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Perversions of Finance


"If we don't overpay for wasting assets the Street won't consider us a growth company!"


As I type, with a couple hours to go in the trading day, crude oil is up a buck fitty (1.50) and Snapper is taking stocks higher. Both rallies seem to be gaining a bit of steam.

It's the kind of day that Regis and Kelly would find "Whacky". As in Regis shouting "Kelly, I tell you, the market rallies even while oil moves up! It's nutty!" while Kelly scrunched her nose, rested her chin on her tiny fist and sighed in agreement. "Crazy, Reeg."

As Claus von Below would sneer, "they have no idea".

Market-watchers' favorite parlor game is musing over short term moves that seem irrational. Having created that straw man, the game ends in destroying it. The effect is that you turn bad news into a rally catalyst, with logic that can sound sage despite being shaped in a perfect hula-hoop of circularity.

"The rally in crude is good for stocks" a guy like me might say with a nod intended to convey confidence. "We'd seen both oil and stocks sell-off on fears of slowing growth. Those fears seem to have been overdone and we're seeing some relief in both markets. Of course, this is something of an uneasy truce, unlikely to last. As we all know, high crude prices is a negative for stocks, long-term."

I just made that up now. I don't know if anyone's ever said those actual words but the logical structure is a generally accurate representation of the practice. To be candid, I'm pretty sure I could "sell it" fairly convincingly, if forced at gunpoint, despite the fact that it's simply silly.

Offensive though you may find such blather, it's easily avoided and more or less harmless when considered relative to the way myths propagated by the Street shape corporate thinking and strategy. Once dragged into the net of angry shareholders or downgrading analysts, far too many companies resort to strategies that would be unthinkable were the companies being run for real "stakeholders".

Steering towards Cable at Ramming Speed

Since I've already picked on GM and their dividend fixation, let's drive over to the MSO's. According to today's WSJ, Cablevision (CVC) has upped their bid for bankrupt Adelphia to $17.1 billion, up from 16.5. The bid seeks to trump a joint bid between Time Warner (TWX) and Comcast (CMCSK).

This is a price of some $3,400 per each of Adelphia's 5-million customers. We've talked about the long term issues facing cable, in terms of growth, saturation, pricing power and competition. We've spoken of the tumult in the ad industry. Just from today's headline that Monday Night Football is moving to ESPN, it can (and should) be inferred that ABC/Disney (DIS) is going to jam the price of carrying ESPN much, much higher.

Yet Cablevision, AOL and Comcast can't stop themselves getting in a bidding war. Were they private (as opposed to "private equity groups") it would be unthinkable. Because they are all public, it's difficult for them to overpay, as far as they and the markets are concerned.

To not chase Adelphia's <5% of the US market would be to concede that growth is a thing of the past. It would end the roll-up play. It is unthinkable to not chase Adelphia, just as a matter of form.

Paying all-time high prices for a demonstrably no-growth, mature market with multiple competitors on deck and having the Street applaud. Now that is whacky.

Missing Links...

  • Interesting reading related to the decision making patterns discussed above as well as Scott's on-going series.

  • Wisdom from a SF gathering of survivors of the '06 quake. Also, a good reminder to me to work on getting Mbop to move out here. You can never have too much ballast.
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No positions in stocks mentioned.

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