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December 20, 1996, Vol. 14, No. 24

Money of the mind

"Historically," the Wall Street Journal explained, "stocks have done better in the long run than bonds, so they should be your best bet for making college money grow." Can it be just that simple? Most investment ideas are valid some of the time, experience has shown, but few are valid all of the time.

Rise, Korea!

In the memory of most living Americans, buying stocks in South Korea was once almost impossible. Now it's selling that is hard to do.

Crude with a yield

Consider an energy royalty trust that posts a certain fetching yield. Not all of this yield is a return on the shareholders' money. Some of it represents a return of the shareholders' money. As the typical royalty trust doesn't spend much to renew its oil or gas reserves, what it owns is what you, the shareholder, eventually get. It pays dividends until the day it runs dry.

More yield grope

Although not impossible, the ancient practice of clipping coupons is, however, slowly dying out. The highest and best use of Treasurys today is deemed to be the highly leveraged one: in a hedge fund portfolio, for example, or on the balance sheet of a foreign central bank.

Rush to up-size

Natural gas flamed to a record $4.467 per 1,000 cubic feet on Monday; up from $1.76 per mcf one balmy day-last September. In a world that has come so very close to material perfection in many different walks of life--e.g., in day-trading common stocks from the comfort of a home office--the gas bull market seems an archaic intrusion.

Money in the bag

Jeffrey Matthews, general partner of Ram Partners, L.P., a Greenwich (Conn.) hedge fund and a paid-up subscriber, has composed a non-autobiographical "Fable for Our Times"...

Who owes bonds

The data on these pages show that Treasurys are not entirely friendless. Thus, the graph plots the volume of net borrowing by the so-called primary dealers (the approximately three-dozen firms that cooperate with the Fed to make a liquid, two-way market in the government's debt): note that such borrowing stands at a new record....

December 6, 1996, Vol. 14, No. 23

Short sale of the month: euphoria

A central bank for central bankers, the Bank for International Settlements (BIS) should logically strive for double obtuseness in its public utterances. Instead, on Thanksgiving eve, the Swiss-based monetary bureaucracy clearly warned of "the prevailing mood of euphoria" in global credit markets. This unmuffled blast appeared just two days after The Wall Street Journal had disclosed how the Federal Reserve proposed to deal with a parabolic Dow Jones Industrial Average.

IPO attack

Demographics may have enlarged the pool of savers, but the great bull market has expanded the population of bankers. The fundamental investment issue is whether the savers will be able to keep up with the bankers. To make the form bet is to take the bankers, giving up points.

Commodity bells ring

Although the Goldman Sachs Commodity Index has outdistanced even the S&P 500 in total return in the past year (see centerfold), commodity investments still elicit more disbelief than admiration. Thus, in a range of markets--e.g., oil, gas, copper the prices for spot delivery routinely command premiums to the prices for more distant delivery. In other words, the structure of markets is bearish: Buyers and sellers project lower prices in the future.

Gnomes don lamp shades

Switzerland, which didn't get around to enacting women's suffrage until 1971, is just now coming to terms with another 20th century innovation. It proposes to legalize unsecured paper money.

Human mutual funds

Marvin Washington, defensive end for the hapless New York Jets, tried last week to put a losing season into long-term perspective. "You can't have a knee-jerk reaction," he reflected in the New York Post. "You have to look at it like the stock market and be in it for the long haul, like a mutual fund. Like in the end it's going to work out for you. Hopefully, that's what my career is going to be. I'm a mutual fund and at the end it's going to work out."

No respect for Uncle Sam

Either the Treasury has become a more deeply troubled credit, or nearly every other borrower is improving. For whatever reason, the demand for the Treasury's paper (in comparison to almost everybody else's paper) is provocatively weak.

November 22, 1996, Vol. 14, No. 22

Case of the lost deflation

Ultra-low interest rates are beginning to materialize even outside of Japan. Thus, the three-month Canadian bill yield is quoted at 2.88% (ultra-low by North American standards) and the Swiss discount rate at 1%. In one sense, Japan is still in a class by itself.

Wrong number

Grant's apologizes for mistakenly using a real phone number as a spoof in a previous article.

