Andre J. Peschong

While oil continues its meteoric rise into uncharted price territory, the real story is how this is playing out with consumers. Plagued by an anemic economy and the lowest consumer confidence index in the last 16 years, the people at the pump are being hit especially hard. When gas reached $3 last summer most consumers looked at it more as a fluke than a trend and did not adjust there driving habits accordingly. With gas pressing past $4 per gallon and with the realization that $3 gas was actually cheap; consumers are finally starting to change their spending habits.

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When the internet bubble popped back in March of 2000 there was a lot of lost footing and confusion, including a bunch of shell shocked venture capitalists, private equity guys and, of course, investment bankers who were walking around dazed, asking one key question, hoping to rescue their future… “What is the next big thing?”

When I talk about “big,” I mean really big, in the context of changing the landscape of the capital community and, in turn, changing the mind set of people changing the way they live.  To explain a little better, let’s look at the “last big thing,” the internet.  The internet certainly provided the type of changing landscape that I’m referring to.   As a powerful and robust catalyst, providing the masses cheaper, faster and better experiences, the information highway changed the way we do business, buy consumer goods, communicate and more.  On a fundamental level the internet changed the way we operate on a daily basis.  It is this type of paradigm shift that I am referring to when I speak of a “big thing.”  

Getting back to the next big thing, we needed a catalyst that was backed up by an event or events.  .  In my opinion, Al Gore was that catalyst.  Through his film, An Inconvenient Truth, he brought attention to the masses on the global warming issue.  Coupled with the  rapid global economic acceleration fueled by China and India’s torrid rate of growth, we see the next big thing taking shape: alternative energy sources.   The massive and rapid growth of China and India has strained consumption of basic resources such as copper, steel, cement and oil which means substantially higher costs for these resources.  We are particularly feeling the pinch of oil prices here in the US (we have jumped from approximately $20 per barrel to over $100 per barrel in just three years,) which is the final and strongest catalyst for seeking alternative fuels.  Al Gore started the beating of the drum and it was validated by rising commodity prices and has been brought to a fever pitch by oils meteoric rise.  The world has suddenly realized that natural resources are finite and we should figure out a way to save the planet. 

Alternative energy, whether it be solar, ethanol, biomass fuels, bio diesel, wind power generation, hydro-electric plants, or electric cars, will fundamentally change the investment landscape and subsequently trickle down into lifestyle shifts. Take a minute to think about all of the industries that are now in business to support these endeavors, there is a massive market opportunity.  The world (or at least the United States) has woken up and has jumped on the “green” wagon.  To get proof of this fact, simply follow the money.  A substantial shift is occurring within venture capital, private equity and to some extent, hedge funds.  Capital is being deployed in this green/alternative energy initiative at a very rapid pace.

Some outside pundits say that this space is getting over heated and everyone is trying to throw money at any company associated with the green space, but from what I see, that is not the case.  The alternative energy space is extremely large and can include many different types of technologies and companies, and is attracting some very serious attention from major capital players.  Trust me, I haven’t traded in my SUV or put solar panels on my house yet, but I think there is really something to this trend and believe we will see another major paradigm shift in the next few years. I will continue to follow this space closely and will have follow up articles and interviews with key people and companies. 

Woke up bright and early on Friday morning for this interview on NY’s Mike Norman Show.  We discussed my take on the Bear Stearns bailout.  Listen to my two part interview here:

http://www.dealflowdiaries.com/mp3s/audioplayer.htm

Select “BizRadio 04-11-08″ and “BizRadio 04-11-08pt2″

It seems that everyone I talk to on Main Street is all concerned and angst ridden towards the government’s bailout of Bear Stearns.  They are angry because they believe the government is supporting big business and even worse, they are supporting Wall Street big business.  It is interesting to hear an everyman’s perspective on something that is so extremely complex and has ramifications that the brightest in the financial community cannot really fathom yet.  This is a very polarizing issue and one that probably has been brought to the surface because of the weak and uncertain economy coupled with election year upheaval. 

What people fail to understand is that the government cannot let Bear Stearns fail!  Why?  It would literally be a massive domino effect that has the potential to lay waste to the fabric of our capital/free market system.  Elizabeth MacDonald at Fox Business explains it well in her article: The Brinkmanship at Bear Stearns.  To put that last statement into perspective the US government issues bonds which have the highest rating possible. What are these bonds backed with?  The answer is nothing but the full faith of the United States government.  What happens if the people lose faith in government, which means the world loses faith that means the bonds tumble, the US credit rating sinks, and we see the dreaded domino effect.

