1. United Airlines Just a Little Too Honest
Rule No. 1 in CEO school: Never say that your company may soon collapse.
Seems kind of obvious, but that rule was flouted by United Airlines chief James Goodwin, who warned in a
letter to employees that the company "will perish" next year unless it can stanch its tremendous losses, which have worsened since the terrorist attacks. "Today, we are literally hemorrhaging money," he wrote.
In raising concerns about the financial viability of United, a unit of
, Goodwin only put into words what outsiders have speculated about. Since Sept. 11, the airline has laid off about 20,000 of its 100,000 employees and cut flights by as much as 25%. It's expected to announce massive losses when it reports third-quarter earnings.
But in response to the disclosure, Goodwin has been roundly attacked. Feeling that he had been all too honest, investors have knocked an additional 24% off the stock's value. The shares are down 54% since Sept 11. Meanwhile, UAL union leaders reportedly say Goodwin has exaggerated company difficulties to gain bargaining leverage in union negotiations. The leaders of one union have petitioned the company's board of directors to have him sacked.
Bottom line: CEOs may get pilloried when they try to dodge the truth, but sometimes it doesn't pay to be too candid about worst-case scenarios, either. Especially when that scenario is the company's own demise.
2. Forget the Victory Gardens; Let's Have a Comfortable War
Sure, we're at war with a band of cave-dwelling outlaws hell bent on our annihilation. But would all freedom-loving Americans
go out and buy some DVD players? Maybe even a nice new car?
That was basically the message from the Treasury Department, on news that Congress had voted for the creation of war bonds to finance antiterrorism efforts and rebuilding following the attacks. Officials at Treasury applauded the sentiment, then politely suggested it would be even better for the economy if Americans just went to stores and bought stuff. "The economy is perhaps our greatest asset as we move forward in these efforts to fight the war on global terrorists," says Betsy Holahan, a department spokesperson. "War bonds are an additional way for Americans to show their patriotism."
For the record, we don't think an issue of war bonds would be dumb, just superfluous. After all, nothing's stopped Americans from buying generic savings bonds -- or better yet, Treasuries -- all of which finance spending by the federal government.
In the meantime, it's a little dislocating to hear politicians talk up war bonds -- which most people associate with hardship and sacrifice -- at the same time top economic gurus are practically begging people to shop. War bonds notwithstanding, we're a long way off from the era of ration books.
3. Enron Again
Last week, we noted the extent of alarm about
revelation that its shareholder equity had dropped $1.2 billion, following some unusual and possibly inappropriate high-level transactions. Following that disclosure, besieged CFO Andrew Fastow has finally
left the company on what's delicately termed a "leave of absence."
In July, Fastow exited a limited partnership, from which he had reportedly reaped large profits, after shareholders and analysts objected to his involvement. Concerns about those dealings and
others had increased in the wake of the disclosure about the charge to equity until even management acknowledged Fastow would have to go as a prerequisite to restoring investor confidence.
But that won't be an easy task, given the resentment about Enron's disinclination to explain its problems. One analyst called Fastow's departure "unsettling," noting that management had given the CFO its endorsement only the day before. Sounding a note of exasperation, analysts at J.P. Morgan Chase, Banc of America Securities and Prudential all downgraded the stock. And there could be more trouble to come: The
Securities and Exchange Commission
has issued Enron a letter of inquiry related to some of its transactions.
4. Gold Diggers
It's understandable that investors felt panicky in September. Unfortunately, some reacted by shoving their hard-earned money into gold funds. According to Financial Research Corp., which tracks fund flows, the specialty precious-metals category was the best-selling equity category during September, with net inflows of $101 million.
Granted, that's not a huge sum in the mutual fund world. By comparison, during the same month, large growth funds saw net redemptions of $7.4 billion. But the fact that so many people are jumping into precious metals is noteworthy, given that gold funds have performed so badly for so long.
Sure, under the bizarre circumstances of late, they've enjoyed somewhat of a pop. According to Morningstar, the average precious-metals fund is up 10.08% year to date. But over the past five years, the same category lost an embarrassing 14.68%. By comparison, even large-cap growth funds -- everybody's favorite whipping boy -- managed to post a positive return. In the same period, they were up 7.13%.
Moreover, circumstances that would seem to be the most favorable in decades -- a combination of attacks on the U.S. government and war -- still don't seem to have boosted gold prices significantly. Despite an initial surge in prices after the terrorist attacks, they're again approaching their pre-Sept. 11 levels. It's too early to say, but it's likely the gold bugs will confront disappointment once again.
5. Amazon Amazes Once Again
still maintains it will become profitable by the fourth quarter. Well, at least it will post a pro forma operating profit.
OK, so maybe that wouldn't include Amazon's service on $2.17 billion in long-term debt or extraordinary charges. In fact, a pro forma operating profit is basically just an accounting concept that would lend a fuzzy, meaningless aura of minor triumph. The company still hasn't said when it will turn an economic profit.
For that matter, even the fourth-quarter prediction is iffy. After announcing the company expected to turn the pro forma operating profit, CFO Warren Jenson added the humble qualifier, "There are no guarantees." Amazon simultaneously lowered its forecast for fourth-quarter revenue, predicting that sales would be somewhere between flat and up by 10% compared with a year ago.
Third-quarter trends weren't encouraging. Though sales overall were up slightly in the third quarter from a year ago, revenue from the company's core books and music business actually fell 12%. At least the company has made progress in cutting costs: A spokesperson says pro forma operating expenses have decreased by 20% over the past year.
Incidentally, in the wake of Amazon's earnings report, two analysts made the belated decision to cut their ratings on the stock, which has fallen 93% from its high back in December 1999. Merrill Lynch analyst Henry Blodget and SG Cowen analyst Scott Reamer downgraded the stock to "neutral" from previous buy ratings. "We thought there might be upside to our estimates," noted Blodget. "There wasn't."