Returns to equity investors have gotten smaller but the fees paid to lawyers, accountants, press agents, investment bankers, commercial bankers and promoters have grown fabulously larger.
In general, things get better and better. Mankind's material lot has been on the rise since time out of mind. For every Napoléon in history, there has been a Pasteur, and for every Stalin, a Salk... A bear must face the fact that, in the long sweep of things, the bulls have a point.
Still, progress sometimes pauses...
From the September/October issue of Investment Properties International:
Beckham Creek Cave
Located in the Boston Mountain Range of the Ozarks in northwestern Arkansas...
Our new Junk Bond Fund index may not be the most volatile indicator in the Grant's collection but it does (as the editorial writers say) bear watching. The index is an aggregate of seven closed-end, high-yield funds that came to market in the past year...
On reflection, it dawned on us, the only thing to know about banks and LBOs is how the bankers are paid. If the real money nowadays is in leveraged-style lending, the case would be open and shut. Bankers would continue to lend until someone, or something, stopped them.
It is hard to consider Romania an unqualified economic success when it lacks for coal and meat, and its tin-pot dictator, Nicolae Ceausescu, has ordered the destruction of 6,000 or 7,000 villages in the interest of socialist modernization. On the other hand, its external debt has achieved de facto investment-grade status.
If the shipping news early this year made you bullish on the dollar (as it did us), you are bound to be a little less bullish following a new report in The Journal of Commerce...
Short rates continue to overtake bond yields -- on Tuesday, the peak yield on the government curve was at 1-1/2 years.
A recurring weekly feature in Salomon Brothers' commercial-bank statistics is the strength in national real-estate lending.
Drexel Burnham's legal crisis has eclipsed the recurring drama of its securities, which is our loss. A proposed new issue of senior subordinated notes of Playtex Family Products Group deserves a look, if only for the sake of the stunning balance-sheet summary...
Federal Reserve policy, although tight in substance, is accommodative in image. Not since 1974, notes Cyrus J. Lawrence Inc., has the gap between the federal funds rate (pushing 9%) and the discount rate (6-1/2%) been wider.
What the yield curve means
In the interest-rate profession, "yield curve" means the alignment of rates over time, from three months to 30 years... A flattish curve is the augury of recession; an inverted curve virtually guarantees one.
In the recession year of 1974, Frederick C. Yeager of St. Louis University took note of some alarming personal-bankruptcy data. Filings per American had risen fourfold since the mid-1950s, and Yeager wondered if the increase was a sign of dry rot.
Some uplift on the deficit question is offered by the Federal Reserve Bank of St. Louis. According to the bank's coffee-table quarterly, International Economic Conditions, the United States has competition for the crown of world profligate.
A debt bear's pulse raced pleasurably when the incoming Mexican president, Carlos Salinas de Gortari, vowed in his inaugural address: "I will avoid confrontation. But I declare emphatically and with conviction: Above the interests of the creditors are the interests of the Mexicans."
A forthcoming issue of "senior extendible reset notes" of Adelphia Communications Corp. will become a collector's item. The work of living artists, it will prove to be the junk-bond market's answer to Jasper Johns's $17 million "False Start."
To the suggestion that Adelphia Communications Corp. may deserve a place in the Guinness Book of World Records, a man at Standard & Poor's scoffed. Richard Siderman, who covers cable television for the rating agency, said: "This is not atypical of the cable industry. In fact, to cover cash interest [as Adelphia does from cash flow] is almost admirable."
Nelson Peltz, who recently sold his majority interest in Triangle Industries to Pechiney S.A. of France for a fortune, has been pressed on questions of timing.
Foreign central banks buy
David Mulford, the assistant Treasury secretary for international affairs on Tuesday called central-bank intervention a "minor' factor in the world-currency markets.
Treasury-bill yields excite
Tuesday's Wall Street Journal was the medium for an unnamed "senior adviser" to President-elect Bush to project an aura of command and imperturbability.
When the price of copper recently topped $1.53 a pound, a monetary milestone was passed. Above that price, a red cent theoretically became more valuable in the smelter than at the checkout counter. The penny, briefly, exceeded bullion parity.
"Seek facts diligently, advice never." Frankly in search of advice, we paid a call on the man who wrote that maxim. He is Philip L. Carret, the author of a book called The Art of Speculation, which was published some 60 years ago...
