A Rally Built on HopeFriday's market action was a prime example of what I've called a rally built on hope. The market chose to look past awful unemployment numbers. True, the official unemployment rate climbed to 6%, but everyone knows the unemployment rate is a lagging indicator that gives a solid picture of where the economy is coming from. At least that was the talk on the trading floors. And the market's willingness to bet on hopes of a stronger economy in the second half got just enough from a jump in factory orders of 2.2% in March. That jump, in data announced just hours after the unemployment numbers, was much higher than the 1.2% gain economists had expected. And it marked the biggest increase in orders since July 2002. Put it all together and the indexes roared out of the gate.
The Battered Telecommunications SectorYou can see a similar dynamic at work in telecommunications. Global Crossing, Qwest ( Q) and MCI, once WorldCom, have bled rivers of red ink in the last two years, enough so that Global Crossing and MCI have sought bankruptcy protection while they reorganize. Qwest merely lost $2.39 a share in 2001 and $1.25 a share in 2002. But nobody has folded. Capacity, which so far outstripped demand that telcos resorted to trading it among themselves in an effort to create revenue to prop up their stocks, is largely now exactly what it was when the sector collapsed. It's what happens now that's important to investors. MCI delivered its planned bankruptcy reorganization to the courts April 14. The company's postbankruptcy capital structure would give the company about $3.5 billion to $4.5 billion in debt, net of cash. That's pretty spectacular for a company that had $30 billion in long-term debt when it went into bankruptcy. In March 2002, MCI was paying $450 million in interest on that debt each quarter, or about $1.8 billion a year. Rough cost savings to the company of paring that $30 billion in debt down to $4 billion comes to $1.6 billion annually. No wonder MCI's competitors tried to block the bankruptcy proceedings and force the liquidation of MCI. When it comes out of bankruptcy, the company will have an extra $1.6 billion in cash flow to play with. To do things like invest in new equipment, if it likes. To upgrade service, perhaps. Or cut prices to win market share.