feeling one gets is that not a whole lot of good is going to come from any of them. Just because the Federal Reserve has cut interest rates to the functional equivalent of zero doesn't mean it's once again time to buy shares in "pay radio" companies from which the fat cats are bailing out -or shares in Chinese phone companies with out-of-date financials.
That seems to be a lesson investors have to keep learning the hard way, over and over again.
* Please send e-mail to: cbyron@nypost.com |
