Tuesday, January 25, 2011

The Year of the Living Dead - 2011

There are many companies and individuals who are zombies right now..

UPDATE 2018:  While many of these "zombie" companies teetered over and died over the years (e.g., Radio Shack) some continue to totter along, chanting "brains! brains!" as they look for more venture capitalists to cannibalize.   But eventually something has to give, and 2018 could be the year that some of the more prominent zombies, such as Sears, finally collapse.  Update:  It did.

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The stock market is up!  Consumer confidence is on the rise!  Claims for unemployment benefits are down!  And long-term forecasts are looking up!  Get ready for more bad news!

Bad news?  Yup.  2011 will be the year of the Zombie.

I thought about this today, as a hotel here on the island "suddenly" went belly-up.  Suddenly is an odd phrase, as it has been doing a slow-motion death over the last four years.  While it was a moderately successful hotel, they decided, at the height of the boom market, to expensively remodel the entire hotel and re-make it as a "Hotel Condo".

The tore apart the various buildings, installing tile roofs and tearing out floor joists (!!) to move walls around.  It was more than a cosmetic rehab.  And then, in 2008, the market collapsed and suddenly, the workmen weren't showing up anymore, and most of the units were in a state of half-completion.

In the two years since then, most of us haven't given it much thought.  The hotel still continues to run, and some units were sold off to investors.  Most of us just presumed they would finish construction later on.  But in this market, where would you get the money?  And who would buy a Hotel/Condo unit for the prices they were asking?  And of course the answers should have been clear.

The place was a zombie.   You've heard the phrase before, "He's already dead, he just doesn't know it, yet".  And that applies to that hotel, and to a whole host of companies, stores, chains, and even individuals - who are upside down, have declining businesses, and are running short on operating capital.  And it is only a matter of time before "suddenly" they close their doors for good, leaving us all to wonder "why didn't we see this coming?"

A lot of folks with upside-down houses, cars, boats, and condos will finally throw in the towel this year, realizing that prices aren't going to bounce back any time soon - and they might as well quit now than try to "hang on".  Throw in a backlog of foreclosures from the robo-signing "controversy" and you've got a lot of foreclosures for 2011 - perhaps more than in 2010.  And of course, this means more properties on the market, which means housing prices will stay flat or depress slightly.

And then there are the corporations, like Sears, and Radio Shack, I spoke of earlier.  Or Blockbuster, for that matter.  We have a lot of retail space that was built in the last decade, just as more and more people are shopping on line and consuming less, as our demographics age.  Expect some of these companies to go away in 2011, which will mean layoffs or at least downsizing.

The bad news isn't over, by a long shot.

But as each zombie out there takes a shotgun blast to the head, it means the economy is moving back toward recovery.  Unless you are a zombie, this is good news.  And even for zombies, there is a hope of a second life.

After the "dot com" bust, we saw a lot of server and fiber optic capacity sit around unused.  Many companies found they could start up inexpensively by snapping up this equipment, used, for pennies on the dollar.  Suddenly, business plans that were too costly to implement, worked.  And a boom in the tech sector resulted.

Similarly, a glut of low-priced housing and retail space will mean good news for people looking for a place to live or businesses looking to open.  Want to start a company?  Open it in Las Vegas.  Not only is there a lot of space available, your workers can buy a house or condo for less than the construction cost.  A low cost of living means lower wages go further.  And I'll bet the Greater Las Vegas Area Chamber of Commerce will help you get some tax incentives to move there.

And so on down the line.  One person's misfortune is at least an opportunity for another.  I bought Real Estate in the 1990's that was depressed from the crash of 1989.  Houses were selling for prices so low that they generated positive income on the first month's rent check!   And yet, many people, not seeing opportunity (because they watch TeeVee and get all the wrong information) shied away.

Today, we see the same trend.  Fear and Greed.  Greed lead them all to invest in Real Estate and Stocks.  Fear caused them to "cash out" at the nadir and invest in Gold - where they are again getting greedy and will again lose their shirts.

Meanwhile, quietly and without fanfare, the truly smart investors are doing the math, whether it is on a spreadsheet on a computer or on the back of an envelope in the front seat of their pickup truck, and realizing that there are opportunities out there - just not in flashy and heavily hyped things.

The zombies will die off this year - and the bad news will probably frighten people out of the market, meaning some dips in the Dow over the year.   But long-term, zombies need to die, if we are to expand the economy.  Like any plant, pruning is needed to make it grow back, stronger and more vibrant than ever.

Update July 2013:   2013 will be the year of the living dead for many - or the year these zombies are finally put down.   While foreclosures are down, many folks are just now realizing that they can't afford their homes, after running through their 401(k) money to try to hang on to them.   They should have quit years ago.   And many companies, such as Radio Shack, Sears, J.C. Penny, and the like still soldier on, with no apparent means of support.   It will be interesting to see how long they hold out.

Blockbuster is gone, as is Borders.  Barns & Noble has thrown in the towel with its e-reader.  But then again, perhaps the whole e-reader marketplace is doomed, now that everyone (it seems) is buying pad devices (not me, yet).

Detroit finally threw in the towel, today.  It has been on life support for several years, with a staggering debt load, and no way to service it.  A shrinking population and a staggering pension liability started the death spiral.  Cutting city services meant only that more and more people fled the city, leaving fewer and fewer people behind to shoulder the overhead.   Sounds like what might happen in Central New York, as property taxes skyrocket, essential services are cut, and people flee.

As I noted before, I was still buying foreclosure properties in 1995, a full SIX YEARS after the 1989 Real Estate meltdown.   Our present meltdown was in 2008, so that means, if history is any guide, that we will see foreclosures well into 2014.

The market is turning around, to be sure.  But that is cold comfort to those "zombies" out there, who hoped against hope to "hold on" and "ride it out" and are finding out just now, that they should have just thrown in the towel early on.