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Summary:

Just how bad is the credit crunch going to get? Overstock CEO Patrick Byrne recently offered up his take, and it might be worth paying attention to.

Now that the credit crunch is beginning to spill into tech, it’s worth wondering just how ugly this is going to get. Two notable perspectives on the situation appeared in recent days, one from a battle-scarred regulator and another from a tech CEO.

The first came from former Fed Chairman Paul Volcker, who was asked four different ways by the Wall Street Journal how bad the fallout will be, and who found four different ways to say “We don’t know yet.”

The second came from Patrick Byrne, CEO of Overstock (OSTK). When writing about Byrne, it’s customary to use the understated adjective “controversial,” so let’s get that out of the way. Byrne was on Fox News, echoing an economic forecast that he had just made on CNBC — an appearance, by the way, that would send his stock spiraling downward (more on that later).

byrne.gifByrne was asked by Fox News’ Terry Keenan whether the mortgage turmoil was hurting Overstock’s sales of home items. After noting that furniture sales were going great guns, he suddenly shifted gears:

BYRNE: I do think that we are in — I have been saying for about two years we’re looking at a 1929 kind of event. I think that we are really in trouble in this country. And what you have seen in the last four months is just the beginning of it.

KEENAN: Wow.

BYRNE: The government has been keeping the economy afloat with flooding us with cheap money. And those days are over. The dollar is cracking. Eventually, they are either going to they have to defend it by raising interest rates or something. But we’re looking at a very bad economic situation.

Wow, indeed. Byrne is no Volcker, but I have a sinking feeling that behind all of Volcker’s anodyne we don’t know’s lurked a scenario as bleak, if not as dramatic, as the one Byrne laid out.

And this is why Patrick Byrne is one of my favorite CEOs. I don’t say that as a shareholder or as a business partner — I am neither — but as a journalist. In an era in which news has become just another form of entertainment, Byrne is as entertaining as they come. I wish there were more CEOs like him.

But for better or worse, there is only one. A story I once wrote once elicited from him an email that was signed “Patrick ‘Frothing at the Mouth’ Byrne,” which made me wonder if Byrne is as crazy as some have suggested. If you know you’re crazy, if you can even joke about it, how crazy are you, really?

Byrne reminds me of one of those maverick, intriguing characters like Anton Chigurh or Omar Little. Not, of course, because he’s some kind of serial killer, but because he stubbornly holds to a code of behavior that very few understand. He tirelessly champions causes that draw few followers: the “jihad” against naked short selling, the private-school voucher initiative in Utah, the deep-discounting at Overstock that leads to losses year after year.

So when Byrne appeared on CNBC on Monday and warned that gross margins would fall during the busiest quarter of the year — despite a 10 percent rise in gross bookings — the stock slid 21 percent. Six weeks ago, Overstock shares were trading for as much as $39.39, their highest level in nearly two years. But after Monday’s slide, the stock is now up only 19 percent this year. One more Byrne interview could wipe that out.
OSTK, last two years

Why would Overstock choose to deepen discounts and beef up promotions during a quarter when it had been otherwise assured of a tidy profit? CIBC, which had been forecasting a $4.2 million profit for the company this quarter, revised that downward on Monday, to a loss of $2 million. That red ink is so much blood in the water for short sellers.

A clue may lie in something else Byrne told Fox:

If anything, we are counter-cyclical. In good times, it is — we have — it’s toughest to get overstock. In bad times is when, suddenly, everybody is calling us to unload product.

In light of that, Byrne must be hoping to build market share. By slashing prices, Bezos-like, during a holiday season in which consumers are counting each penny, he’s doubling down — betting he’ll wind up with an even larger share. If so, maybe his recent TV appearances aren’t so crazy after all. Risky? Very. But crazy? We’ll see.

  1. Doubling down?

    They barely carry any inventory anymore. I’m not sure what doubling down would consist of.

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  2. I’ve known Patrick for a couple of years. He joined my party, I did not join him. He’s right. I’ve watched naked shorting right to the point of having Exchange Specialists tell me about floor traders killing them, and having the exchange cover it up. He’s not crazy. He’s honest – and to a fault. We finally have a leader, someone selfless who is willing to take the underdog side when it would be so easy to sit back and peel a grape, and we want to kill him. Wake up. Is there anybody out there that thinks Wall St. is on our side. They believe they can continue to take the system to the brink and the Government (us) will continually bail them out. Many Wall Str’s laugh. they say “We’re too big to fail”.

