A friend just sent this. (Trouble is, I’ve already voted.)

Insolvency shadows media companies

The trading trajectory of media company shares over the last month bears an uncanny resemblance to trading in the shares of companies like Bear Stearns and AIG in the weeks leading up to their bankruptcies. Look at the chart here and see how WPO, NYT and CBS have plunged much more dramatically than the overall market.

Media companies face a number of what might be politely called “challenges.” (Or, more bluntly, razor-edged threats resting on their jugular veins.) In a downturn, corporations slash ad spending since this is often their biggest and easiest discretionary spending line item; advertising makes an easy, fat and juicy saving. The advertising contraction’s impact is exacerbated in this downturn, because cash flows are frozen. There’s no doubt that the normal industry AR age of 90 days will stretch out to… 120 days? 180 days? In a normal environment, media companies could borrow to cover the cash flow shortfall, but this is no normal environment. Here’s a graph of the way WPO has traded this week:

Huffington post-mortem

With all this in mind, today’s NYTimes credulous piece about the Huffington Post and its young sibling The Daily Beast was particularly amusing. The journalist takes at face-value the assertion that things are swell.

In the short term, The Huffington Post could make Ms. Huffington even richer than she already is; if the site were to be sold, the value that is often mentioned by people with knowledge of the site’s finances is $200 million. A person briefed on the site’s finances says it is not for sale, but that another financing round of more than $5 million could be closed by the end of the year. Over the last three years the site has raised $11 million — underscoring the site’s ability to attract traffic on a shoestring budget.

$11 million is a shoestring budget?

Here’s that verbiage really means: “has raised $11 million” means Huffpo has lost $11 million since it was founded. And now “raising more than $5 million” means the site expects to lose another $5 million in the coming year or so. That’s success on a shoe-string budget?

In an environment when potential acquirers and competitors are all nearly insolvent themselves (see paragraph one), only the looniest of investors will fund a money-losing Huffington Post for anything less than an punative share of the company.

The optimist’s paradox

Ms. Huffington faces a horrific dilemma that might be called the optimist’s paradox. Huffpo is most likely nearly out of money (hence the need to raise $5 million in coming weeks.) And while a prudent manager who sees her cash running low would trim expenses, Huffington can’t afford the psychological horror of cutting her payroll because this would clearly contradict what she’s busy telling potential investors… that all is well and she’s incredibly optimistic about next year.

So, instead, Huffington has to speed ahead towards the abyss hoping some white knight steps in to build a bridge to profitablity. She has to hold on to her mask of shocking optimism right up to the moment when the last potential sugar daddy steps away from the bargaining table. (And smart potential buyers will, knowing this is a buyer’s market, be tempted to string her along towards the moment of insolvency to increase their negotiating leverage.) If the knight doesn’t arrive in time, Huffington won’t have enough cash to fund even a skeleton operation.

The un-layoff list

Which brings us to the unlayoff list. You’ll no doubt recall the TechCrunch layoff tracker. Companies tracked there have tallied 22k layoff in the last month. Yet, weirdly, those companies are some of the healthiest of the money losing startups. For example, Adbrite cut 40% of its staff… but is now profitable. In contrast, unprofitable startups that are not laying people off are either a) so far from being profitable that they can’t conceive of ways to cut enough costs to get to profitablity or b) trapped in the optimist’s paradox and can’t cut lest they alienate potential buyers or c) both. (Thanks to Sequoia Capital, which has seen plenty entrepreneurs go down this path, here’s a graph.)

We went to the North Carolina State Fair Saturday night for the demolition derby and Sunday morning for some extra baseball tossing. (Won a huge do for two broken beer bottles.)

Though only 2 people in every 100 were wearing stickers, McCain/Palin outnumbered Obama/Biden five to one. Though the crowd was 30% African American, nearly all the Obama stickers were on middle aged white males.

Bloomberg reports:

Companies cut their short-term borrowing for the sixth straight week, for a total contraction of $366 billion to $1.45 trillion, the Fed said Oct. 23, as investors balked at taking on the debt. The market is down 35 percent from its peak of $2.22 trillion in August 2007.

Apparently two thirds or that contraction is in the last 6 weeks. I’m not specialist on monetary policy, and I realize that some of that borrowing was done elsewhere. But, some of it, certainly in the last six weeks certainly was not. If companies are borrowing, say, 10% less than they were a year ago, doesn’t that mean we’ve had at least a 10% contraction in GDP?

“In the week ending Oct. 18, the advance figure for seasonally adjusted initial claims was 478,000, an increase of 15,000 from the previous week’s revised figure of 463,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 480,250, a decrease of 4,500 from the previous week’s revised average of 484,750.”

Yesterday Adbrite, one of the smartest dotcoms around, laid off 40% of its staff, including two honchos, in an effort to become cashflow positive in anticipation of the coming advertising ice age. As Techcrunch noted

The irony of Adbrite making cuts isn’t lost on us. The company was originally spun off from FuckedCompany.com in 2003 by founder Philip Kaplan. FuckedCompany, of course, brutally chronicled the layoffs and liquidations that marked the end of the 2000 Internet bubble (and was the subject of our 2007 April Fools prank, which was much funnier in the middle of a bull market). If the site were still live today, Kaplan would be writing about this there.

Meanwhile, Clickz has started a “red ink calculator” and here’s a layoff tracker from Techcrunch. And let’s not forget the deadpool.

Google’s CEO Eric Schmidt said yesterday, “All of us are vulnerable. It’s a race between a contraction in advertising, which would affect everybody, and a very positive shift from offline to online.”

Blogads is not immune to an ice age, and we’re looking for notches on our belt to tighten. Meanwhile, we’re pleased to be cash flow positive and profitable since 2004 and the low cost operator in our space serving bloggers who are themselves the low cost operators in the media marketplace.

Update: Meanwhile, a reader writes in to point out that VCs are turning the screws on unprofitable long-shot companies they’ve invested in.

Laura Collins’ profile of Arianna Huffington in the New Yorker included this wonderful oxymoron: “The site has been a triumph. Since the launch, Huffington and Lerer have raised eleven million dollars.”

In people-speak, “raising eleven million dollars” means “spending” eleven million dollars more than you’ve made.

Warren Buffett warns against market-timing:

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Elsewhere, he notes that his investment fund Berkshire Hathaway is not 100% in stocks… why?

Google’s 26% earnings growth in Q3 versus last year seems to have cheered investors, sending the shares up 10% (to $390) in after-hours trading.

Seems like very old news to trade on, since the economy went into a tailspend 90% of the way through the quarter.

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