See stocks run

The first-grade class of a certain West Coast public school is learning all about the stock market. "Students will buy stock with imaginary money and then we will watch what happens," the boys and girls and their mommies and daddies are advised. "Look over your Stock Market Worksheet. Have mom or dad read over the stocks with you and help you decide which ones to buy with your imaginary money."

The crop that wasn't

As forecasts of world starvation have so often failed to materialize in recent decades, the word "crisis" has necessarily suffered a devaluation in agricultural usage. Therefore, in its place, a practical speculator may mentally substitute the less incendiary "bull market."

Yield grope

Jayhawk Acceptance Corp., Dallas, last summer entered the cosmetic surgery lending field... Jayhawk's mainstay line of business is sub-prime auto lending. Why it would choose to finance nose jobs, hair transplants, breast augmentation and tattoo removal (on an unsecured basis, naturally), the American Banker related, is that there aren't enough sub-prime auto assets to go around...

Banking on EMU

If, as and when Europe adopts a single currency (1999 is the hoped-for starting date), what will happen to the banks that make a good living by trading lots of currencies? If the continent of Europe is going to become one big, efficient banking market, what will happen to all the little, inefficient banking markets? What will happen to all the also-running banks that excelled because of their expertise in a local currency that no longer exists? Following a brief investigation...

Lend--to whom?

The lush times of the 1990s are depicted by the arresting graph at the bottom of this page. As can be seen, equity capital of U.S.-chartered banks never contracted in the 1989-91 bad patch. And since the early 1990s, it has expanded at rates in excess of 10%. When we say that the capacity to lend has overtaken the capacity to borrow, our mind's eye sees this picture.

November 8, 1996, Vol. 14, No. 21

Springs of perpetual wealth

This special, two-part issue of Grant's features a prospectus for The Grant's Extreme Growth Fund, a figment of our imagination and that of a Cambridge (Mass.) reader, Seth A. Klarman, who, indeed, dreamed up the idea. Let us be clear that this document is a parody. Even so, now that we think of it, any money remitted for the purchase of the imaginary shares will be gratefully deposited by the fictitious mutual-fund distributor.

Buy Treasurys, sell others

Grant's has lately developed a fixation on risk spreads. We have repeatedly contended that risk rates are too low in relation to Treasury rates; or, in a more positive vein, that Treasurys are poised to outperform risk-sensitive debt instruments. We have asked why anyone would want the short-dated paper of a domestic personal-computer maker. . .

Goddamn deficit

Arthur B. Treman Jr., who died on October 26 at the age of 67, was a lifelong friend of the blunt truth. In retirement, he goddamned the federal deficit and the people who only made it worse. . .

Corrections: a pair

Two points of correction, one from the Oct. 15 conference and one from the Oct. 25 issue of Grant's.

Long and contrary

"Cable TV: the Looming Crisis," proclaimed the October 14 cover of Business Week. "[R]egulations are being rolled back," said the story behind the headline, "and cable's monopoly-like hold on 67% of U.S. households is being seriously threatened by an array of new competitors."

October 25, 1996, Vol. 14, No. 20

Gnomes talk their book

The Swiss monetary authorities would not stand idly by if the Swiss franc, one of the world's most sought after currencies, became even more sought after. So, in effect, warned a vice president of the Swiss National Bank, Jean-Pierre Roth, in Zurich on Tuesday. . . .

Thing of beauty

It is a tribute to American resiliency that a man who flamed out in the Phoenix real estate market of the late 1980s. . .

Pro Euro-value

So far has the New World outshone the Old in growth and speculation over the past six years that even a great American patriot--any incumbent politician at any level of government in the United States, for example--might entertain the possibility of a reversal of fortune.

Bet on imperfection

The best bond trade isn't a gamble on the direction of rates, we think, but an investment in their alignment, or rather realignment.

There is no plan

'Live free or die'

In the question-and-answer session following his talk on the high-tech investment mania, Fred Hickey was asked if there is anything he does like. "In the high-tech field... let's see...

Low expectations

Paul Stephens, collector of cast-off securities and devotee of unpopular investment ideas, said that he has nothing against growth stocks per se. What he objects to in the current high-priced environment, he told the Grant's crowd, is paying for them.

