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An owner of gold mining stocks has a dream for the new year: a derivatives fiasco in which the world's central banks... have positioned themselves against a rising gold price. When a new bull market erupts, our man contends, the central banks will lose both face and money, and the losses of the paper currencies will be gold's gain. It is his holiday thought.
Fort Howard, the Green Bay (Wis.)-based leader in the "away-from-home" segment of the domestic tissue market (the sneezing-out market?), wants to recapitalize itself. It is proposing to raise $345 million in new equity and $1.3 billion in additional credit facilities and term loans.
Last Friday's rescue of a pair of failing Japanese credit unions by the Bank of Japan made history: They were the first financial institutions since Yarnaichi Securities in 1965 to be plucked from the brink by the central bank itself. The intervention will prompt a new round of questions from enquiring readers about post-bubble Japan....
Like fraternal twins, any two closed-end bond funds may look the same without being the same. Many of them are leveraged, but there are varieties of that: straight debt, reverse repurchase agreements, commercial paper, preferred stock, etc. Furthermore, the assets that a fund has borrowed to acquire may or may not be tailored to the debt employed...
"King of carry," published in the Dec. 3, 1993, Grant's, was the story of David Braver, the man who had devoted his career to leveraged bond investment. A year ago, he was buying seven-year mortgages yielding 7.15% with three-month debt costing 3.26%. Now he is not, of course....
In counterpoint to the page one essay about financial contraction, Mergers & Corporate Policy reports a breakthrough in the direction of innovation and bravery: "A new financial firm, Greenfield Financial Advisors, is promoting the mostly untested use of capital raising secured through intangible assets," the newsletter writes.
At about six times earnings and about one times book value, the publicly traded brokerage firms had better not represent the cutting edge of stockmarket valuation. If the blue chips were valued as Wall Street is valued already, the Dow Jones Industrial Average would stand (or lie prostrate) at something like 1,300.
The winner of last week's midterm elections was not so much the GOP as the composite editorial-page program of Barron's, Investor's Business Daily and The Wall Street Journal. On the day before the election, capital-gains tax relief was a gleam in a partisan eye. Twenty-four hours later, it was a looming piece of federal legislation.
The government bond market is unregulated as to margin requirements. The stock market, an experienced reader called to insist, might as well not be. Regulation "T," he said, echoing a theme sounded in the last issue, is a dead letter for the sophisticated, leverage-seeking investor.
The name of Benjamin Graham was invoked early and often at last week's Grant's conference. Michael Katz, hedge-fund manager and value investor talked about value on the long and short sides. Marc Perkins, Palm Beach (Fla.) investment adviser, described the opportunity-laden decline of the U.S. energy infrastructure. And Christopher H. Browne, general partner of Tweedy, Browne Co., a firm that actually did business with the father of value investing, identified Graham-like themes around the world.
If the Federal Reserve is making it costlier to borrow (by 75 basis points on Tuesday afternoon), lenders are collectively making it easier. Thus, The Journal of Commerce reports that the return of easy credit and hungry bankers is threatening to incite a new round of shipbuilding and, therefore, inevitably a new glut.
Every monetary crank understands the historical tendency of paper money to become worthless. Offsetting this, however, is the tendency of people the world over to accept it--in particular the dollar, even today, in a new bear market--for what it purports to be. Bill Clinton complains that this is an age of cynicism. In monetary affairs, it is the age of faith.
To judge by the commodities markets, the economy is following Wall Street's instructions exactly. Over the past three months, the Goldman Sachs Commodity Index has rung up a total return of minus 8,45%, which is worse than any coupon security on the Treasury yield curve, even in this, the worst bond year ever...
"History shows," said Business Week, winding up a cover story on the miracle workers at Fidelity Investments, "that the longer your investment horizon, the more compelling is the case for owning stocks. As long as that continues to be true, Fidelity's wondrous stock-picking machine seems likely to approach the long-elusive goal of perpetual motion."
A man who has failed to raise big institutional money for his long-term commodity partnerships--failed to duplicate the fund-raising prowess of some of the ruined hedge funds--is bittersweet about rejection. Michael Aronstein, general partner of a pair of domestic commodity funds (up 25% after fees in this begrudging year), says that it's encouraging, from a contrary-opinion point of view, that so many people doubt him.
In the deep of summer, LaRoche Industries, issued $100 million of junk bonds. Only an underwriter's salesman would have called them "high-yield securities."... The transaction was a throwback to boom days, first to the 1980s, when only an optimist expected cash flow to cover fixed charges, but also to the 1920s...
So near to the Commerce Department yet so far, Washington, D.C.-based Allied Capital Corp. is a font of information on small business. Commerce is in the economic intelligence business because it has to be. Allied is in some of the same lines of the business (anecdote collection and microeconomic analysis, especially) because it wants to be.
