barron's -- any idea who neff is?
Neff: They're probably a little flattened at the moment. But Microsoft, Intel,
Cisco, MCI WorldCom and Dell are the five that are 39% of the Nasdaq
100. Incidentally, all five of those are in the S&P 500 -- and make up 9.3%
of the S&P. The Nasdaq 100's cap now is over $2 trillion. It's about 19% of
all equities in this country. And, of course, if you go down to the 10th largest,
that's Yahoo and the 11th is Amazon.com. A couple of months ago Amazon
passed Borders and Barnes & Noble in market cap.
Gabelli: Passed them! In one day of trading -- pick any day this year -- the
increase in Amazon's market cap was greater than the entire market caps of
those companies!
Neff: Exactly. Subsequently, Amazon has passed Sears Roebuck in market
cap. Think about that for a minute. Now it has almost twice the cap of Sears
Roebuck. Where does this all end? I don't know. But, it seems to me that
shorting the index futures is kind of a cowardly way to bet that it does end. I
had a friend who wanted to short Amazon about a month and a half ago --
but he couldn't borrow the stock.
Gabelli: Lucky him. He saved himself 400%. The stock at the beginning of
this year was at 300 and change. It has since split 3-for-1 and is at 180 today.
In six trading days. So three times 180 is 540, 300 to 540 is 80%. There
were 50 million shares pre-split. Its market cap has gone from $15 billion to
over $25 billion.
Neff: Books are a low-margin business. Barnes & Noble is on the Internet.
Can Borders be far behind?
Gabelli: But if I take 10 shares of Amazon, I can buy Lillian Vernon and
solve all my logistic problems. I can buy this and this and this. If I were them,
I'd run awfully hard to make a lot of wonderfully interesting acquisitions.
Neff: Do you know that in the most recent quarter, their sales were triple a
year ago. But their deficit was also higher than a year ago. It reminds you of
the old wheeze about the used-car dealer: He lost $100 on each car, but he
made it up on volume!
Now, where does this all this silliness end, I don't know. But at some point
you get to the last buyer. I can't quite role play who is doing this, you know.
Institutions aren't supposed to be in there, although I'll bet the momentum guys
and camp followers have come in. Then you've got all these people on
computers, mindlessly buying and selling intraday for $9 and scraping a couple
of hundred bucks out.
Gabelli: Somebody holds $28 billion worth of Amazon today.
Neff: At the end of each day, somebody does.
Gabelli: They're not my customers; I wish they were.
Neff: Obviously, the stemwinders still have half of it or thereabouts.
Q: The stemwinders?
Neff: The CEO, the founder -- the insiders. You don't want to short
Amazon, but selling the futures seems to me a cowardly bet against the mania.
As sure as we're sitting here, one of these great companies in this index is
going to trip a little bit. When that happens, everybody and his brother is going
to try and get out of the stock in one day. And then it will have some effect on
the rest.
and ...
Amazon.com once again captured the market's fancy last week. With little
effort, the big Internet retailer sold $1.25 billion of 4.75% convertible bonds
due in 2009.
Demand was so strong that the deal was more than doubled from its starting
point of $500 million. And Amazon officials didn't have to trudge around
visiting investors to market the deal. Lead underwriter Morgan Stanley Dean
Witter launched the offering Thursday morning and priced it by nightfall.
Initially, the deal traded well. The converts traded up to 105 before they were
even priced. But enthusiasm sagged after the offering's size ballooned. By
Friday's close, the bonds fell to 98 3/4 and Amazon's stock fell 5 15/16
points to 116 15/16. The shares suffered both from the potential dilution
posed by the converts and from pressure exerted by hedge funds that buy
convertible bonds and short the issuer's stock to offset their risk.
Why did investors pounce on this deal? Sandra Durn, a portfolio manager at
Nicholas-Applegate, liked the fact that the bonds would participate in 85% of
Amazon's upward price move but suffer only 40% of any downside. "For me,
this is the perfect way to play the Internet," says Durn.
Then there's the frenzy surrounding the stock. Reports circulated that Amazon
officials have been telling analysts they believe the stock's price will rise so fast
they'll be able to call the bonds and force investors to convert into stock
within a year. Now, that can only occur if the stock rises to $234.08 -- a
90% climb from Thursday's close of $122.875.
"They don't think they're going to make the coupon payment for too long,"
says Ravi Malik, a portfolio manager at Froley-Revy, an institutional
bond-fund manager.
An Amazon spokesman, however, said company officials did not discuss the
bond's potential conversion. "That's cockamamie," he said. "We never talk
about our stock price."
But now that the excitement is over, consider the following: Many of the
investors in the world of convertible bonds are hedge funds that buy the bond
and short the stock. So in general, they aren't concerned with the stock price
or the company's credit quality, just the volatility of the stock. As a result, their
participation can skew the market's supply/demand dynamics.
"This is the only market where a triple-C-rated company can raise money with
a coupon under 5% and get rewarded for its stock's volatility," notes Neil
Feinberg, a director at MacKay Shields. In addition, many investors will buy
the bonds because they get measured against an index in which Amazon's
converts will likely be included. These investors aren't focused on the fact that
the company has yet to turn a profit. Indeed, it seems as if Amazon will have
to pay the coupon from the proceeds of the bond offering.
Junk-bond investors, on the other hand, are generally more aware of credit
concerns. And while the stock has skyrocketed over the past year, the junk
bond Amazon sold last spring trades below par. The zero-coupon bond
trades around 65.5, and accreted value is 66.0885.
The convertible bond market has become notorious for attracting red-hot
industries, with volatile stocks, that are looking for cash. The problem: The
stocks seem to peak soon after they visit the convert market. Oil-service
companies sold a slew of convertible bonds before the price of oil took a dive
and sent the stocks spiraling down. Ditto for health care. Coincidence?
Maybe. But you can be sure that a batch of Internet companies will hit the
convertible bond market in the next few months. Then watch out.
and
.
Amazon.com broke ground with the biggest convertible securities offering
ever by an Internet company, when it sold $1.25 billion of 10-year bonds last
week.
Amazon selected as its lead manager Morgan Stanley Dean Witter, whose
Internet analyst, Mary Meeker, is the best-known bull on the stock (" 'Net
Queen," December 21.). One firm that didn't figure in the underwriting was
Merrill Lynch, whose Internet analyst, Jonathan Cohen, is the biggest Street
bear on Amazon. Merrill's absence from the deal will only increase pressure
on Street analysts to toe the line and not say bad things about potentially
lucrative underwriting clients.
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