No inflation.' none

"In the short run," Susan Sterne, Greenwich (Conn.)-based consumer economist, told the audience, "there is nothing in the cyclical setting to allow inflation to accelerate."

Reversion to the mean

"Obviously," said William A. Fleckenstein, Seattle-based hedgefund investor, expounding on the bedrock principle of reversion to the mean, "if some narrowing process were not at work, then large men would produce ever larger offspring and small men ever smaller offspring, and the world would consist solely of midgets and giants.

Margin of safety

"I wonder if Benjamin Graham were writing today," mused Peter Cundill, Canadian value investor, "if he would have some chapters on the antithesis of value.

Yield compression

Although value is not the 1996 bond market's strong suit, our fixed-income speaker said that he could identify one value-laden asset class, at least. . .

America gets a downgrade

If the United States is the Coca-Cola of sovereign credits, why does it suddenly pay more to borrow than a neighboring Pepsi?

October 11, 1996, Vol. 14, No. 19

Mayor Barry in a landslide

Confidence has seized the credit markets like the all-points Bill Clinton handshake. From Brady bonds to junk bonds to investment-grade corporates, investors have willingly paid more for the extra basis point of income. For months on end, spreads between risk rates and government rates have narrowed.

Sell Coke

The Coca-Cola Co. is ubiquitous and lucrative, and the world, in which it operates is prosperous and welcoming. If there is one essential, late-century, bull-market, American enterprise, Coke is it. It is a great stock in a great stock market, and it is trading at a great price. Furthermore, it is owned by Warren Buffett, a great investor.

Buy Coke

If Coca-Cola is overvalued, Gucci Group must be over-overvalued. If a can of Coke is always the same, one Gucci line must always be a little bit different from another. If Coke sells to everyman, Gucci sells to the very particular kind of woman "who enjoys flaunting her bod and her bank account just a bit more than she should," to quote Women's Wear Daily.

Bull story

Pixar Inc., the digital animation studio that rode the success of Disney's "Toy Story" to fantastic heights in the stock market (and made its chief, Steve Jobs, a paper billionaire for about a week), wasn't up for long. . . .

Advantage: fine print

Charles W. .Peabody, one of the finest financial detectives employed in the private sector, has discovered a telltale note in the latest Advanta Corp. 8-K report....

Because it can

The most bull-market-compatible name of the IPO season to date is Infinity Financial Technology, of Mountain View, Calif. Infinity's line of business is computer software that analyzes options and derivatives and monitors trading positions.

Power surge

When trading in the brand new electricity futures market got under way in March 1995, the near-universal expectation was that prices would fall. The actual outcome was gratifyingly contrary: they rose. Some leading questions would therefore seem to require an answer.

Greater Beardstown

The number of registered investment clubs has trailed the balloon of the Dow like a gondola; In March 1995, when we last took note of this phenomenon, the club population was pushing 13,000. Now, it is over the hump of 24,000.

Energetic returns

Over the past 12 months, the Goldman Sachs Commodity index has produced a total return of 46.8%, almost exactly twice as high as the total return on the S&P 500 (dividends included, such as they are).

September 27, 1996, Vol. 14, No. 18

Don't touch that dial

Last Saturday, a pair of San Francisco radio stations changed hands for $115 million. One of them had sold for $13 million only a year and a half ago, the other for $16 million about three years ago. The two properties jointly produced annual gross revenues of roughly $13.5 million last year. Are radio stations gaining value, or is the dollar losing it?

Up with people

It isn't a shortage of customers that's worrying the merchants at the soon-to-open SouthPark Center Mall in the Cleveland suburb of Strongsville. It's a shortage of employees.

What, me worry?

"You buy no deal where the underwriters' fees are larger than the last 12 months' revenues of the underlying credit," explains a seasoned corporate-bond buyer, confiding the personal rule of thumb he uses to screen new issues in the excess-prone 1996 junk market.

Swiss miss

So low is the estate of gold bullion that skeptical savers continue to bid up the Swiss franc. Why the franc should appeal to the people who reject the euro (the currency that official Europe is trying to put over as an improvement on the deutschemark, a currency that would seem to need no improvement, at least as a store of value) is beyond us.