While vacationing on Martha's Vineyard last month, President Bill Clinton played golf with Warren Buffett and William Gates Jr., both members of the billionaires' club, a nontraditional Democratic constituency. Although opposed to the rich in other settings, Clinton has shown himself, in general, to be a man of the bull market.
In the United States, the money supply is very nearly stationary, the pace of car sales is weaker, the gait of new-job creation is slower, and Gap Inc., of all the dynamic retail chains, has reported a 5% drop in same-store sales for August. All of these facts fit the bond bulls' view of a national economy that is obediently slowing in response to a tightening Federal Reserve policy.
As of a month ago, the Federal Reserve's own picked government bond dealers were heavily in debt, borrowers against their own securities. The dealer-borrowing data are always a month old and, therefore, not a certain guide to the future, but the reflex response of the 39 reporting firms is evidently to enjoy the hospitality of the positively sloped yield curve.
The Federal Reserve has raised the cost of bank reserves, but banks have reduced their need for them. The federal funds rate has risen, but so has the volume of non-reservable deposits--notably, the dollars borrowed by banks, both foreign and domestic, from their own overseas offices. Domestic bank deposits, in the meantime, have scarcely grown at all.
As men and women of the world, the readers of Grant's will sympathize with the corporate insider who wishes that the Securities Act of 1933 and the Securities and Exchange Act of 1934 had never been written into law and that Albert Wiggin, the portly, self-dealing chairman of the Chase National Bank, had never been born. Wall Street understands, too...
Over a five-minute period, the president of a Rhode Island-based automotive supply company counts the trucks that are going his way and then he multiplies by 12. That gives him an hourly rate of flow. Over the years, he told Grant's, 500 trucks per hour has been his average sighting. Last week he saw 660 an hour. "I haven't seen so many tractor trailers on the Ohio Turnpike in years," he said.
Lodged inside the unfathomable Bloomberg machine is a corporate history of Alaska Air Group (how do they get it all into such a little box?). Alaska Airlines, the company's principal operating subsidiary, is the 10th largest U.S. carrier, serving a half- dozen Western states and eight foreign cities...
The theme of the annual conference of the International Swap and Derivatives Association is usually a derivative itself. It is derived from the temper of the times. Thus, last year's topic: "New Products and New Participants." And this year's: "Independent Risk Oversight: Risk Measurement and Management."
This just in from Kokomo, Ind.: The cost of newsprint to the Kokomo Tribune went up by 7% on August 1 after rising by 7% last March. In 1993 it did not go up at all. "Unfortunately," says the Tribune's publisher, Arden Draeger, "I see the prices continuing to increase in the near future."
So big is a $6.6 trillion economy that a documentable anecdote is available to support every sane forecast. Bulls and bears can match each other by the hour, strong rubber prices being entered into evidence against weak lumber prices, or a hopeful downturn in agricultural tractor inventory being set against a worrisome drop in agricultural equipment retail sales. It can go on all night.
In money-market mutual funds, the obvious hasn't happened. Short-term rates have risen and equity mutual-fund values have fallen, but money-fund assets haven't expanded. In fact, May's total taxable money-fund assets ($466.2 billion) were lower than April's ($477.5 billion); we can't wait to see June's, which are due any day.
"Russia is in very serious trouble," said Aleksandr I. Solzhenitsyn, recently returning to Moscow from a 20-year exile and after a two-month railroad journey across the nation that, under different management, had kicked him out. "There are groans bellowing across this country."
If the 1990s are shaping up to be a repeat of the 1970s, the Clinton administration is destined to become the financial heir of the Carter administration. Scott E. Smith, a paid-up subscriber from Chicago who insists that he really doesn't mind that the yen puts he bought on the say-so of this publication have gone to 3-3/4 from 12 in only seven months, contributed this interesting formula.
Maxxam Inc., a possible investment for the 1990s, has a balance sheet from the 1980s. The company's principal owner, Charles E. Hurwitz, 53 years old, is himself a man of the 1980s--a takeover artist, leverage artist, entrepreneur, one-time owner and director of a failed Texas S&L and former investment-banking client of the former Drexel Burnham Lambert.
Advanta Corp., the Horsham (Pa.) credit-card purveyor, is forming a $100 million venture-capital partnership "to seek out private equity investment opportunities in the financial and information-services industries." Evidently, it's diversifying against the day when credit cards become obsolete...
When Jeffrey Sachs, erstwhile adviser to Russia, stood up in London the other day to call for the creation of a bankruptcy court for insolvent governments, the global bear bond market instantly came into sharper focus. Given the growing weight of debt and the absence of help from a new inflation (help, that is, from the borrowers' point of view), the possibility of public-sector default no longer seems outlandish...
