Will satellite radio survive bankruptcy?

Written by Michael Vass

There is something I want to address that long-term readers or those who are familiar with my past might be aware of. I was a stock broker prior to being involved with investor relations and the formation of my company M V Consulting, Inc. And in those days I made many recommendations or reviews, but I never lied. Which is why I left the industry on my terms and without ever receiving a complaint.

But some may be familiar with some documents I have written since that time discussing one of my favorite positions, SIRI – Sirius Satellite Radio. I was very familiar with the entire industry of satellite radio, being involved with Sirius back when it was still called CD Radio and had yet to purchase the frequencies from the Government.

News has now come out that the company, Sirius XM Radio is in discussions to go bankrupt under Chapter 11. The stock is currently priced at around 11 cents.

I will not give a recommendation on this stock, as I am not a broker. But what I will do is share my thoughts on the industry.

Back in the early 90’s the concept of a radio format in which people would pay a subscription was unheard of. In fact I had many debates with then-fellow brokers over the merit of the concept. I am sure that many brokers in the early stages of cable television had the same battles. The first shares I bought in the company were for a client, under his recommendation, at $6.

I learned about the company, and the marketplace it hoped to enter. Facts about the industry include:

Regular radio has poor transmission
Range of any regular station is highly limited
Travelers cannot listen to favorite programming outside of a local region with few exceptions
There are some 100 million drivers in the nation, who spend on average roughly 2.5 hours commuting to and from work to home every day.

These facts and many other conditions in the economy helped raise the stock to $65 back then. To my knowledge that was the highest sale of any share of the stock ever, and it occurred in the after market.

Since that time the company has been plagued with rumors of bankruptcy or outright failure.

The stock has fallen in a similar manner to what is happening now before. And previously I thought it was an extreme buy. Far smarter investors and institutions had placed hundreds of millions into the debt and stock purchases.

But the economy was good then. Or at least better than now.

I still like the concept of satellite radio. I think it is a fact of the future, much like cable. And I envision television and/or on-demand movies being a future capability. But the current economy, and the addition of hundreds of millions in debt are serious problems.

It’s no wonder that 24% of the shares are currently being shorted. The market smells blood, in an economic vortex of pain. And with $1 billion in debt that needs to be repaid in a year where Democrats are hurting the economy worse than it already is – in my opinion – it has a daunting task in front of it.

So the question is can the company survive a Chapter 11 filing and come out the other side with a value?

Maybe. If the economy does not breach the levels of unemployment seen in the 80’s. If inflation does not roar like a lion. If any portion of the stimulus plan works better than most fiscal conservatives believe.

People will still need and drive cars. They will still have to commute long hours. And they will need entertainment for those trips. And the satellites and equipment already out there is an asset for the future. It just might not be for Sirius XM though.

So I will say simply this. As most brokers will state, a stock trading for pennies on the dollar is a gamble that something positive will happen before the company folds. If you are right you make a huge percentage gain, if you are wrong you lose everything. Some companies are worth that bet, others are not.

My ultimate opinion will remain my own. I will not make a recommendation. Qualified investment advisors familiar with individual investor needs are best to speak with on this matter.

Only one thing is always true in the market.

“Bulls and bears make money. Pigs get slaughtered. Never be a pig.”

Dow 7600? Believe it

Written by Michael Vass

As the 4th quarter moves steadily towards the holidays and businesses across the nation collectively hold their breath, I decided to look forward to 2009. What are some of the things that I see coming economically in the new year?

Dow Jones Index at 7600. Yep that’s a bleak statement. It’s not what anyone is asking for in their wishlist to Santa this year (except a few masochistic short-sellers). This is definitely a lump of coal.

But I will say something that you really aren’t expecting. That’s the upside in my view.

The 4th quarter of 2008 is going to be bad. Very Bad. We all know it. We knew it when before Halloween businesses were already getting their Christmas displays in order. They needed sales that bad. And still do.