Rah, rah real estate

The Yale endowment totaled $1 billion a little more than a decade ago; it appreciated by almost that much in the 1996 fiscal year alone. Now the endowment is up to $5 billion. Its 25.7% gain in the 12 months ended June 30 is almost identical to the rate of return on the Wilshire 5000. What is remarkable about this coincidence is how little of the university's money is committed to public equities (as distinct from private ones). . .

Era of good feelings

Always a festival indoors, the bull stock market moved outdoors on September 16 when America Online threw itself a block party on Wall Street. The occasion was the listing of its squeezable common shares (up 36% from its September low as of this writing) on the New York Stock Exchange.

The first loss. . .

September 13, 1996, Vol. 14, No. 17

Ditching old maid

The decline and shriveling up of the gold market (in which measured price volatility has recently set decade-lows) has coincided with new claims on behalf of the future European monetary union.


The press-stopping, $9.6 billion merger of NationsBank Corp., of Charlotte, N.C., with Boatmen's Bancshares, of St. Louis, constitutes a credit-cycle event as much as it does a corporate-finance event.

Securitized insecurity

On September 5, AT&T Universal Card Services took action to stop up the leaks in a pool of its own securitized credit-card loans. This repair was conducted noblesse oblige; no such reinforcement was required under the terms of the bond indenture. Nor, as a matter of fact, was the issue in mortal danger of sinking...

Option on revulsion

Measured volatility in the gold market last week touched a low not seen in at least a decade, our spies (some of whom could barely keep their eyes open) report.

In-country bulletin

John Keefe, New York financial consultant, vacationed in Mexico last month, taking in the social and economic sights, studying the local press and extricating himself from a serious automobile accident, which left him uninjured but not unshaken. It was truly an unforgettable trip, he reflects, and he undertook to record his thoughts and impressions, including the financial aspect, which boils down to a question: Can a record-high Bolsa be reconciled with the Mexico that he saw for himself? His conclusion: It can't be.

More brokers, less crude

From the September 9 Bloomberg: "The number of securities brokers registered with the National Association of Securities Dealers has reached an all-time high of 527,000...

August 16, 1996, Vol. 14, No. 16

Your key word: 'oil'

Few things are more gratifying than the sound of the corroboration of one's favorite investment prejudices, especially when, as in this case, the corroborator is a known moneymaker. Tom Waldeck's voice carried melodically over the telephone...

Happy 25th!

On Sunday evening, Aug. 15; 1971, President Richard M. Nixon announced the cutting loose of the dollar from the anchor to which it had been tied for decades: a fixed gold exchange rate. The immediate response of the American capital markets to this heresy--and to peacetime wage-and-price controls, conceived and administered by Republicans, another Nixon first--was euphoria.

In the raw

The collapse in the dollar value of semiconductor bookings last month was the sharpest in a decade (that being the span of years for which data are available). As usual, the culprit wasn't the physical volume of sales; units were flat to gently rising, and silicon remains in short supply. The source of the trouble was capacity...

PC road trip

ather than picking up a telephone or logging onto the Net, Larry Woods prefers to conduct his investment research as it was done before the information age. He hits the road. Driving by day and camping out by night, he stops at computer stores and asks, "How's business?"

Growth finance company

Sirrom Capital is the new poster company for the credit cycle of the mid-1990s. Co-founded in 1992 by a Nashville physician, John A. Morris Jr. (the company's name is the entrepreneur's spelled backwards), Sirrom lends to businesses that are too green for bank credit but too seasoned for venture capital. If it can be imagined, it lends to businesses that, even in this great bull market, have not yet got around to going public. . . .

One more capital goods glut

The halving of the Baltic Freight Spot Index since May 1, 1995, is a calamity all right, but not the macroeconomic calamity it might seem. What ails the demand for oceangoing shipping isn't world trade, relates our pilot and source, James L. Winchester, shipping analyst at Lazard Freres. The cause of the collapse in dry bulk cargo rates is a shipbuilding boom....

August 2, 1996, Vol. 14, No. 15

So good it's bad

Citing the corrosive effects of prosperity, a Fort Worth finance company warned its investors on Tuesday to brace themselves for lower profit margins. The strength of the economy is one paradoxical source of trouble. . .

Up with 'XAU'

Grant’s is chronically bearish on the institution of central banking but not for that reason permanently bullish on gold-related investments. For example, we issued a cautionary note on the valuation of gold-mining shares as recently as. . .