In the case of Bear Stearns, they were utilizing yield enhancements, which is a fancy phrase for using leverage, and a lot of it, with the CDO products (Collateralized Debt Obligations). This is not an unusual practice, as most hedge funds implement yield enhancements. However, the sheer amount of CDO’s that Bear Stearns was holding as not only a principal but also as a clearing firm and a prime broker for other hedge funds was staggering.  Additionally,  the amount of leverage used was enormous. 

As a result,  basic supply and demand issues really came to play in the governments’ decision for a “bailout”.    If the government had not guaranteed the Bear Stearns debt for JP Morgan’s buyout offer then the deal never would have taken place. Bear Stearns would have gone into liquidation, which would have literally dumped the assets of the company onto the street where buyers were extremely scarce to begin with.  This devastating domino effect would have led to a complete meltdown in the mortgage securities market which would have dumped a massive amount of foreclosures onto an already saturated real estate market thus compounding the pain to individuals and so on and so on… you get the idea.  Sometimes discretion is the better part of valor.  If in fact there was no quick and decisive decision by the Fed to guarantee the debt the hardworking people on the street would have suffered the most.  There  would potentially have been a run on banks, companies folding because of no liquidity, housing prices plummeting to all time lows and unemployment rates exceeding 10- 15%. 

What the Bear Stearns “rescue” has really done is allowed the government to come into these massive investment companies with more rules and regulations similar to the Glass-Steagall Act in the banking sector.  This will create more bureaucracy but in the long run should minimize another potential domino effect.  History has given us some lessons…we should learn from them. 

I was recently interviewed on BizRadio’s Brent Clanton Show on the current real estate market as well as Angel Investing.  Listen to my interview here:

http://www.dealflowdiaries.com/mp3s/audioplayer.htm        

Select “BizRadio 03-28-08″

Fear and greed are the only two motivations for action when playing in the arena known as Wall Street.  Fear of losing money or missing an opportunity, or just fear of making the wrong decision.  Greed is an all motivating factor just as Gordon Gecko said in the famous movie Wall Street “The point is, ladies and gentleman, that greed — for lack of a better word — is good, greed is right, greed works.  Greed clarifies, cuts through, and captures the essence of the evolutionary spirit”.  This yin and yang is played out daily not only on Wall Street but also our lives.  Fear and greed are substantial motivating factors similar to a fight or flight response when faced with a stressful situation (i.e. the economy.)

Let’s go back about 4 years ago to any and all business sections, front pages and even in the local sections of any newspaper across the country.  Real estate was the hottest topic for discussion.  Prices were going up in some areas by double digits per year; people were all trying to get a slice of the American dream before they were unable to afford it.  Speculators were running rampant, extending themselves well beyond rational means based solely on the premise that prices would keep rising.    Interest rates were relatively low and the lending institutions, coupled with cheap money, synthetic loan products (negative amortization) and no lending standards to speak of were creating a buying frenzy.  The beating of the drum got progressively louder and faster, so much so that the public believed that if they didn’t buy in they would miss the real estate gravy train.  There were experts, pundits, and talking heads opining on how great this market was and the fact that real estate, unlike the technology bubble, was tangible, not based upon arbitrary valuations manufactured by Wall Street wizards.  There was not a doomsayer to be found, not even Alan Greenspan touting irrational exuberance.  The new found wealth and home equity piggy banks that consumers were using to pump up the economy kept the speculation going to ever higher levels. Then the music suddenly stopped with the subprime explosion and there were no chairs left, just the feeling of bewilderment.  Since that moment, roughly in the summer of 2007, there has only been a sense of complete doom and gloom with not an optimist to be found.  Why did we have to learn this lesson over again? Shouldn’t the stock market bubble have taught us something? It’s a simple answer: people, for the most part, participate in the herd mentality which is based on what they see, hear and read.  This, in my opinion, only exacerbates the current market volatility.  If people believe that prices are headed even lower they will wait to purchase as they do not want to try and catch a falling knife, which in essence becomes a self fulfilling prophecy.  There are some easy lessons that can be applied with any irrational market movement, be it up or down.  The first is you will never buy the bottom and sell the top of the market.  If you can just be within 10% to 15% of the top or bottom you are doing extremely well.  Second, if it seems unrealistic or that valuations do not make sense then it is best to step away from the market or become very selective. Third, is if you do not truly understand what you are investing in then don’t do it.  Last but certainly not least, use common sense, something that is easier said than done. 

And remember, it is never as good as you think it is and conversely it is never as bad either… 

IR is a basic absolute for a company even considering being publicly traded. With all the costs associated with being a public company such as SOX compliance, legal, accounting, transfer agent fees, listing fees etc…  Why then would a company want to cut back or not have a full effort to effectively get the story out to investors, shareholders, and the institutional market? 

