Fine Print – April 2009
Every market, be it bear or bull, seems to generate a catchphrase that eventually comes to encapsulate the mojo of the moment. In late 1996, for example, after Federal Reserve Board Chairman Alan Greenspan wondered if “irrational exuberance” hadn’t artificially inflated asset values, that expression became the stand-in reference to the tech-driven stock bubble that dominated the decade — as well as the title of a book, orchestral symphony and series of paintings. Going further back, we had “greed is good” and “brother, can you spare a dime,” referring to the up and down markets of the 1980s and 1930s, respectively.
It’s early yet, but I have a catchphrase nominee for the historic downturn through which we’re all now suffering and will surely continue to do so until the slapdash tinkerings with the economic machinery somehow pay off: “secular headwinds.”
It’s a peculiar idiom, in that “secular” is typically used to identify something as nonreligious — and God knows (cue rimshot) there’s nothing particularly spiritual about a headwind in the first place. But if you read far enough into the dictionary’s assemblage of definitions for the word, you realize it also refers to anything that spans the ages. Thus “secular” is simply a fancy way of saying “essentially permanent,” meaning that when a chief executive officer invokes the phrase — as my old boss McClatchy Newspapers CEO Gary Pruitt is prone to do — it’s not a lament so much as a confession: “We failed to see the world has changed.”
A quick (and admittedly cursory) online search of the phrase shows it apparently was first uttered in 2002 on CNN’s Moneyline. But that same search showed a mushrooming use of it in 2008, as the economy headed south and corporate leaders and business reporters sought to explain plunging earnings. Everyone was facing headwinds, and the only question was whether they were cyclical or secular. That distinction is debated with Talmudic precision. It just so happens that a couple of companies in my neighborhood demonstrate the crucial difference between the two, which can be summarized this way: Battling a cyclical headwind means you’ll live to sell another day, while a secular headwind means you’re a corpse — albeit one probably still warm.
Chapel Hill-based Investors Title Co., which sells real-estate title insurance, was trading at $50 a share this time last year. These days, it hovers in the low $20s, has reduced its staff and seen a 2007 profit of more than $8.4 million turn into a 2008 loss of nearly $1.2 million. But for a company whose fortunes are tied to the sad-sack real-estate industry, that performance is normal and understandable. When home sales pick up, Investors Title’s results will pick up. That’s a cyclical headwind. It’ll eventually change directions and become a favorable breeze.
Then there’s R.H. Donnelley Corp., the Cary-based publisher of Yellow Pages directories. A generation ago, having the contract to print directories for a monopoly phone company was a license to print money. In its day, the phone book was the equivalent to the Internet — which is to say, an amazing repository of information, tips, lists, maps and, of course, the telephone numbers and addresses of virtually every person and business in the vicinity. All homes and offices had a well-thumbed phone book, an item as indispensable to daily life as your Web browser is today. But Donnelley — which operates online and can’t be accused of not understanding what the digital age would do to its core business — nonetheless doubled down on the print business in 2006 when it bought Dex Media, another phone book publisher, for $4.2 billion.
The problem is that phone books are more annoyance than useful tool these days. The last person to celebrate the arrival of a phone book was Steve Martin’s movie character, Navin Johnson, in 1979’s The Jerk. (“The new phone book’s here!”) Finding a new directory at your front door only means it’s time to go through the annual disposal anguish over the old one. Phone books are a cumbersome relic left over from the previous century and whose usefulness is only a faint memory to anyone over 20 years old. That, ladies and gentleman, is a secular headwind. Making a $4 billion bet on a fading industry explains why R.H. Donnelley’s debt rating is nosediving and its share price so low it was delisted from the New York Stock Exchange.
Other industries have learned the hard way about secular headwinds. Travel agents are an endangered species, for instance, and all but the most obtuse real-estate agent wakes up in the morning wondering if this is the day when technology seamlessly matches up buyers and sellers without the middle man’s help. What’s true at the poker table — if you look around and don’t see the sucker, it’s you — has a similar corollary in business: By the time you figure out a headwind is secular, you’re already on the ground with the other deadwood.