Courtesy of Karl Denninger at The Market Ticker
NEW YORK (TheStreet) — When Cisco last took the stage in November, CEO John Chambers predicted an uplift in business. He didn’t mention at the time that the company would offer to lend a hand in the form of zero-percent financing.
Taking a page from the automakers’ playbook circa 2002, Cisco introduced three-year, interest-free financing for its small and mid-sized business customers last week. The cheap loans are sure to help juice sales to cash-strapped customers far and wide.
Uh, no. That’s not the playbook of automakers circa 2002.
It is the playbook of Lucent circa 1997.
Need I remind anyone how that story ended?
Lucent "sold" a metric boatload of hardware on capital financing at essentially zero interest terms to Winstar Communications – the firm that bought my Internet company – along with many others.
Winstar (and others) ultimately defaulted, unable to make their business goals turn into actual long-term cash flow.
Lawsuits flew and ultimately Winstar folded, all but destroying Lucent in the process, as they were stuck with an unbelievable amount of financed hardware that was not only generating no cash flow but which had depreciated (as all computer and network equipment does) to an insane degree the moment it was put into service.
Lucent – one of the most-storied technological companies ever to exist in the United States, the spun-off parent of Bell Labs that had years ago invented the transistor and slung us into the digital age and which held a solid majority of all telephone switch business in the United States, was later essentially forced to merge with Alcatel to avoid bankruptcy.
This is Ponzi-style financing and John Chambers knows better, having survived the 2000 tech crash in no small part because he didn’t do the same thing that Lucent did and thus didn’t get hammered by the defaults when the bust came.
The market has paid exactly zero attention to this "contribution" to CISCO’s sales, and it won’t in the immediate future either. You can count on it. I’m willing to bet there will not be one mainstream analyst who will point this out tomorrow morning in a research report and slap a big fat SELL on CISCO as a consequence. I sure didn’t hear anyone on the Fast Money CNBS show bring it up.
The market loves a good bit of Ponzi Finance and typically rewards those firms that engage in it for quite some time – sometimes for as long as a year or two.
But each and every loan made below market price for the credit extended is impaired at origination. It cannot be otherwise as there is no such thing as a real zero or negative cost of capital, even if only on time value. "Spurring demand" by holding the risk on a product you sell looks good when you consider that after a year or two you could "eat it" and lose "just your gross margin", until you consider that you spent that margin on salaries and operational needs for the business in the interim.
That we are seeing this sort of crap again in the technology space just ten short years after it blew up last time, taking down one of the titans in the telecommunications space, is proof positive that there is no real economic recovery, there is no solid fundamental demand, and that it is financial trickery and games that are leading to these "excellent results."
I can’t tell you when the collapse engendered from this round of BS will come, but I can tell you with all but absolute certainty that it will, just as I said it would last time when I saw this same game being played in this very same industry.
"This time it’s different" – right John?
I look forward to FedExing a copy of this article to you in a year or two, with a big fat "I told you so" scrawed across the front of it in black sharpie marker.