Any company that is going to be publicly traded needs to have an effective campaign, complete with a budget, responsibilities and a basic sense of a preferred outcome.  IR and or PR are as necessary as a website to any public company.  Now the important question is how, with over 24,000 publicly traded companies, does a company differentiate itself?

IR strategies come in many forms and flavors and those change over time but what this market currently demands from an IR group is old fashioned relationship building.  With all the electronic communication that is currently available IR groups are losing the art of the relationship whether it is with an investor, fund manager, broker or analyst.  Having worked as a broker, investment banker and fund manager I have a fair amount of background over the years on what works and what does not.  IR groups need to demonstrate a clear understanding of the client companies business and be able to eloquently and efficiently relate that to the person or group they are speaking to.  The story must be concise while showing the companies benefits and then relating that to the creation of value and why someone either institutional or individual should take a position.  There is always a liquidity issue which brings in the potential for wild price swings but if in fact the IR person can get the investors to take a position and not just trade the company’s stock then that is where, slowly but surely value can be created.

All fund managers and institutions regardless of focus or size have a discretionary portion of their portfolio that can be allocated towards ideas that make sense.  IR groups need to understand the value proposition that the client company has and relate that effectively to these buyers.  In essence IR people need to be extremely well versed and researched in the client companies industry so that they can have intelligent conversations with key potential investors while building a relationship. 

There is no magic bullet as to what works and IR people need to be very cognizant of management’s time they can allocate to doing interviews or attending conferences as they still need to run a business.  I believe select conferences can work for smaller tier companies such as the B. Riley Investor Conference as well as the Roth Capital Conference.  Another excellent venue for smaller companies looking for key exposure is the NIBA Conference (National Investment Bankers Association), although a company needs to have a member sponsor them.  All of these conferences are fertile ground for a company to present their story and for the IR group to make sure it is followed up on with personal contact.  There are many websites that tout exposure and may have a small following but generally those sites will not garner substantial credibility or long term shareholders and they are typically very expensive.  One of the last areas for credibility is the analysts.  While most smaller cap companies have a hard time getting coverage there are some interesting alternatives such as pay for services.  Most of the pay for analyst services is really just expensive poorly written pieces but there are a few groups who do an extremely good job and are worth the cost.  One group who actually has a good following with the smaller to mid tier brokerage firms is JM Dutton & Associates.  Their reports are institutional quality and are getting picked up on the street from brokerage firms.

Here comes the attack of the more nimble SPAC’s (Special Purpose Acquisition Corp.) These are a relatively new twist to a very old concept which were previously called blank check companies.  There are no business operations inside the corporate entity just the construct of a company such as shareholders, capital, management and a publicly traded entity.  However, SPAC’s differ greatly from their former brethren because they have structured these new vehicles to be more transparent as well as being very investor friendly.  SPAC’s are a way for “John Q Public” to basically get involved with private equity deals while still having the ability to exit through the sale of shares in the open market. 

So how do you decide what SPAC is good??  Well, considering management is really the driver behind what type of company will ultimately end up being acquired it would be best to look at their respective track records.  Here is a checklist of questions that you should go through when considering any SPAC investment:

• Does management have depth in the space they are looking to make a deal? 
• Does management have a vested interest, meaning did they pay into the SPAC in order to earn their promote (the promote is the incentive equity management will receive once an acquisition has been completed)? 
• Do they have a previous experience in mergers and acquisitions? 
• Do the underwriters have a good track record in actually having the SPAC’s successfully merge with an acquisition candidate? 
• If they do, what has the share price done since the acquisition? 
• Do the underwriters have good research departments that can follow these newly formed companies? 
• Last but certainly not least what area is the SPAC targeting for acquisitions? 

If it is an area that generally does not have a high success rate then the capital may be tied up for a period of time or the SPAC may never end up doing a deal and the capital would be returned and this is bad because it is an opportunity cost. 

Having just attended an excellent SPAC conference in San Francisco and seeing the amount of interest from the investment community, I can say that SPAC’s will become much more prevalent in the next 12 months.  The only hitch could be that if a higher percentage of deals have to return capital because they could not find a suitable transaction that will cast a shadow on SPAC’s future.  Time will tell if SPAC’s are just the newest flavor of the investment banker’s financial alchemy or if they are truly a newer better form of capital structure.

Time for some shameless self promotion!  In case you didn’t catch them on Google or your news feeds, I was just interviewed for two new articles. Check them out at:

• No Slack With SPACs (BloggingStocks.com)
• Depressed Stocks Open Door to More Takeovers (DowJones MarketWatch)