The reader who provoked this table, Marc Perkins, chairman of Perkins Capital Advisers, Palm Beach, Fla., says that the numbers are reminiscent of another cycle. As the savings-and-loan industry was felled by high interest rates in the late 1970s, he contends, so Wall Street is at risk in the mid-l990s.
Yesterday was the deadline for telling the Treasury Department how many foreign investments you own. Let us say that you are an American investor, subject to the Constitution, the Paperwork Reduction Act of 1980 and the other laws of the land, and that you own a certain substantial minimum of foreign securities and/or short-term foreign investments.
Question: If the rate of bank lending were 20 times faster than the growth of the real economy in which the lending took place, would that be bullish or bearish for the economy and markets of the country in question? Answer: It would be bullish until the day it stopped. Then, the next day, it would start to become bearish.
The coffee-killing Brazilian frost is a parable of cycles. For years, as the coffee bear market ground on, growers despaired, and they skimped on maintenance (Grant's, January 28)..."When you take a crop that hasn't been fertilized for four years and was unhealthy to begin with because of a lack of care, the damage could be untold." Nowadays, the bond market watches the grain market.
The Bank of England, dowager of central banks, ancient protector of the coin of the realm, agent of devaluation, gentlemen's club and bawdy house, entertained more than 100 of the world's central-bank governors in London last week on the occasion of its 300th birthday.
Except that commodity prices tend to fall over the long run (tending to revert to the cost of production, which itself is usually falling), except that futures trading is inherently leveraged, and except that commodity bull moves hit like hail storms, futures markets constitute the perfect outlet for patient, value-seeking, long-term capital...
Despite ample provocation, no international financial panic occurred in the early 1990s. It could have, but didn't, begin in Japan, the provider of almost half of the international bank credit in the late 1980s. Real-estate depressions struck far and wide, yet a worldwide run on illiquid institutions didn't start in Scandinavia, the U.S...
On page one of the April 8 issue ("Revenge of the margin clerks"), we incorrectly stated that the credit-risk portion of Salomon Brothers' derivatives book at year-end 1993 was $42.5 billion. In fact, the firm says, it amounted to $8.6 billion. Equity capital was $5.3 billion.
In Russia this season, tank production is rising but wheat production is falling. The official economy of the former Soviet Union, as distinct from the thriving "black" economy, is seized by a "nonpayments" crisis - the Dun & Bradstreet version of hell, in which businesses just stop remitting funds...
Like sex, the margin call is an ancient institution, possibly as old as debt itself. The bond liquidation of 1994 has a rich American lineage, one that reaches back to the Civil War, to the aftermath of World War I and to the ostensibly serene years of the second Eisenhower administration....
In Mexico, Brazil, Britain, Germany and the province of Quebec, candidates not at all resembling Ronald Reagan and Margaret Thatcher lead the fields in scheduled or prospective 1994 elections. If the global financial markets are nervous, not all the blame can attach to interest rates.
For more lush years than Wall Street deserved, the Federal Reserve System was loose but the banking system, real-estate-laden and undercapitalized, was tight. Interest rates declined, but a reluctance to lend in America was complemented by a disinclination to borrow. Lending did not expand, as it customarily does, but contracted instead. But now the Fed is tightening as the banks are loosening.
First came the Henry Ford automobile, plain and black. Then came the automobile loan, conservative and short. Now -- an automotive revolution for the 1990s -- comes the lease. As hedge funds speculated in the two-year note, so consumers may drive away a Chevrolet, with little or no money down.
It stands to reason that the only elected Democrat in Orange County, Calif., is the manager of the county's highly leveraged, multibillion-dollar, fixed-income investment funds, and he is running for office against a Republican in the middle of a bear market. The lucky man is Robert L. Citron, age 68.
Wall Street always promised that the bond market would head off the next inflation at the pass by forcing a timely rise in interest rates. What the brokers and their hired economists never explained, however, was that the margin departments, not the "bond-market vigilantes," would precipitate the selling.
Bears are massing along the Canadian and Mexican borders. The Bolsa, paying no heed to the rally on Wall Street, fell by 1.4% on Tuesday to a new 1994 low after dropping by more than 6% on Monday. "Although U.S. bond prices rose today and interest rates dropped," Bloomberg reported from Mexico City, "investors are convinced the Mexican government will be forced to increase domestic interest rates to keep foreign capital in the country."
One fine day, perhaps, the convertible bond or preferred stock of your dreams will be quoted at 50 cents on the dollar. Its yield will be high and its conversion premium will be low, but the buyers will be absent instead of grateful. Value is the gift of bear markets, and we are trying to plan ahead.