Unemployment is up, financial companies are laying off people in the thousands, and the prospect of inflation looms larger by the day. Add to that recipe a Democratic President (a historically bad indicator for the economy) who’s policies – based on his voting records – are extremely left leaning, a Democrat-led Congress, the worst Speaker of the House ever, and you get a big mess.

But there is the fact that over $1.2 trillion has been spent this year to bailout the mortgage and credit crisis. The money has been the worst spent money I have seen since Waterworld was made. And the fact that no one has control over how or where this money is being spent, just means that it is being spent poorly and ineffectively.

So all that is left to look forward to is the thought that the auto makers are now first in line to ask for their own bailout, to be followed by retailers, pharmaceuticals, airlines and probably every other industry in America. And Congress will likely pony up the money for each of them.

But let us not forget that Congress has included the people in their spend at will program. So far a 2nd stimulus plan is being conceived, growing from an initial hidden $50 billion, to $150 to $300, and now is being speculated at $500 billion dollars. Nancy Pelosi doesn’t just screw up, she does it with swings to the bleachers.

Any one of these things would not hurt the stock market that much. And the by-product of severely deflated oil prices would be a boon to business in the mid-term. But it’s all happening at once. Saving on energy doesn’t matter much when you have no sales revenue.

The weakness in the stock market can bee seen in that just before the presidential election, the big institutions watched the polls and sold to get out of the way before President Obama was voted in. His promises to raise taxes, and his historic voting record were not overlooked. The only pause in selling came to allow smaller investors a chance to buy into the market and raise prices for the next wave of selling. My guess is that most of the money is sitting in cash right now, waiting for an opportunity in anything but stocks. At least in the U.S.

This means that New York City will get crushed this year. Bonuses from financials are getting scrutinized and thus being cut across the board. That means less money in the tri-state area, and thus a bad Northeast holiday season. That means the east coast will suffer and the nation as a rippling effect.

I’m sure some believe the polispeak that Wall Street and Main Street are separate – a concept only politicians could come up with. But this is how I see it all playing out.

Holiday sales will be off from last years rate, further pressuring the Dow Jones Index. Unemployment will increase going into the New Year, and inflation will start to rise.

President Obama will get inaugurated and the Dow will drop 500 points. This is not a racial reaction, but a political one. Within a week or so of that date a $300 billion 2nd stimulus plan will be passes raising the market temporarily. Several forward indicators will suggest a negative 4th quarter and 1st quarter 2009. Home sales will drop again – due to fewer loan approvals. Home prices should drop in proportion, with foreclosures increasing.

Oil prices should stabilize at around $65 - $70 per barrel to start the year as speculation and alternative investments will drive the price higher. Gold and precious metals should all increase dramatically in a similar manner to that of 2008. Growth in China will likely stall as well, especially since the boost from the Olympics will have faded.

President Obama will be forced to state that he will not raise corporate taxes, and a smaller increase in capital gains will be proposed. Taxes will increase roughly 3% on all income groups.

HD television service will cause a disruption across the nation and millions realize they need different television set, and will spike retail sales – but this is a false increase in the economy. It will be read as a positive indicator by politicians though.

Several mid-sized financials will fail, blame will go to short-sellers and corporate greed. Increased regulations will be passed that will not address the potential for bad business decisions, and the markets will sell again in fear of a more socialized America. The first rounds of nationalized healthcare will be discussed. The national debt will run higher, the deficit even more so as new spending will have no check from Congress.

Confidence in the U.S. Treasuries will weaken, and several nations will begin to sell in hopes of buying national debt of England and a few isolated nations. There will not be a run on America as this would instantly plunge the world into a depression. But the fear will accelerate pressure on the markets. The Fed will lower interest rates again to counter these fears, and to again increase loan availability. Inflation will start to gain attention in the media.

Unemployment will hit a 20 year high, again raising fears of a depression. And Iran and Russia will take aggressive stances in the world stage. Oil will run on this fear, as will gold. But direct crisis will be averted for the time being.

