The Five Dumbest Things on Wall Street This Week
1. What in the WorldCom?
You know, we at the Five Dumbest Things research lab thought we had built up a tolerance for Dumbness. Because we're studying Dumb things week in and week out, you'd think we'd seen it all. You'd think nothing could surprise us anymore.
Yeah, that's what we thought. Until WorldCom (WCOME).
As the world learned this week, the Securities and Exchange Commission has accused WorldCom of a scheme to wildly understate expenses and overstate earnings. Over the five quarters ended March 31, the company didn't earn $2.6 billion before income taxes and minority interests, as reported; instead, says the SEC, WorldCom lost $1.2 billion.The Dumbness of the alleged misdeeds overwhelms us. We're talking World-Class Dumbness here. Dumber than Enron Dumbness. Face it: When Thomson Financial Investment Banking/Capital Markets (the former Securities Data) gets around to ranking all-time Dumbness, this development at WorldCom will be No. 1 with a bullet. Given the magnitude of the Dumbness here, it's hard for us to pick out a specific element of the WorldCom mess to single out for particular scrutiny. But we'll give it a shot. A little background. What WorldCom did, according to the SEC, was diddle with the largest expense on its profit-and-loss statements: line costs, which amounted to 42% of revenue last year -- as originally reported, at least. The SEC says these line costs generally represent fees paid to other telecom network providers for the right to access their networks.
2. Briefly NotedLast week, you may recall, we explored the sexual suggestiveness of female cellists featured in advertisements for Morgan Stanley (MWD), OppenheimerFunds and Alitalia.
3. The Magnificent SeveranceFace it: This WorldCom debacle is just too big to squeeze into one Dumb Thing. So here's a second.
4. Promethean UnboundCertain companies are like tow trucks: If they're in the neighborhood, chances are good there's a car wreck close at hand. That came to mind once we took a look at one of the latest deals involving Promethean Asset Management, one-time lender to such well-known clunkers as eToys, Excite@Home and the sub-dollar MicroStrategy (MSTR). Wheezing and sputtering in the breakdown lane this time around is InterVoice-Brite (INTV), which sells voice-recognition systems and other services to telcos. Late last month, InterVoice-Brite issued a press release saying it had successfully restructured its debt, in part through $10 million in convertible notes it issued in a private placement. "I'm pleased with these transactions," the CEO said in a statement. What the company didn't say (although investors might have figured it out from an SEC filing to which the release alluded) is that the convertible notes, issued to Promethean, look an awful lot like what cynical Wall Street types call a toxic convertible or death-spiral convertible. In such convertibles, the underlying company shares have a floating price. In a worst-case scenario, a company's share price falls after it issues the convert, causing an increase in the number of shares that will be issued upon conversion of the debt. That threat of dilution causes shares to fall further, starting the downward cycle all over again and leading to the death-spiral characterization. In this particular case, the conversion price is fixed. But what isn't fixed is how many shares InterVoice-Brite might have to issue as it pays off the loan. See, starting in September, InterVoice-Brite will have pay Promethean about $1 million a month to repay the debt. If it chooses, it can pay in cash. But if it doesn't or can't, InterVoice-Brite will have to issue common stock to make the payment. The lower the stock falls, the more stock InterVoice-Brite will have to issue, and -- well, you get the idea. The burning question, of course, is whether InterVoice-Brite will have enough cash on hand to make the payments. Chief Financial Officer Rob-Roy Graham says the company believes it can, based on its cash on hand and expected cash flows. But some short-sellers are betting against it, pointing to factors such as the anemic telco market and the company's $807,000 in negative cash flow from operations, reported Monday, for the three months ended May 31. They also point out that Promethean itself, as discussed in the relevant SEC filing, is able to short the stock. So far, the short bet on InterVoice-Brite has been a good one. Since May 29, the night before the Promethean deal was announced, the stock has fallen from $3.11 to $1.75, or 44%. For his part, Jamie O'Brien, managing member of Promethean, doesn't agree with the toxic and death-spiral characterizations of the deal. "They [InterVoice-Brite] are in complete control whether they're going to use cash, or whether they want, periodically, to use stock," says O'Brien. "We hope the company repays in cash, and the company has publicly stated they expect to repay in cash. It's a very boring instrument, hopefully." For InterVoice-Brite's sake, let's hope so.
5. Of Course, This Might Explain Charles BarkleyWe at the research lab hope that reading down this far hasn't been a complete waste of time for you. But just in case, we'll try to redeem ourselves. We call your attention to press releases issued Thursday by CP&L and Florida Power, two subsidiaries of Progress Energy (PGN). In anticipation of the forthcoming movie Like Mike, Progress advises people to not, in fact, be like the hero of the movie, Calvin, played by rapper Lil Bow Wow. In one of the film's key scenes, Calvin climbs on a roof during a rainstorm so he can retrieve a pair of basketball shoes hanging from a power line. When lightning strikes, the "energized" shoes give Calvin superhuman basketball skills, resulting in his becoming the first 14-year-old to play in the NBA. In real life, Progress Energy points out, the likeliest outcome of that particular scene would be a dead Calvin. What's Dumb? Not the press release. Not the movie, either -- at least, judging from this particular scene. No, what's Dumb is that in today's society it makes perfect sense for Progress Energy to issue the press release. Kids mindlessly copy the things they see people doing in the media, whether it's lying down in the middle of the road, making a blowtorch from an aerosol can or trading stocks without the help of an investment professional. Kids, don't try these things at home.
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