Personal bankruptcies soar
In all of 1946, there were fewer than 9,000 personal bankruptcy filings in the United States. In 1987, there were about 9,000 filings a week. On those numbers hangs a story that, if not uplifting, is fascinating.
In the department of general financial anxiety, CHIPS, the Clearing House Interbank Payments System, a computer network that facilitates the movement of dollar balances among 138 banks in 35 countries, had the busiest day in its history on November 14.
News that Citibanker John S. Reed bought 100,000 shares of Citicorp common on the first anniversary of the stock-market crash -- the chairman is optimistic on the Latin American debt situation -- was quickly overhauled by the upset results in Brazil's municipal elections.
Our index of highly leveraged equities ("stub stocks") has weakened, junk-bond prices have stalled and a new closed-end fund that intends to invest in bonds of sub-junk grade (USF&G Pacholder Fund, listed on the American Stock Exchange) met a cool reception.
In late October Germany's ruling Christian Democratic Party leaked its decision to exempt accrued interest from the proposed 10% interest withholding tax. The Deutsche mark has been rising ever since...
When Frank W. Woolworth, the American five-and-ten-cent store magnate, built his Cathedral of Commerce in lower Manhattan in 1913, he chose Otis elevators, and as the lucky inheritor of Mr. Woolworth's 40th-floor study, I'm here to say that they're still working.
The election is over, monetary policy is tight and money-market interest rates are high and rising. You've read about the dollar. By one measure only can the central bank be said to be accommodative: That is the measure of free reserves, defined as excess reserves (balances held by banks over and above the legal minimum) minus borrowing from the Fed.
Treasury-bill yields are high enough to give pause and raise questions.
Although Grant's has been around for only five of the past 88 years, we have dedicated our fifth anniversary issue to a grand tour of the 20th-century American bond market: from the Gold Standard Act of 1900 to the Federated Department Stores subordinated discount debentures of 1988 and a look beyond.
Under the bland heading "Legal Matters," the new Fort Howard Corp. junk-bond prospectus discloses that Davis Polk & Wardwell, the distinguished New York law firm, will perform the routine duty of passing on the validity of the securities.
In quiet counterpoint to the recent run of good Brazilian news—the country has wiped out all interest arrears to commercial -bank creditors for the first time since last year—the prices of Latin American sovereign debt are falling.
Our Stub Stock Index -- an average of eight companies capitalized mainly with debt-eased again in the latest week, and junk-bond yields rose.
Shad Rowe writes from Dallas:
If you pay taxes, have money and are willing to capitalize on the desperation of the Federal Home Loan Bank Board, perhaps you should take a close look at the Southwest Plan.
Another voice in the choir
(Reprinted from Grant's, Vol. 1, No. 1, Nov. 7, 1983.)
In a more perfect world, this magazine would not have been born...
It will be hard to accuse the Federal Reserve of electing George Bush.
Underheating: the evidence mounts
Technology stocks have fallen, retail sales are lackluster and monetary growth is suspiciously weak. Bond yields are down from their late summer peaks in the United States, Canada, Germany, Japan, Britain, Switzerland, the Netherlands and France. Yield curves have flattened around the world.
"Norway pledges support for ailing banking system" -- International Herald Tribune, September 16.
"Oslo easing foreigners' stock curbs"
-- International Herald Tribune, September 17.
The Federal Reserve's August "Survey of Bank Lending Practices" is out, and the results show more sporting blood in the veins of buyers and sellers of corporate bank loans. Sub-investment-grade debt, once an unusual commodity in the loan market, has come to predominate...
From a New York Times financial advertising circular: "Nearly a year after last fall's stock market turmoil, the lucrative and successful mergers and acquisitions field continues to thrive...
The Deutsche mark, 40 years old last June, has been about as good as paper money has ever been or (given the history of governments and printing presses) is likely to get. Literally from the postwar ashes, it has risen to become the world's No. 2 reserve currency and a monetary symbol for the quality-conscious Federal Republic.
Harcourt Brace Jovanovich, the recapitalized publisher, is back in the capital markets again because it has to be. Concerning the recapitalization of the recapitalization, William Jovanovich, chairman and chief executive officer, exulted: "This is a triumph...
TOKYO -- Share prices of Nippon Telegraph & Telephone, Japan's largest telecommunications company, sank to a 1988 low Friday on the Tokyo Stock Exchange. -- International Herald Tribune, October 8.
