Investing Off The Ever-Recycled Pitfalls of Vendor Financing

I still remember the first time I got published. I wrote an article for TheStreet.com about how the sudden constriction of capital in the telecom industry was likely to spell doom for most of the industry. I was wrong about a lot in that article (I'm pretty sure I've been wrong about a lot in EVERY article I've ever written though -- that's because I make a lot of predictions and offer a lot of analysis and opinion...and you're always wrong even when you're right depending on who's reading you...so anyway, yeah, I'm wrong about a lot of stuff I write, okay? Oh, my, quite a digression about wrongness here, huh...), but one thing that I was very right about was that the credit shortage in telecom that hit at the end of a period of a glut of capital in the industry during which as I used to write, "anybody with the word 'communications' in their business plan could raised billions" was indeed a doomsday scenario for most of the industry.

As I've noted forever, one of my Jedi Masters taught me the simple principle that "all gluts are followed by shortages are followed by gluts"...and you can invest on that principle over and over again.

At the top of the glut of capital in the industry, Level 3 Communications was worth more than McDonald's and Disney combined. Haven't heard of Level 3? Exactly. How about 360 Networks, once headed up by billionaire former Microsoft CFO, Greg Maffei? Winstar? Enron was even in the telecom fiber route, not to mention "telecom services trading", which was actually just mostly an accounting scam between those scumbags and their scumbaggin' counterparts at WorldCom.

Oh yeah, WorldCom was once worth hundreds of billions. More than Bear Stearns, that's for sure. (As an aside on that note, what's the difference between Jimmy Cayne's trashing of Bear with questionable accounting and bookkeeping and disclosures and Bernie Ebbers' own trashing of his billion-dollar enterprise? I guess if you get the Federal Reserve and Capitol Hill convinced that the economy "might" collapse if you don't bail out Jimmy and his cronies then you get free money and no jail time. Make a note for next time, Bernie.)

But all these companies are gone now. Well, LVLT's still around, even if it's still down 99% plus from its highs in 2000. So too is its suppliers, like Nortel and Lucent -- down 99% or so from their highs of yesteryears.

And speaking of Nortel and Lucent and their 99% declines from the highs...you wanna know when the highs were hit? When they tried to keep their bubbled balls up in the air by extending cheap and easy financing to all those telecom companies that had excess capital but little prospects for near-term growth and business. That was 2000 and 2001 when they could tell that demand had collapsed by Nortel, Lucent, Cisco, et al started offering "vendor financing".

Remember when Ford and GM got wild with their "vendor financing" back in 2003, 2004? At the top, right before they ran out of access to capital themselves and collapsed?

Why do I bring all this up today? Two parallels to watch:

1. How many times in the last year have I said, "Wall Street's gone from a glut of capital to a shortage"? That cycle's just turned, and it'll take a few years at least to play out, just as telecom, the dot com bubbles did and the car bubble from 2002-2004 is still. Stay away from the financials. (And pray that the government lets those reckless scumbag investment bankers who kept their billions of gains during the glut lose their shirts and eat their own losses now that the shortage is here...socializing losses after privatized gains is evil.)

2. See this article in the USA Today about tech companies offering "vendor financing" to their ever-more-capital-constricted customer base? Careful with the tech cycle too, guys.