Dot-com crash losers become winners again

February 14, 2010

David Olive

PETER BAXTER/SHUTTERSTOCK

A decade ago next month, the so-called dot-com mania crested, soon followed by a widespread collapse across the entire high-tech sector. When the panic selling was over, some $8 trillion (U.S.) in stock-market value had been wiped out. Hundreds of tech start-ups disappeared.

Many of the biggest firms in the vanguard of the Internet revolution never recovered. These include telecom equipment makers Nortel Networks, Lucent Technologies and Global Crossing, and telecom provider WorldCom, the world's second-largest telecom company when it collapsed in an epic accounting scandal in 2002. And Sun Microsystems, which bragged of having put "the dot in dot-com," was merged out of existence last month with its bargain-priced acquisition by Oracle.

At the height of the Internet-driven investor euphoria, stratospheric market valuations were based not on profits, which were non-existent (indeed, so were revenues in many cases) but on new "metrics" like spiralling growth in Internet page views. "The ability to monetize shareholder ignorance has probably never been exceeded," Warren Buffett warned at the time.

After the dot-com bust and even more devastating "tech wreck" – a 38 per cent collapse in the Dow Jones industrial average by 2002, the worst stock-market drop since the Crash of 1929 – the tech sector understandably became an investor no-go zone.

Yet, discriminating tech investors who kept the faith have profited mightily from five undeniable winners of the Internet revolution:

• Cisco Systems Inc., the San Jose, Calif., firm whose best-in-class routers are the Internet's "traffic cops." Shares have doubled from a post-crash nadir of $12 in 2001.
• Google Inc., the top search engine, whose stock has quintupled since going public in 2004.
• Amazon.com Inc., the dominant online retailer, whose stock is up 1,530 per cent from its post-crash low of $7.20.
• Apple Inc., given up for dead in the 1990s when its market share in computer operating systems slipped to about 3 per cent, its stock is up 2,873 per cent since 2003 on the strength of the iPod and iPhone.
• Research In Motion Ltd. RIM), the Waterloo-based BlackBerry inventor whose stock cratered in 2000, losing 94 per cent of its peak 2000 value, only to surge 2,982 per cent since bottoming out in 2002.

These firms not only survived, but thrived.

What do they have in common?

Business smarts

• RIM's co-founders, Jim Balsillie and Mike Lazaridis, kept their eye on the business, not RIM's heady stock price, during the tech mania, to the point of requiring any employee caught mentioning the stock price to buy doughnuts for the entire staff. RIM focused on building the most secure email network, making itself indispensable to its base of corporate and government users.
• Cisco became the most M&A-savvy tech firm in history, growing rapidly from successful acquisitions in a field notorious for failed takeovers.
• Nortel, by contrast, wrote off most of the $34 billion worth of takeovers it made between 1997 and 2000.
• Amazon, like Cisco and RIM, accumulated an immense war chest of spare cash, raised in the stock market at the height of the euphoria, and carefully husbanded its cash "burn" as it grew an enterprise that consistently lost money until it refined its unproven business model to the point where last year, in the midst of a consumer recession with few equals in modern history, it turned a profit of $900 million.

Evangelical leadership

• Apple's Steve Jobs effortlessly evolved from a high priest of personal computing to a cocky champion of music and communications gadgetry.
• Cisco's John Chambers made the rounds of Fortune 500 CEOs, warning of the perils awaiting anyone foolish enough not to embrace the Internet in everything from marketing to inventory control to internal communications networks.
• RIM's Balsillie, the business half of the co-CEO-ship he shares with techie Lazaridis, got in the face of financiers, industrialists, politicians, surgeons and others for whom secure, instant communication with colleagues was, by his description, essential and possible only with a BlackBerry.

Game-changing

• Jobs, only 54, has been a prime mover in revolutionizing personal computing, animated motion pictures, the music industry and mobile communications.
• Founder and CEO Jeff Bezos has proved with Amazon that almost anything can be sold online, turning his electronic bookstore into an Internet general store, and changing consumer behaviour not only by persuading Amazon's 88 million customers to buy apparel and giftware sight unseen, but to research prosaic purchases like cleaning agents the way they do cars and houses.
• Google eclipsed an incumbent, subscriber-based America Online by making search free, deriving its prodigious revenues from advertising.

Market knowledge

An obvious requirement, one would think. Yet once-dominant firms as varied as Eastman Kodak Co., Gap Inc. and Starbucks Corp. – to say nothing of the Detroit Three – have managed to let themselves decline in customer relevance.

• Both Cisco and RIM sell to corporate customers, RIM having expanded into the consumer market only in recent years. That makes these firms acutely sensitive to the requirements of telcos such as Verizon Communications and Bell Canada, which use or distribute their products and demand the highest standards of reliability.
• Amazon exploits the global "town square" nature of the Internet to create at least 50 new community applications each year, from discussion boards and chat rooms to the world's largest inventory of consumer-written reviews – making itself not only an exceptionally customer-friendly vendor but a favoured online hangout for Sarah Vaughan and John Irving fans.

Buffett was right, of course. All movements go too far, and the undeniable promise of the Internet turned into an unsustainable gold rush.

Neither was it enough to be an evangelist for the Internet and one's role in it, or Scott McNeely's Sun Microsystems would have emerged a winner rather than a casualty of the online revolution. As in previous industrial upheavals, business fundamentals – adequate funding, relentless new product development, unflagging attention to shifts in customer demands – ultimately won out.

Sun's last CEO, Jonathan Schwartz, summed it up in a farewell haiku that alluded to the path-breaking company's failure in the last decade to keep ahead of changes in computing demands:

"Financial crisis
Stalled too many customers
CEO no more."