Grant's is a publication of trees more than of forests, but the Federated Department Store-type of transaction deserves to be seen in macroeconomic context.
Financial news from the Soviet Union is, if possible, bleaker than that from the Home Loan Bank Board...
That rogue net-borrowed reserve position vanished in the latest Federal Reserve statement week.
Danger: Economists see eye to eye
A venerable Wall Street debating technique is to define a consensus that excludes oneself and then to invoke the lore of contrary opinion (i.e., when everyone agrees on something, the superior individual should disagree).
"Uncle Sam is being asked to provide some financial security for George Steinbrenner [chairman of American Ship Building and principal owner of the New York Yankees].
The great department-store merchants brought debt to Main Street. As hard as it may be to believe in 1988, at the turn of the century the average consumer was still considered an unacceptable credit risk.
"Unscrupulous Japanese companies, facing a nationwide shortage of university graduates, are resorting to kidnapping potential recruits to keep them out of the hands of rival employers."
-- Financial Times, September 21.
When almost nobody was worried about the savings and loan situation, Marc Perkins was outspokenly bearish.
The Third World debt market stopped sinking and started going up, with Argentine and Brazilian prices stronger by a cent or two in the past two weeks...
On September 22, the editor of Grant's addressed a conference of the Investment Management Institute in New York on the topic of "Risks in Banking: Asset Quality and Capital Exposure." His remarks follow:
My assignment this morning is to defend the proposition that the glass of debt is half empty, not half full. It is a familiar role, as I am a half-empty kind of fellow, born and bred...
Money-market rates are rising again, and the banking system has fallen (or been pushed) into a position of net borrowed reserves.
With the producer price index up, domestic capacity utilization rates up and the dollar (taking a three-year view) still way down, the recent action in gold and bonds seems passing strange.
Debt forgiveness is winning adherents above and below the Rio Grande, and a new chapter in the Michener-length story of Third World finance may be opening. From quarters as predictable as Buenos Aires and as unexpected as New York, some radical ideas are gaining respectability.
The threat posed by too much equity capital -- a financial peril largely unexplored until late in the current boom, by the way -- has been addressed,by a number of distinguished journals, notably the Harvard Business Review...
Bond-market personnel have returned from vacation to heaven on Earth. Treasury securities are well bid for -- August's crop of business data was on the weak side -- but so, too, are speculative-grade issues. Money market rates, notably short-bill rates, are easier. Credit spreads are tight.
The topic of automobile dealers is, admittedly, a platonic one from the investor's point of view, but it appealed to us because the Ford or General Motors or Honda franchise business is a Norman Rockwell type of business. If one were seeking a glimpse of mainstream American finance, one would want to know about the finances of 25,000 car dealers in this, the sixth year of the Reagan boom.
Shad Rowe writes:
This is the story of a Texas-size house and the people who lived in it. The house, situated in Preston Hollow on a street called Gaywood near North Dallas, is arguably the most prestigious residence in our city. What commends it to the attention of the credit-minded reader, though, is not its splendid grounds or Roman statues but its rich, 50-year history...
Only a few weeks ago, world central banks were competitively tightening monetary policy, domestic and foreign money rates were on the rise and a condition of net borrowed reserves threatened to rule in the United States.
The recent trend on the Big Board, where more stocks have been falling in price on a daily basis than gaining, is beginning to worry technical analysts.
-- The New York Times, August 13.
Quanex Corp., a maker of specialty steel products, is offering 1.2 million shares of Depository Convertible Exchangeable Preferred Shares, each representing one-tenth share of a soon-to-be-priced Cumulative Convertible Exchangeable Preferred Stock.
John Naisbitt, Mr. Megatrends, now prophesies an end to the business cycle. In the futurologist's opinion, booms and busts are things of the past because global financial markets have become the efficient regulators of interest rates and inflation.
That will be music to the ears of Duracell, the battery manufacturer that recently became the object of a Kohlberg, Kravis & Roberts leveraged buyout....
Shearson Lehman Hutton, which invented auction-rate preferred stock, is thought to own most of the $125 million issue it underwrote for MCorp, Dallas, in 1985. MCorp is sick with the bank-holding company disease.
Ex-auto sales, retail sales would be weak. Ex-auto loans, auto sales would be very weak. Ergo, auto loans make us strong.
