I had originally intended to publish this column back in August of last year, just prior to 9/11. Something came up, then another and then those “events.” I therefore postponed delivery out of deference to other communiqués of more immediate concern or importance. I also felt that the content of what I’d happened to write in my opening two paragraphs didn’t seem quite appropriate. Perhaps it is no more so now, but I think the passage of time helps regain perspective. I should point out that in these opening two paragraphs, I was referring to the state of the economy and the fate of technology companies and their stakeholders. Anyway, here’s what I wrote:
What a year this has been. A truly mad season: Fast, furious and frenzied with some very angry people out there who are without hope, faith or love. There have been many casualties and certainly more funerals than I can remember. And it’s not even over yet. Sadly, there will likely be many more deaths and most of them will probably not be afforded a decent burial. Before you know it, the year will soon be ending and by the looks of it, all I can say is, “good riddance.” Not that I’m averse to a little pain to impart some lessons and always-needed humility. I just hate lingering at funerals. The beast is long dead and buried. I know some are holding out for a miraculous re-birth, but I suspect not even the flowers we tossed lovingly on the grave will take root. Sadly, they’re dead too. It’s not that we’ve become calloused or suddenly accustomed to death; rather, we are still negotiating through the five stages of death and dying: (1) Shock/Denial; (2) Anger/Resentment; (3) Bargaining; (4) Depression, and finally; (5) Acceptance. Individually, some cycle through this faster than others, but the collective economy usually needs a nod from Joe Six-Pack before it feels fully ready for the challenges of a new cycle. Okay…Bottoms up.
So, the storm clouds appear to be clearing and the sun is emerging, as it always does. Or maybe the state of pessimism is getting rather old. To be sure, I can very easily argue (too easily, as my wife contends) that we may be resting in the eye of an economic hurricane. That argument, however, is actually a bit too easy, which leads me to think that it must be wrong. It’s certainly overplayed. Eventually, the market will get tired of all the negativity and start to re-focus on the incredible opportunities unique to our world, our market and our good fortune of living where we do in the times we do. Pessimism, like any virus, is easy to contract and it quickly drains physical and mental resources. Besides, few ever make serious advances (or money) by being negative. Still, the cold reality about technology investing is that beaten-up companies, and certainly small caps, hardly ever rebound. My own experience and the research of my Piper Jaffray Middle Market M&A colleagues prove this out time and again. Or, more poignantly, there are plenty of companies for which, as David Siminoff (Capital Research) says, “there’s great support at zero.”
Okay, on to 2002 and better things ahead.
The Recovery Recipe – Stuck in a Moment
The mantra of the miracle of the second-half recovery is so strong that I expect McDonald’s will soon include it as part of their “Happy Meal.” My own recipe calls for equal parts Miracle Growth (the plant food – green thumbs for dummies), the Hair Club for Men (or Propecia for the chemically-inclined), Chia Pet and . . . Hope. Optimism is a good thing and somewhat unique to the US (ask any immigrant). Wall Street had hoped for a 2H:01 recovery, remember? It’s okay, we’re tenacious, so let’s try again for Recovery 2H:02. It’s kind of like our campaign slogan, though less imaginative than a bought vowel from Willy Brown or a memory lapse from Gary Condit. Nevertheless, we seem fixated on the somewhat magical powers of the second half to create this elusive recovery. Indeed, there are signs: robust auto sales (but at what cost to next year’s performance?); booming housing sales (as interest rates and sale prices have plummeted); capital liquidity (scared investors have raised cash); and big government spending (though our most favorite lender (Japan) has been flattened). This may seem like spurious data, but I hope you will join me in celebrating some of the more incontestable signs of an inevitable recovery: innovation, freedom, determination, anger, and frustration. We all want the recovery. Trust me, the entertainment value of seeing your favorite investment bankers squirm is way overrated. Pretty macabre, too.
Revamped Research: No Dirty Laundry
You may have noticed that a number of investment banks, including Piper Jaffray, have revamped their rating systems for stock recommendations. This is a good thing. It represents a renewed relationship with investors in an attempt to win back some trust that may have been forsaken during the bizarre (bazaar?) environment of a couple years ago. New rating systems allow for general house cleaning (i.e., dropping coverage) and the collecting of past sins and hostile issues into a de-militarized zone. (It also might imply that we’re in the “bargaining” phase (3) of death and dying referred to above.) Certainly, sell-side analysts are thankful for an opportunity to hit the reset button and re-establish credibility and rapport with the buy-side. The challenge, of course, as the President often reminds us, is that the war on Terror is far from over. But in their defense, research analysts, contrary to popular opinion, are terrible villains but excellent scapegoats. Successful analysts typically provide what the market demands from them. Years ago, it was fundamental accounting and business analysis. Then, it became deep industry and sector expertise in order to select likely winners. More recently, it was to (somehow) justify valuations of stocks being driven up by insatiable buy-side demand. Not surprisingly, analysts are now quickly donning green eyeshades in order to offer up the accounting diligence the market is clamoring for. Portfolio terror can never be eliminated, but, with most available resources that were previously expounding growth now focused on defense, it’s likely that the current state of high alert will stay with us for quite some time. No sense trying to stretch a single into extra bases when I can keep the uniform nice and clean by staying on base. Growth requires some stretching on everyone’s part (students, parents, entrepreneurs, investors, regulators) and often involves falling down, sliding and getting bit soiled. Well, you can see where I’m going with this. More appropriate is the change of billboard advertisements along Highway 101 in the SF Bay Area from anything dot.com to Clorox bleach. Cleans away sins, stains, strong buy ratings and dirty, underwater stock options.
Judging Judges . . . Arbiters or Arbitrageurs?
“What were they smoking?” you might ask. Surely, those Olympic judges forgot that as sponsor of the games and defender of the free world, the US deserves a little gratitude. We’ll take that in the form of medals, please. Favoritism and leniency towards Canadians, too – they’re almost like Americans, just nicer and more balanced. But we should cut the judges a little slack. You have to think that Olympic judges tend to lead fairly uninteresting lives (except the Italians, for whom everything is grand theater). Gone are the days when half of them were really KGB agents or from Interpol, so they’ve probably felt insignificant and ignored for the past couple Games. Naturally, they probably thought (and yes, they do think as a group) that they could live it up a bit while in America. Gee, how about some drugs? By all accounts, America has a plentiful and readily available supply. These Olympic judges, no dummies they, probably jumped on opium (by the looks of it, they smoked a lot) before prices skyrocketed. Why opium? The judges doubtless caught wind of the Bush administration’s plan to pay Afghan farmers to destroy their poppy (opium) crops. Afghanistan’s poppies, you see, creates 70% of the world’s heroin supply. I’m sure George Dubya thought that killing off the supply would really put a squeeze on the remaining al-Qaida terrorists and smoke out Osama. Sadly, my guess is that our President’s good intentions will only serve to make a few Afghan farmers even wealthier before they (or someone else) relocate and resume production for the voracious US consumption. Clearly, the Bush administration forgot some fundamental economic principals before striking their creepy Afghan poppy crop deal. Or, perhaps they thought that somehow, by reducing supply they could curtail consumption. How about, instead of paying off the growers, we buy them out? Let’s face it, government is ill-suited to control something like consumptive behavior or addiction that is such an unalterable and timeless part of the human condition. But it can influence distribution, quality and…taxation. Removing the criminal element from the drug trade would be nice (if not noble), but the real boon would be the increase in tax revenues and, of course, investment banking fees. Evidently, those Olympic judges must have smelled a potential bidding war on Afghan poppy farms.
May your heart be joyful, you thoughts grounded and your returns, well, heady.