Risk-Weary L.A. Investors Liquidate Their Holdings

With the Fed cutting interest rates and tax refund checks all but in the mail, one might suspect that investors would be comforted. Not in Los Angeles.

A look at several economic indicators reveals that a large and increasing number of local investors and business owners are cashing in their chips, or at least large portions of them. Among the higher-profile examples, billionaire Gary Winnick last week unloaded some 10 million shares of his Global Crossing Ltd., and fellow billionaire Alfred Mann unloaded his 17-year-old company MiniMed Inc. and a related privately held research firm. The lion's share of the $3.7 billion sale price was in cold, hard cash.

But the cash-out craze is hardly limited to billionaires. Recent data from Standard & Poor's indicates that the number of insider sell transactions at Los Angeles-based public companies has risen dramatically.

In the past three months, the insider sell-to-buy ratio has increased to 4.83, up from 3.33 for the prior three-month period. At the same time, the number of shares sold by local insiders skyrocketed to 42.6 million in the last three months, up 123 percent from the prior three-month period.

"I think people have seen with their own eyes how wealth in concentrated stock positions can evaporate," said Greg Range, managing partner at Duff & Phelps, an investment banking and financial advisory firm. "They're taking chips off the table even if they're still optimistic about the company they're invested in."

Korn/Ferry International Inc., the Century City-based executive recruitment firm, is a prime example. The most recent 36 insider transactions at that company have been sells, totaling more than 150,000 shares.

So where is all this cash going? A few different places.

For Winnick and other wealthy, savvy investors, much of the cash is being used to buy up distressed companies on the cheap, an increasing common practice these days. For others, the cash is being squirreled away in the relative safety of money market funds and mutual funds invested in large, value companies.

Of course, not everyone looking to cash out is succeeding in doing so. Many wannabe-sellers are being stymied by lenders' increasing unwillingness to provide financing to potential buyers. That trend is evident from statistics on local home sales and mergers-and-acquisitions activity.

Home sales volume has been slowing, as buyers and lenders balk at stubbornly high asking prices and hopeful sellers refuse to acknowledge that the market is softening.

Mergers-and-acquisition activity is likewise slowing, with only $282.4 billion in such deals transacted nationwide year to date, almost 50 percent off the $553 billion total for the same period last year, according to Mergerstat, a company that tracks M & A; activity.

Greg Soukup, a partner and co-director of Ernst & Young's National Office West in Los Angeles, which specializes in M & A; and corporate finance, said the reason is simple: bankers, like investors, are showing a marked preference for holding onto their cash.

Tightened purse strings

"It's really tough to get senior debt to finance a deal," said Soukup. "(Lenders) are really tightening up credit policies and not making new loans."

Meanwhile, for deep-pocketed investors with money to burn, the slowing economy presents an opportune time to bottom-fish for bargains. Such is the strategy of billionaire Philip Anschutz, who has made a profitable habit of buying distressed companies and then turning them around. He is currently picking up movie chains on the cheap in U.S. Bankruptcy Court.

Thus, while total M & A; activity is down, there has been a sharp upturn in the number of distressed sales, though no official statistics are kept on such transactions, said Lindsey Alley, senior vice president for mergers and acquisitions at Houlihan Lokey Howard & Zukin, a Los Angeles-based investment banking firm.

"I can think of 15 examples (of distressed-company sales) in the past year," he said. "Usually their cash flow is upside down. They took on leverage two or three years ago, but in today's economy, they are not generating the cash flow to service the debt."

If the bank refuses to restructure the debt perhaps writing it down by half in return for an equity stake the company becomes a sitting duck for vulture investors who can then snatch the assets for cents on the dollar.

Of course, those kinds of big-money plays are beyond the reach of the average Joe, who may still be shell-shocked from watching his once high-flying Internet stocks plummet, and who is now in search of the modern equivalent of the mattress or coffee can buried in the backyard.

Looking for value

Data released last week by the Financial Research Corp., which tracks mutual fund flows, found that investors are returning to mutual funds, but this time large-cap value stocks with low price-to-earning ratios are the preferred choice.

Estimated net sales of stock and bond funds the amount of money flowing into the funds minus the amount flowing out totaled $20.5 billion in April. That was a reversal of negative net outflow of $8.6 billion in March. The best-selling category was large value funds, with $4.1 billion in sales.

At the same time, small investors dumped $1.04 billion into money market funds in the week ended May 29, even though the simple annual yield on such taxable funds is less than 4 percent.

Tom Leiser, a senior economist with the UCLA Anderson Forecast, said that small investors have had enough of trying to beat the market and striving to get rich quick. They're happy enough now with smaller, safer returns.

"A lot of people have been burned trying to function as stock pickers. Now, it's spreading your risks and betting on the future of the U.S. economy," he said.

What Angelenos are not betting on is real estate, apparently aware that many people who bought homes in the late 1980s after the end of that bull market often ended upside down on their mortgages well into the '90s, as home values faded.

Home sales in Los Angeles County fell by 4.3 percent in April, despite cheap mortgage rates, as the median price rose to $226,640, 6.9 percent greater than the same period last year. More-expensive homes are drawing less interest from potential buyers, according to agents.

"On the higher end, houses are staying on the market a little longer. I don't see the volume of new property increasing, but with (houses) staying on the market, you're seeing the number of listings going up," said Irma Vargas, president of the Beverly Hills/Greater Los Angeles Association of Realtors. "I think people in the move-up market are being more prudent they already have a home."

As for where is the local economy is going in the months ahead, that depends largely on consumers themselves.

Surprisingly, the Conference Board's consumer-confidence index rose 0.4 percent in April. That was twice the 0.2 percent uptick of the month before, a seemingly certain sign that consumers are not as scared as some might believe. Which also means it might not be that hard to pry open their wallets in the months to come, and keep the economy moving forward.

But with residents and businesses facing the prospect of a steep jump in their utility bills and other energy costs, especially in California, it's not clear just how long that optimism can survive.

The Anderson Forecast is set to release its latest projections this month. The forecast is not set, but Leiser said this much is clear: Don't expect a magic turnaround here anytime soon.

"The main variable in this is the consumer. The typical household now owes more money in credit card debt than it has in investments," he said. "There is a concern that consumers cannot maintain that kind of leverage through continuing economic bad news."

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