Thursday, January 22, 2009

Oy: Nokia; Another Nail in Endless Growth's Coffin

The economy continues to do its Schumpeterian destructive thing, though once again without the creativity. Economic reality has finally and definitively come to cellphones. The wonderfully named Juho Erkheikki reports from Helsinki for that Nokia Oyj (NYSE: NOK) is a troubled company. Lowering its financial estimates once again and cutting its dividend, the company "has also halted share buybacks and plans to reduce capital spending this year to preserve cash." Nokia also "forecast a 10 percent slide in industry sales."

To the left is a chart of Nokia's stock since it joined the NYSE on July 1, 1994. The triangles on the up-part of the chart are stock splits.

The stock peaked at 62 when the NASDAQ peaked in early 2000, then had a secondary peak at around 42 when the market as a whole peaked in fall, 2007, but then fell 58% in 2008.

Since 2003, the company has bought back 1 billion shares at what I will guess, looking at the chart, is a total price of $18 B. It has paid far less than that in dividends. Guess how much stock officers and directors have? Providing no surprise to readers of this blog, it is less than 1% of the total. An amateur chart reader will look at the rapidly deteriorating industry fundamentals, the fact that this cash-rich company is cutting capital spending, and the double bottom in the stock (2002 and 2004 just under $11/share), and conclude that there is not a lot to stop this stock from descending into the single digits. This would be the reverse of the one-way move up in the 1990's.

Corporate sales for 2008 were close to $70 B. Nokia is too big to succeed, and it is the biggest success in its field. (I have spared you the far worse stock chart of Motorola, which stock is more or less back to levels reached in the 1970s.)

As with so many other companies, Nokia sold itself and investors on the belief in endless growth. It finds itself already in a cyclical industry. The half of the world's potential cellphone users who are not now owners of a cellphone are the poorest ones. Nokia is a tired giant. Its stock price is due to open today at about $12.50 in New York trading, it appears. Nokia's markets are tired. Cellphones are just unexciting consumer items. (Even Blackberries are ubiquitous, it appears.)

What is worst for the cheerleaders for endless growth, whether it be in cellphones in specific or the economy as a whole, is that we in the "developed" world who are middle class or better don't need more toys. We don't need more cars than we have. We don't need more Starbucks, fast food outlets, discount retailers, luxury brands, variations on vodka, etc. In the cities where I live or travel, including South Florida and Southern California, I don't see many potholes that need filling to "stimulate" the economy. (I do however see miles of construction equipment lining Florida's Turnpike but slow progress in the road-widening project.)

What everyone I know feels we need is a sense that our money needs to stop being given to the sharpies who goofed (polite term) when running our biggest financial institutions. Their stockholders and bondholders need to take responsibility for their investments. This belief is universal amongst everyone I speak with, including one friend who describes himself as "to the right of Attila the Hun" and another friend who marched over the last two years for the simultaneous impeachment and removal from office of George Bush and Dick Cheney so that Nancy Pelosi could become President. In this time of recession, when more and more the homeless cease to disproportionately be mentally troubled or addicted to alcohol or illegal drugs, what is needed is more assistance for the needy. That's the truly needy, not the financial crowd. This assistance can include a free Nokia phone and service contract!

What is going on in Nokia is going on over and over again in the economy. Even the best large companies, such as Nokia, don't know what to do to provide legitimate growth, so they resort to gimmicks such as speculating in their own stock under the guise of returning money to shareholders (such as the insiders who want to cash in their options at the best price), lobbying to gain tax benefits, unfair changes to pension plans (think IBM), but only start raising dividends when business is about to go downhill (Nokia, AIG, IBM) as a last resort to try to attract "value" investors.

The next new thing that will energize stock investors and the economy may come with Government support and creativity, such as the Internet, which was a U.S. Government invention. It may come privately, the way air flight and the automobile developed privately. Until it/they arrive, those with money are likely to continue to be very careful how they invest it.

Copyright (C) Long Lake LLC 2009

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