In what was the biggest initial public offering up until that time, Duff & Phelps Selected Utilities, the billion-dollar closed-end utility fund, was brought to market on Jan. 21, 1987. Four days later, the Dow Jones Utility Index made its all-time closing high. The price of a share of the fund went up a little and down a lot.
From the Financial Times of August 12:
The number of Indian companies that are technically bankrupt has been rising at an alarming race, according to a study by the Federation of Indian Chambers of Commerce.
Thanks to wall sockets and the electronic computer, it is possible to project a corporation's financial results many years into the future. The projections are subjective, but the mere fact that somebody made them helps to soothe the nerves of prospective investors...
J.P. Morgan pulled the U.S. government's chestnuts out of the fire in the second Cleveland administration, so it may be churlish to carp now, 90-odd years later, when the Morgan bank gets around to asking for reciprocity.
This publication leaves for the country with its nerves shot but convictions intact. It acknowledges that recent reports of business activity have been stronger than it had banked on. However...
The vaporization of the claims of investors in the nationalized First RepublicBank Corp. (the holding company, not the subsidiary banks) was a speculative anticlimax.
In real-estate lingo, a bear market is a "soft" market, a low price is a "realistic" price and a salesman is a "Realtor." Expressed in technical terms, then, pockets of the Northeast market are soft, prices are realistic and Realtors are pacing nervously by their phones.
Onward and upward in financial services
India Growth Fund, the first closed-end fund available to Americans who wish to invest in Indian equities (and who hasn't had the urge?), is being offered through Merrill Lynch.
Copper prices have been slipping, a bearish sign for business activity.
The insurance business used to be quaint: Until Underwriters Reinsurance Co. broke ranks late last year, no property/casualty insurer had done a leveraged buyout. Now Underwriters Reinsurance, formerly Buffalo Reinsurance Co. (est. 1867), has entered the modern age, and imitators are known to be following.
Credit quality is cheap in the corporate bond market. Top-of-the-line securities yield less than middling grade, as always, but the gap has been closing. Thus -- an opportunity for the retrograde, credit-minded investor -- the cost of trading up in quality has fallen: Safety costs less.
Goldome New York Capital Corp. III, with an assist from Smith Barney, Harris Upham & Co., has issued $250 million of Exchangeable Share-Adjusted Broker-Remarketed Equity Securities Preferred Stock.
Contestants in a debate are allowed to marshal the academic evidence that suits them.
"There are lots of people out there writing checks. This is a very liquid world. Capital is not the problem."
The successful investor is a master of paradox. He expects the unexpected, distrusts the experts and loves what the majority hates. He believes that, in markets as in heaven, the first shall be last and the last shall be first.
Ever think your own government sets an insuperable standard for misguided policy? Consider the Germans.
False alarm. The banking system's plunge into net borrowed reserves was short-lived (the latest fortnightly settlement period brought a return to free reserves). Federal funds continue to trade around 7-7/8%, and growth in the Fed's balance sheet has accelerated.
Worldwide interest rates are going up -- or, in a less predictive vein, were going up until the moment of this writing, which is Tuesday, July 19. The levitation occurred in all major financial centers, even Zurich...
What the "shrewd" and "practical" man of business favored when United States Gypsum Co. was incorporated in 1901 was monopoly. What he favors in 1988 is leverage.
Greenwich, Conn., has been singled out in these pages for special mention, but house prices throughout metropolitan New York have been weak for months.
"Monetary pressure" rises
Our Index of Monetary Pressure has staged a dramatic upside breakout, rallying from negative territory as recently as March (and 0.31 in early July) to 0.51 last week, the highest reading since 1984.
Not to be outdone by the Harvard Business Review (Grant's, July 8), The New York Times Magazine put debt glutton Robert Campeau on its July 17 cover.
Shad Rowe writes from Dallas:
I have no business relationship with Richard Rainwater, I am sorry to say. As the scale of his operations and reputation has continued to grow...
Since late November 1984, the Federal Reserve has kept the nation's banks well provisioned with reserve dollars. From time to time, banks in need of funds with which to settle their accounts at the Fed would make application to the discount window, and the Fed would obligingly write a check...
By the time you read this page, a get-together of some creditors of First RepublicBank Corp. will have convened and adjourned.
Dow Jones-Irwin, the dull-book publisher, is out with a new self-help title, The Challenges of Wealth, a sympathetic treatment of the problems of the newly rich, including a look at the always knotty dilemma: "How money changes your relationship with others."