I expect all of this to happen in the first quarter of 2009. It is my expectation that to some degree every item I mentioned will occur. The importance and effect of each of these items will depend on timing and reaction as they all play off of each other. But the net result will be a 7600 Dow Jones Index, or lower.

I expect that this will be the bottom of the market. Smaller investors will flee the markets, and discussion of Federal intervention to save 401K’s will begin. This will also be seen as socialistic, but the need will outweigh these fears. The market will likely hover in this bottom range for the 2nd Quarter.

I’m not sure what might happen next.

I hope that I am wrong an most of these expectations. I would love to see the market gain confidence and rally in the face of these events. I hope that President Obama can rise to the occasion and lift the economic and personal spirits. But that is yet to be seen.

If I am as correct as I was in 2008, then 60 – 70% of what I have said will occur, though not exactly in my timeframe. Take that as you will.

Bailing out the stock market, and killing the economy

Written by Michael Vass

Don’t you love when the Government spends your money? And they do it on a scale so grand that you just have to stop and go wow.

Currently the Government has proposed the best deal Wall Street has ever seen. After having spent over a quarter of a billion dollars on Bear Sterns and mortgage loans and other financials (like AIG), it is now going to by every bad loan of every financial company. Oh joy!

Of course the stock market is flying. Every financial company will now have the chance to load up the Government with every single bad debt they can engineer to be connected to terms of the bailout. And the people working at these banks are far smarter than the Government agencies that will take over these debts. Instantly the books of each bank and brokerage and insurance company will look astounding. All relevant economic guidelines will look solidly in the black: book value, loan reserves, earnings per anything, and so on. All it took is what will be over a trillion dollars of taxpayer money.

Add to this the face that 799 companies in the stock market are no longer allowed to be sold short and you have a market that has no choice but to go up. Like I’ve always said the financials always lead the market higher. Sadly this is bollocks.

The market is artificially propped up right now. Without this bailout, which will hurt the economy for the next President (no matter who it is), we would have found a bottom. But that means once all the crap is done the market will eventually find that bottom, and then exceed it. Just like what happened after the internet bubble burst. Trying to cushion that lead to the real estate bubble and it’s bursting, and now this will lead to another bubble that will burst as well.

Perhaps my time as a stockbroker gives me better insight on this but this is bad. We are talking about over a trillion dollars that will grow and become a bigger problem the next time.

And the Presidential candidates are showing us how they will deal with that next problem now. Senator Obama is waiting for information, instilling no confidence in the market or for investors. Senator McCain is looking for people to blame, which has about the same effect. The only difference is perhaps the fact that since the President must look strong to give the markets any feeling of safety Senator John McCain is looking more Presidential.

But taxes look that they will get raised. It’s the only way to pay off $1 trillion dollars. That means Senator Obama will definitely increase taxes on everyone, massively. And Senator McCain will have to raise them to some extent.

Obama already wants to raise corporate taxes, and increase taxes of everyone from $31,850 and up at least 3%, and raise taxes on energy consumption, capital gains taxes, and payroll taxes. Add this bill and those numbers increase almost exponentially. He will undoubtedly equal or exceed the economic environment of President Carter.

For McCain we will see the likely removal of the President Bush tax cuts. Possibly increases on capital gains as well due to political pressure. This means slower growth in the economy and tough times – not like some want people to believe exist now but will actually exist by 2010.

Here is one thing that I would love to see. I believe that any owner or CEO of a company deserves whatever pay they can justify. There is no limit on what they can be paid, if they have created a profit for their company. But that does not mean they cannot receive a tax, similar to a luxury tax, for a bonus in excess of say $25 million.

If a CEO can grow a company 15% or more and thus ensure everyone connected with the company is safe that deserves a reward. If they retire and the company had netted a profit over their time at the lead, again they deserve a bonus. Because after becoming a CEO of some of the largest companies in the world is likely to be the last job they will ever have. But again the extreme bonus tax should exist. They will still receive millions, so they aren’t going to a poorhouse or changing their lifestyle.

