Here Come the Bankruptcies!

News reports indicates that Frontier Airlines and Linens n Things are filing for Chapter 11 bankruptcy. They join a growing list of companies that can’t pay their debts: firms like Skybus Airlines, Movie Gallery, and First Marblehead Bank’s student loan guarantor.

Bankruptcies make for dramatic news copy. It’s all there: management errors, layoffs, worried bankers, and courtroom drama. But they rarely forecast anything but last year’s economy. As an example, filings spiked in March of 2001, well after the tech bubble had begun to burst. They continued to head higher for the next two years, until they peaked in March of 2004, well after the recovery was underway.

Bankruptcies are a lagging indicator. Using them to manage money is like heading down the highway with your eyes firmly glued to the rear-view mirror.

Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!

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