At the top of the stock market -- historians will have to try to understand the state of mind -- cash was the lowliest investment asset available. Unlike stocks and bonds, which always seemed to appreciate, Treasury bills never doubled or tripled or constituted the object of a hostile tender offer. They fulfilled no investment function except as a kind of talisman to ward off loss.
Like Elaine Garzarelli, Grant's has its indicators, and we never take our eyes off them. London is our leading indicator of worldwide inflation (despite the huge devaluation of the pound sterling in the fall of 1992 and the brisk progress of the British business expansion...
Not only is it hard to make money in anything nowadays (year-over-year rates of return in the long bond and the Goldman Sachs Commodity index are 3.18% and minus 8.06%, respectively, according to our handy table), but also it is difficult to sustain one's favorite prejudices.
Nothing becomes gold so much as its lengthening list of detractors. The Wall Street Journal, the world's central banks and a number of formerly wealthy and handsome hedge-fund investors are on record with bearish words or deeds. We ourselves got off a skeptical piece on gold-mine equity valuations at what would prove to be the top of the current upswing...
The Texan known as "Bulldog," skip tracer and automobile repossession man, says that his business is turning up. The reason that Bulldog is bullish on the repo trade will come as food and drink to the still-solvent bondholders. It is because he thinks that the economy is weakening.
Election year in Mexico (as we only began to explore in the last issue) is a time for democratic tradition, of which the greatest is that the governing party always wins. So rigidly observed is this precedent that when the incumbents did briefly appear to have come in second in 1988, it was only a matter of time before the results were recalibrated and the party was declared to have come in first after all.
What is wrong with the money supply, and is it (whatever it is) catching? Does it validate the Grant's commodity-price outlook or the economic observations of Bulldog, the repo man? We ask because money is not doing what we thought it would do. In a proper cyclical expansion, bankers would be lending and the monetary aggregates would be percolating.
At a glance, the break in bond prices last week seemed all out of proportion to the monetary cause. On February 4, the federal funds rate was pushed up by 25 basis points, to 3-1/4%. By Tuesday, the 30-year bond yield had risen by 30 basis points, to 6.60%. More than one authority called the reaction unfathomable. What is the Federal Reserve in business to do except beat inflation to the punch?
Exactly according to bullish script, the Mexican stock market did not collapse following the January 1 outbreak of armed revolt in the southernmost state of Chiapas. What the bulls do not usually talk about, however, is one official source of this strength: A Mexican government agency was buying stock along with the optimists from the private sector.
What Alan Greenspan really thinks is that the consumer price index has become so bollixed up that it no longer reflects the true rate of price inflation. Also, that the economy is closer to full employment than it might appear. All in all, according to people who had the opportunity to hear him out before his recent Humphrey-Hawkins testimony, the first 25 basis-point tightening will certainly not be the last.
Roosevelt Savings Bank, based in the seasonally leafy Long Island suburb of Garden City, is as conspicuous for what it sells as for what it doesn't. What it doesn't sell is mutual funds. In this eccentricity it is as different from Wells Fargo, Mellon, Citibank et al. as it is possible for a bank to be in 1994.
What does the lagging oil price signify for the future of the commodity markets and specifically for energy markets? The second-best answer is that, in the past, pronounced weakness in the oil market in relation to commodities spelled bullish things for oil -- both for oil and oil stocks. (The very best, at least the most honest, answer would be, pure and simple: "Who knows?")
Not just anyone may purchase the new junk bonds of Sullivan Communications or its subsidiary, Sullivan Graphics. This rare opportunity is available only to qualified institutional investors. Perhaps the stewards of other people's money are more discerning than amateur investors. Or, just possibly, they are less discerning.
For a number of disinflationary years, the leasing of offshore drilling rigs has been an unprofitable, sometimes a hopeless, line of business, but for Chiles Offshore Corp., 1993 shapes up as a kind of miracle. For the first year since 1989, the company says, it expects not to show a net loss.
It has not gone unnoticed in bond-land that the Chinese and the Indians and the Russians outnumber the Americans, that Chinese wages are lower than the developed world's wages or that the Third World is growing faster than the first. . . . For ourselves, we have been wondering if the bulls haven't overlooked one important detail.
The rich, too, must live somewhere. They must find an apartment, buy it, renovate it and furnish it, not forgetting to dress the walls in silk. What makes the rich so very different is that they don't need to finance it — at the better Manhattan addresses, in fact, they may not finance it. It is a bull market in rich peoples' apartments...
The Federal Reserve -- the accompanying picture is worth a paragraph, at a minimum -- has lately reduced the rate at which it buys Treasury securities. However, this marginal slowdown is a pale shadow of the expected reduction in the volume of purchase in 1994 by state and local governments.