But if a CEO fails to create a profit, they should be restricted in their pay as well. IF a company must be sold to save it, or is cutting workers to stay a float, then management has failed the company. If the company must be bailed out by the Government, the CEO has failed it. Again I can agree that the CEO deserves to be paid their salary, but not a bonus. And if they are leaving the company and created net losses their retirement package should reflect that. So instead of $100 million as an example they would receive say $1 million for each year they were on the job, and still have to pay the extreme bonus tax.

And when I say an extreme bonus tax I mean that say 50% of any bonus over $25 million dollars is split between the company and the Government. The split is 33% to employees, 33% to the corporation, and 33% to the Government. That scenario benefits the company and its employees, hopefully increasing profitability and shareholder confidence. It also benefits the nation. And I can’t see how any CEO that would have gotten say $34 million as a bonus would be upset because they got a $17 million dollar bonus.

But that won’t happen. Just like taxes won’t go up because of this bailout, or that there will not be another crash in the markets because the Government has intervened.

I predicted a 10,200 Dow Jones Index by December. I stand by that. I stated that 9,300 on the Dow in 2009 was possible, I still believe that. And I said that I think $160 per barrel of crude oil would happen over the winter, which may be overly aggressive but still possible. This bailout does not remove these possibilities, it enhances them. Greater regulation does not prevent future problems; it increases the cost of identifying them. Preventing short sales does not help the market, it hides the weakness. And none of these things prevents bad decisions which are honestly the key reason why we had the internet and real estate bubbles.

The only questions that are left are when will the next problem become evident, and how much will the Government spend to bail that out as well.

Yes I thought Lehman was a buy - in 2005

Written by Michael Vass

I was speaking with an old friend and colleague of mine today, and he reminded me of something I had forgotten. As I have mentioned before I was a stockbroker, and I worked with my friend for a few years. While we were at the same firm one of my bigger positions was in Lehman.

Now at the time, thru most of the 90’s I felt that Lehman was a great buy. It was one of the better managed brokerage houses, and well diversified. It weathered the Mexico financial crisis without huge exposure, and had few losses in derivative trades, that took down Barrings.

In fact after I left the brokerage industry and entered the investor relations industry I wrote a review of Lehman back in September of 2005. At the time the stock was trading at the post-split price of $56.60. That was 2x book value and an excellent price in my opinion. The stock went on to run, reaching a high of $85.80 in January 2007. A nice 54% gain in 16 months. Who would be unhappy.

I believe at the time I stated

“Perhaps as Warren Buffett has said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

Well it’s been 3 years now and that same investment looks horrendous. I have to admit that if anyone has held the stock all the way down they have to be pissed off. The company ruined its great cash and book value with bad calls in mortgage and asset-backed loans. The fact that a buyer must be found is the clearest answer of how risky the investments they made were.

I have to say that I am glad I am no longer a stockbroker. But I would also like to say that the call I made was correct at the time. And that I believe that I would have pulled my investment in January of this year at the latest, around $66. My posts of that time identifies that I was looking forward to a horrible year, and that is coming to pass as well.

So I am man enough to stands up and say what I called correctly, and what I missed as well.

But I’ll add this. If I had free capital that I could leverage without fear of loss, I’d buy options and/or stock in Lehman right now. With great risk sometimes comes great reward.

Now some would say I am insane. I don’t think so. My bet is that Lehman is too diversified and too large to be allowed to fail. Like Bear Stearns something will be done to mitigate the loss in the company.

There are too many stocks, 401k’s, pensions, and other assets directly tied to the financial institution. There are too many stockbrokers and staff. Too many corporate loans. And definitely too many mortgages to let this go under completely. My bet is that they will be absorbed by another brokerage or bank. Possibly even an insurance company.

And consider this. Politically this would be horrible if it fails. It will hurt both Democrats – because Congress failed to act to help ensure mortgages would not get worse and helped in the loss of jobs – and Republicans – because this is happening on President Bush’s watch.

