1. That's Credible!
Kudos to Morgan Stanley media analyst Rich Bilotti, who this week wins our Top Gun Award for Evasive Maneuvers.
Here's a guy in a tough spot. On the one hand, if your employer does a lot of investment banking for the cable television industry, you don't want to go around offending clients past and future -- say,
, for which Morgan Stanley helped raise $1.4 billion in stock and debt over the past two years.
On the other hand, sometimes you have to acknowledge the fact that those same clients' stock is held in low esteem by many investors and may not regain respectability anytime soon. That would include, of course, Adelphia Communications, whose stock lost half its value as a result of last week's surprise disclosure that the company, which had been telling the Street it was cutting down debt, actually had $2.3 billion more in potential liabilities than it had previously disclosed.
So how does Bilotti diplomatically express the market's unhappiness with Adelphia? Well, in a report about the Coudersport, Pa.-based company issued March 28, Bilotti wrote, "We believe the market will apply a management credibility discount" to Adelphia.
What that means is that instead of valuing the company the same way he values other cable companies -- at about 13.5 or 14 times expected 2003 earnings before interest, taxes, depreciation and amortization (a common cable industry financial yardstick) -- he's cutting Adelphia's target multiple to 12.8 times 2003 EBITDA. What that means, in turn, is that before other adjustments, Bilotti's cutting Adelphia's price target from $35 to $29.
"Management credibility discount" -- what a beautiful turn of phrase. So sweet. One almost forgets that it means something like, "You know the Rigas family that runs Adelphia? Well, if a Rigas tells you that Pennsylvania's summer weather is warm and sunny, you'd better wear your parka to Adelphia's July 4 picnic."
2. You Know, Thalidomide Gets a Bad Rap, Too, but It's Excellent for Treating Leprosy
AOL Time Warner
got all self-righteous this week when a company executive, at the penalty hearing in
antitrust case, testified that Microsoft's restrictions on Windows prevented manufacturers from designing special PCs for children -- stuff like a Harry Potter PC or a hypothetical "Lego station" computer.
And this is supposed to outrage us?
Hasn't anyone else been paying attention over the past few years? PCs aren't T-shirts or bedsheets or backpacks, for which parents are willing to fork over a few extra bucks for a piece of cloth with a Pokemon character stamped on it. Logo'd PCs have turned out to be consistent failures -- most notably the
-licensed Barbie and Hot Wheels PCs made by the now-bankrupt
. No matter what AOL says, we at the research lab doubt that customizing the log-on screen will salvage what is at heart an irredeemably Dumb Idea.
Instead of whining to a judge about how Microsoft stands in the path of kiddie-brand-licensed computers, AOL Time Warner and PC manufacturers should be sending thank you notes to Bill Gates. Along with Hot Wheels and Barbie toothbrushes for his kids.
3. Basket Case
But let's get back to Morgan Stanley. We usually pay about as much attention to model portfolios as we do to weather forecasts for Coudersport, Pa., but this week -- well, this week we couldn't help ourselves.
As pointed out to us by a money manager who asked to remain anonymous, Morgan Stanley made a curious change on Wednesday to its model portfolio -- you know, the basket of stocks Morgan Stanley publishes as a starting point for retail investors and high-net-worth individuals to build their portfolios.
Instead of parking 2% of your money, as previously advised, in
, which the portfolio strategists view as "fairly valued," the firm now suggests trading in that stock for shares in the
iShares Nasdaq Biotechnology Index
-- an exchange-traded fund -- for "gaining exposure to this volatile but promising sector while minimizing our exposure to individual stock-specific risk."
Hmm. So instead of placing your bet on an individual stock, Morgan thinks you're better off investing in a basket of 70 stocks? As in, you're better off buying some sort of indexed mutual fund than, say, one recommended by a Morgan Stanley equity research analyst?
But take what Morgan is saying to its logical extreme, and you end up mailing a check to indexing giant Vanguard.
Our source, an investor in Morgan Stanley itself, insists this is a very smart move, not a dumb one. If you're an investment adviser, you want to make sure your customers get a competitive return. And indexed funds are good vehicles for delivering them.
"It's an admission on their part that their analysts aren't any better than any other analysts," says the manager.
Leah Modigliani, a Morgan equity strategist, counters that the extreme we're taking it to is an illogical one. The reason Morgan went with the biotech ETF was that in the context of this 50-stock portfolio, a single biotech stock would introduce too much volatility. Biotech "is a particularly volatile sector, and we wanted to get the diversification benefits afforded to you in this ETF," Modigliani says. "In a larger portfolio, I would absolutely look to our analysts to pick the winners in biotech."
4. Duck, Duck, Duck ... Loonie!
Now you've reached the part of our column where we try to write about Canada without prompting thousands of parka-wearing Canadians to email us about how patronizing and ignorant U.S. citizens can be when it comes to current events in our neighbor to the, uh, well, uh, whatever direction we're supposed to travel in if we go to Canada.
As currency traders around the world have already learned, the value of the Canadian dollar, a.k.a. the Loonie, dropped three-tenths of 1% against the U.S. dollar in thin trading Monday.
The reason? Apparently, currency traders got taken in by a fake April Fools' Day news story, one that reported that Canadian Finance Minister Paul Martin was retiring to raise Charolais cattle and "handsome Fawn Runner ducks."
For us provincial Americans, the most fascinating part of the whole episode was when the fake story's author, Canadian Pierre Bourque, explained to
his puzzlement that anyone took his tale seriously: "It is April 1, after all," Bourque told Reuters. "The ducks were the telltale sign."
Ah, yes. The ducks. Always a telltale sign.
Note to all Canadians reading this: Please look away for a moment.
Note to everyone else: Shake your head in disbelief.
OK, Canadians! You can look back now!
5. Xyber, Uh, Not
Weren't we just talking about can't-miss ideas in the world of computing hardware?
Well, here's another one: the
As in, "Gosh, all we have to do is break into the $400 million bridge-inspection market, and we'll be rolling in revenues!"
Or, "If we can outfit Geraldo with a Xybernaut-driven head-mounted camera, we'll be able to be right there with him as he explores the treacherous hotel rooms of Afghanistan!"
Yes, customers are just busting down the doors.
No, we weren't the least bit doubtful this week about this particular company's chances for success, once the company said this week it would hit the low end of expected revenue for the quarter ended March 31.
Especially not after the company -- which was founded in 1990 and went public in 1996 -- announced it was laying off as much as 20% of its staff to help cut costs.
See, we can't help being encouraged by the company's burning through $28.3 million in cash last year, on revenue of $9.8 million.
And we love how CEO Edward G. Newman has his wife and brother on the payroll.
And we're big fans of the $1 million loan the company has outstanding to CEO Newman -- a loan Newman used, Bernie Ebbers style, to stave off a margin call for another loan secured by Newman's Xybernaut stock. The loan, due to be paid off by the end of 2001, has been extended for another year.
See, we're absolutely sure that wearable computers will take off soon. And as soon as they do, we at the Five Dumbest Things research lab will be all over them.
As soon as we find a new home for all our Barbie PCs.