Dee Rockets Up - Reserve Increases

Feb 10, 2010 19:59 ET

Delphi Energy Reports Significant Growth in Reserves

CALGARY, ALBERTA--(Marketwire - Feb. 10, 2010) - Delphi Energy Corp. ("Delphi" or the "Company") (TSX:DEE) is pleased to report its crude oil and natural gas reserves information for the year ended December 31, 2009.

Highlights

- Achieved finding, development and acquisition costs ("FD&A") of $12.06 per barrel of oil equivalent ("boe") for total proved reserves and $9.21 per boe for total proved plus probable reserves. The FD&A costs over the past three years averaged $18.20 per boe for total proved and $15.42 per boe for total proved plus probable.

- Increased total proved reserves by 19 percent to 18.0 million boe and total proved plus probable reserves by 24 percent to 27.4 million boe.

- Improved recycle ratio to 2.6 in 2009 compared to 1.6 in 2008.

- Increased proved plus probable reserve life index ("RLI") to 11.0 years in 2009 compared to 9.5 years in 2008.

- Increased before tax net present value across all reserve categories despite a significant reduction in forecasted natural gas prices.

- Increased net undeveloped land to 172,200 acres; a 37 percent increase over 2008 and a 92 percent increase over 2007.

Risk has greatly increased this week. There are two reasons.

First, the Euro-bomb could explode anytime.

Second, the U.S. government dropped a bomb in telling us that the employment losses during the current recession are far worse than people had believed.

Canada fared much better with a strong +43,000 jobs growth. The unemployment rate dropped from 8.5% to 8.3%. The key issue for Canada is the fallout effect from a continued weak U.S. economy.

The Euro Bomb

The EU is in a lose-lose situation. If they rescue Greece, then other countries will have their hands out like Spain, Portugal, and Ireland. There could be others too. I doubt the main players (Germany and France) will have the stomach to bailout so many countries. The fundamental problem is that it is very difficult (near impossible) to have a currency union without a political union. While Euroland rules were established (size of deficit, government debt), they were (and are) routinely violated and there is no way to enforce - because of the lack of political union.

You create moral hazard problems. Countries will borrow and spend with the expectation that the system will bail them out. Sound familiar? If the large countries even marginally violate the rules (size of deficit, debt), then this energizes the smaller countries to brazenly violate the rules of the game.

If the EU does nothing, then the Euro will likely fall apart (or at least lose some member countries)

The real question is how deep Germany and France will want to reach into their pockets to keep the Euro going.

The Jobs Bomb

U.S. unemployment dropped by 0.3% to 9.7%. Good news, right?

At the same time, the data were "revised"

We now know that at least 8.4 million jobs have been lost in this recession. Just last month, we thought it was 7.2 million. With the stroke of the Bureau of Labor Statistics' pen, 1.2 million jobs vanished. Poof.

Let put this in perspective. The drawdown in people employed (non-farm payrolls) in this recession has been -6.11% (from December 2007, the month of the economic peak to today). In the 2001 recession, the drawdown was -1.21% (peak to trough). The 1990-1991 recession was only -1.13%. 1981 was more serious with a -3.08% drawdown. The recession of 1980 was only -1.07%.

Think of it this way. If we add up the employment losses over the past four recessions combined together, it sums to a -6.49% drawdown. We are dangerously close (-6.11%) to having this recession being as bad (in terms of jobs) as the previous four recessions!

Was there any good news?

Yes.

While the Establishment Survey suggested that nonfarm payrolls fell by 20,000, the unemployment rate is based on a different survey.

The Household Survey suggested fewer people were unemployed. That's why the rate dropped. To be clear, the civilian labor force increased from 153.059 million to 153.170 million (denominator) and the unemployed decreased from 15.267 million to 14.837 million (numerator). Dividing the two numbers produces 9.687% unemployment.

There were many other small pieces of good news including: (i) greater participation rate (people re-entering labor force rose from 64.6 to 64.7); (ii) small increases in number of hours worked and average wage; and (iii) increase in temporary employment (which is usually a leading indicator of permanent employment growth).

The biggest good news is the trend. The employment situation is stabilizing.

My fears

• Usually, temp jobs are a leading indicator of growth in permanent jobs. This time might be different. Given the longer-term economic uncertainty, companies are satisfied rolling through temporary employees.
• We might see increased CAPEX without much employment growth. Companies are in the process of replacing and/or refurbishing their depleted capital equipment. Such expenditures may lead to labor savings. As such, it is unrealistic to think of hiring back all the laid off workers.
• The long duration of unemployment will lead to workers' skills becoming stale. While companies have lots of job applicants, they might have fewer qualified applicants because of depreciated skills.
• There will not be enough growth to get us into the +300,000 monthly range for non-farm payrolls additions (we need +100,000 per month simply for population growth and 300,000 to get back all the current recession jobs lost in three years). This means that unemployment rate will be stuck at a very high level for a very long time.
• The continuing credit squeeze on small and medium sized business will defeat the recovery. Most of jobs are created by small and medium sized businesses and these firms are still severely constrained in getting credit.
• There is great economic uncertainty as a result of the extreme leverage in the U.S. economy. Corporations have reduced their leverage. Consumers have made considerable progress in increasing their savings. However, that is all offset by an exploding government debt. We are approximately at a situation where total (consumer, corporate and government) debt is 350% GDP. In the 1990s, it was about 250%. In the 1980s, 175%. In the 1950s, 60s and 70s about 150%. The previous peak was about 300% in 1933. Such a dark cloud on the horizon magnifies risk. Add to this the fear of increased taxes. Higher risk means less investment, slower employment growth, and upside prospects for the U.S. economy.

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