    Where are the leaders?I have to turn on the tv and see what Warren Buffett had for breakfast. He knows about this. Why is he quiet? Could it be all that money he has in GS??? Come on. Wake up. Help the man, before we’re all in the Street (sic).

    Here’s my challenge. Point to anything about SIV’s, CDO’s, Subprime…..who did it, and what are the consequences? I can tell you exactly what happened. Wall Street packaged this crap and loaded it up with “credits”. That’s what bond guys call commissions – “credits”. The managers got special incentives, and layed on the sales forces. This stuff is in every pension fund, state pool, throughout the entire country. BAC had to shut a 14bb money market. And the worst hasn’t even begun. Now, we’re going om make them cover the billions and billions in stocks they sold us, but never gave us the stock. so you tell me. How crazy is he????

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  3. So his company benefits from a bad economy,

    “In bad times is when, suddenly, everybody is calling us to unload product.”

    and he’s a hero because he’s claiming the economy is in trouble? No, he’s doing what any other cut-throat CEO does, say and do whatever it takes to make money.

    Say something often enough and it becomes true. Repetition is the key. Get enough people to repeat things, whether or not they’re true and other pick up on it and so on and so on. It’s an old trick and they’re hoping it will work for selfish reasons.

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  4. lenofus:

    Wall St. is not a single entity – it is many individuals/institutions – each looking for their own best interests. So if one group was indulging in speculative naked short-selling, other individuals/institutions who know better would be the counter-party in the transaction.

    Also, there are many things that the company can do – like announcing buybacks through debt financing – that is, if the cash flows can support it. Your conspiracy theory doesn’t hold much water.

    Besides, CDO’s and SIV’s are rather irrelevant to this conversation.

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  5. in my prev. comment… I meant short-selling, not naked short-selling – abuse of which is illegal. Can this not be easily traced?

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  6. On Dec 5, 2006, Gary Aguirre appeared before the Senate Judiciary committee. Arlen Specter accussed senior SEC officials of perjury. Wonder why it’s so hard to trace? Do some research. It’s all over the place. Try ‘Deepcapturethemovie.com”.

    Secondly. why should companies jump through hoops to survive?

    Third. REGSHO.COM. How many days has OSTK had FTD’s? 660 or so. NO conspiracy. Yeah, this just fell though the cracks.

    Counterparties? I have emails from at least five firms concerning one stock, where there were, at each of these firms, at least 500,000 of this particular entity. This was four or five years ago. Question? Where is the money? Customers paid for the goods. Where did the money go???? Wake up. I was on Wall St. for a long, long time. Wake up, before your ass is in the street. And when it’s there, don’t expect anybody to care, except Patrick Bryne.

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  7. [...] Worst case scenario: The next Great Depression — A diseased housing market and a weak dollar have economists and Federal officials chewing their fingernails, as evidenced by the latest quarter-point rate drop in interest rates, designed to stimulate the economy by making borrowing cheaper (thus encouraging spending). Predictions of recession are also on the rise, but just how bad could it get? If you’re prone to worrying, don’t ask Overstock.com CEO Patrick Byrne, who thinks we might be on our way back to the Great Depression. Better drop the Web 2.0 stocks and start investing in those canned food startups, if he’s right. More on his ideas from GigaOm. [...]

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  8. I am just curious to know how many stories you have written about Jim Cramer and his T.V. appearance where he explains how to game the market using RIMM as an example and how he uses the media to spread stories. Or how many stories about two senators on the senate floor appealing to m Mr. Cox to clean up all the FTD’s that are two years old. Or how many stories about those who are in jail who admitted to naked short selling. Or could you explain why Mr. Cox the head of the SEC agrees with Patrick Byrne that naked short selling does exist saily as well as his pedecessors. Why not tell the stories of the failed pensions and the risk if Mr. Byrne and many others are right. Be a journalist and give all the stories not your chosen ones.

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