Plus, if this bank is allowed to fail it will shake confidence in U.S. financials and the Dollar. Loans and Treasury bonds will be called or sold to deflect losses and prevent future hits. The combination of these events and the resulting hit to the economy will be devastating. I would imagine a full 3% of the nation would be sent to soup lines directly.

So if I am right Lehman will be taken over, but at what price? I expect a range of $3.50 to $5. At the top it means a gain of 41%, at the bottom a loss of 4%. I like those odds. Especially in this environment.

Now I could be very wrong. The Government might let this brokerage fail. That will hurt a lot and have repercussions, but ultimately it will be good for the market. But I think seeing Lehman tank or sell for $2 is distasteful for too many. A slight premium to the current close of $3.65 would be a big positive for the market.

And if you have read some of my posts on how I see the economy I don’t think you are too surprised by this outcome.

“The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters. …

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama - for the reasons stated - then I further expect a drop to 9,300 during 2009. A significant bear market indeed.”

I still stand by these thoughts I mentioned in July. I still say Citigroup is the real big fear. I still think that crude oil prices will run back up to $160 per barrel over the winter. I still expect large increases in inflation and unemployment. Freddie Mac, Fannie Mae, and Lehman are the tip of the financial iceberg. Be prepared.

My friend stated

“Well this is just like Xerox and Kodak. Back in the day they were on everyone’s list to own. They were thought to be too big to drop. But today nobody speaks about them. Why shouldn’t the same thing happen to financials?”

That is very true. But the real question is how we transition to the new financial stock leaders. Opportunities always exist in even the worse markets. You just need to sit back and pay attention, and know your risk tolerance.

I may be wrong again, but I’m willing to tell you my thoughts. You can make your own decisions on how best to manage and invest your holdings.

[By the way, here are how a few other of my calls went.
• AMD – May 2005 – $16.08 High $40.54 in February 2006 now $5.75
• AMLN – February 2005 - $22.48 High $50.81 in October 2007 now $20.18
• ERTS – November 2004 - $47.79 High $68.12 in January 2005 now $44.99
• SIRI – September 2004 - $3.00 High $7.95 in December 2004 now $0.95

  Just wanted to be clear and honest on what I have publicly said in the past.]

The aftermath of the Yahoo - Microsoft deal

Written by Michael Vass

If you have looked at the stock market (U.S.) lately then you cannot have missed a couple of things. Banks are still reeling, Lehman Brothers being the latest in a string of major financials that have had to seek out financing to shore up massive losses. Oil companies are getting a lot of negative publicity due to the election year politics. Energy alternatives are sparking another round of interest, as the generally do every election year for the past roughly 20 years.

But what has garnered a lot of attention is the sector that no one has really spoken about in some time. The technology arena. In particular the latest mega-deal, Yahoo and Microsoft. Everyone has heard some aspect of it, and opinions are flying.

Now the deal officially died last week. Microsoft won’t raise their price or even offer one for Yahoo. Yahoo for its part made a deal with Google, allowing ads from the leading search engine to appear on Yahoo for $300 million. So the shake up begins.

Microsoft has had it’s price raise because it won’t be buying anything, and stockholders will be happy about not having the books burdened with Yahoo. Google is happy as they seriously increase ad revenue with the increased exposure. The likelihood of increase revenues for higher ad fees and increased numbers are on the horizon and analysts will be checking the quarterly reports to see if a new trendline confirms this speculation.

Those looking at what may happen should keep an eye out on Yahoo. After failing to be bought by Microsoft, and only securing a deal that really benefits Google the shareholders are boiling. The desire for bigger profits is going to weigh heavily on the CEO and Board. Something is going to need to be done.

I expect that a couple more deals and the takeover of a smaller technology company will be in the air for Yahoo. Plus an expanded advertising sales campaign will likely unfold within the slow summer quarter showing better numbers as fall unfolds. If I am correct opportunity may abound in the disappointment this deal failing has caused.

But that is just one outlook. What do you think?