For the corporate investor
Adjustable-rate preferred stock (ARPS) is a security that was supposed to stay put. It was sold to corporate treasurers both for its alleged price stability and for its unique tax advantages.
Money-market interest rates have risen worldwide. Benchmark three-month yields stand at 1988 highs in Tokyo, London, Frankfurt and Zurich. In low-yield countries, the percentage increases are stunning.
Growing U.S. exports have helped raise depressed outbound liner shipping rates but several senior executives have told me their companies are really hurting on the import side, where rates have fallen by 30% or more. -- Don C. Becker in The Journal of Commerce, June 29.
Brazil and a committee representing its creditor banks came to terms last month, after all. In brief, Brazil will resume paying interest if the banks will lend it the funds with which to make the payments.
So hot is the Tokyo real-estate market that speculation has moved underground. So, at least, reports the Japan Economic Journal, describing a trend toward subterranean development...
The Harvard Business Review is as au courant as debt. In the May-June issue, it published a piece fetchingly headed, "Why Not Leverage Your Company to the Hilt?" On tap for the July-August number is an article in a similar vein, "Corporate Raiders: Head 'em Off at Value Gap."
Like the fighter who didn't do his road work, E-II bondholders have cast a beseeching glance in the direction of the referee. Lawsuits have been filed and a creditors' protective group, the Institutional Bondholders' Rights Association, has been formed, and the association has issued a press release.
We suppose there'll be plenty of time to worry about the behavior of bond prices in the next recession.
Bill rates are up, bond rates are down, and the yield curve is flatter. As suggested in the piece on the next recession, a flattening curve is more or less predictable in the late stages of a business expansion. (Is anything entirely predictable? A veteran campaigner must doubt it.)
Countless man-years have been devoted to the search for the perfect investment. It has almost become a banal occupation. However, the hunt for the least perfect investment has attracted relatively little interest. Where is this grail -in -reverse? What would it look like if one came across it?
"Debt securities issued by Financing Corp. (FICO), an organization created by Congress, are now qualified investments for 'AAA' rated financings." So adjured Standard & Poor's last month, and FICO—the quasi- public agency established to bail out the Federal Savings & Loan Insurance Corp. by borrowing up to $10.825 billion—thereby grew in market stature. Also fortifying the FICO name was a new private placement of FICO debt, the 10s of 2018, which Salomon Brothers promptly converted into a series of zero -coupon bonds. (It was the first such issue of agency zeros and amounted, in a way, to a play within a play...
Speaking of real estate, Tokyo residential property prices vaulted by 68.9% in 1987, according to the National Land Agency. It was the greatest boom year on record. In 1973, the runner-up year, prices advanced by a mere 36%. File those data under "history," however. The news this spring is that prices are falling....
In Greenwich, Conn., a springtime rally in house prices was once a perennial event, like the return of the robin or the rose. In the boom years of 1985 and 1986, the upturn started early, pre-robin, but this year it began late. Indeed, sales volume from January through March was the lowest in a decade. House prices registered only narrow gains, and condominium prices actually fell. Business picked up toward the end of March, but the pre-rose auguries are mixed....
Late Tuesday, the three-month Treasury bill fetched 6.35%, 35 basis points more than the discount rate. The bill rate (but not foreign money rates—see the back of this issue) has been moving up, so the gap between the stationary discount rate and the rising bill rate has been widening. "It is a relatively rare event when the bill rate passes decisively through the discount rate," John Mendelson, the Dean Witter Reynolds market analyst, cautioned on Monday, "but often this action has preceded sharp movements in the market."
When brokerage firms got into the bridge-loan business last year— lending to corporate borrowers to facilitate this or that ultraleveraged transaction—we thought we heard a bell. When banks entered the same business, grabbing market share from the brokers, we could have sworn we heard another. Now—by the way, what round is this, ref?--the American Banker reports that Manufacturers Hanover and Citicorp each have organized $1 billion bridge--loan funds to share the high returns available in junk-grade lending with other financial institutions.
A cash machine at an East Side bank was very nice to customers on Sunday—it doled out $20 bills as if they were $5 bills . . .. Word of the friendly machine quickly spread and a line formed of customers eager to put their bank cards into the slot and strike it rich.—New York Post, April 26.
All the malfunctioning cash machines in New York can't explain the bulging American currency stock....