Who pays whom?

After the Tennessee Valley Authority managed last week to borrow at a cheaper rate than that allowed the federal government, which, incidentally, owns it—27 basis points cheaper, using March 31, 1998, as a yield-curve benchmark—every remaining doubt about the level of anxiety in the corporate credit market was erased. There is no anxiety. In fairness, the TVA achieved this remarkable borrowing cost, in part, by. . .

Cultures clash

Browsers on the World Wide Web have encountered not one but two home pages connected to the initials “BBH”: Brown Brothers Harriman & Co., the Wall Street banking institution, and Beavis and Butthead, the non-Wall Street MTV cartoon show.

'I see numbers'

If the source of last week’s stockmarket rally was the superficially uplifting results of a handful of personal-computer makers—e.g., IBM, Compaq Computer and Gateway 2000—it was all a gigantic misunderstanding. Fred Hickey, editor of’ The, High Tech Strategist, Nashua, N. H., say so, authoritatively. . .

Whoa, Canada!

Long both a victim and a beneficiary of inflation (in its joint capacities as sclerotic social democracy and leading commodity exporter), Canada has this year become a disinflationary poster country. So meager is the rate of consumer price inflation that the Bank of Canada has actually begun to speculate on the potential for price deflation. . .

Dead-cat bounce

Monday’s doubling in the price of the shares of Credit Foncier, the doomed, 144-year-old French mortgage bank, was a gift of the French state, exacted from the French taxpayer. Declining to bail out the bank and run it, the government ordered its acquisition—at a value more than twice as high as that prevailing when the shares were suspended from trading two Thursdays ago. . .

Extreme speculation

According to Bloomberg, which knows everything, no fewer than 33 U.S. companies are still valued at 100 times trailing net income (or more) and 10 times revenues (or more), the recent setback to the Nasdaq Stock Market notwithstanding.

Neighborhood news

On a recent Thursday night, sources told Grant’s Interest Rate Observer exclusively, police broke up an altercation between drivers in the regular late-night traffic jam that snarls Wall Street all the way around the Broad Street corner.

Upward creep the rates

Possibly, the U.S. money market is tightening itself, as the Treasury bond market previously tightened itself. Three-month bills fetched 5.34% on Tuesday, tying a new high for the year that was set only the day before. . .

July 19, 1996, Vol. 14, No. 14

The capitalization of human progress

Either the great bull stock market is over, or it isn’t. We think it is. However, even if--just this once--we have jumped the gun, the summertime correction will have served the salutary purpose of settling a long-raging theoretical argument. Now there is a modern, documented case of the stock-market averages not going up. What fundamentally characterizes a bear market, besides a fall in value, is a loss of faith. . .

New era report

“You Can Make a Million,” beckons the July 1996 Reader’s Digest. “Everybody Ought to be Rich,” exhorted the August l929 Ladies’Home Journal. Much has changed in 67 years—aluminum baseball bats and space travel come first to mind—but inspirational late-bull-market journalism has remained the same. A comparative reading of the two specimens, ancient and modern, furnishes new evidence in support of the proposition that investor psychology is the one great speculative constant. . .

Alignment of forces

Anecdotal confirmation of the theory that everybody was thinking one, big, bullish thought is provided by a friend who follows hedge funds. . .

Did not, did so

To the familiar list of risks of investing in brokerage-house stocks, add the litigiousness of the modern client. He or she was prone to hostile action even during the up cycle. . .

Future shrink

“[Y]ou do not have to be a pessimist,” writes Peter Bernstein, the distinguished financial economist who isn’t one, “to recognize that—at the very least—a downward trend in equity returns is virtually inevitable.” Inevitable,” only slightly diluted by the modifier “virtually,” is one of the strongest colors on the predictive palette...

Pricing credit

The pea of financial excess isn’t stationary but movable. Thus, in the 1980s, it was hidden under the shell of debt. In the early 1990s, it was slipped under the shell of equity. Small wonder, then, that the stock market’s correction to date has been sharper than the debt markets’. Stocks have more to correct....

France meets Mississippi

“Buying Eurafrance,” we stated in a June 7 story about undervalued French stocks, “one can buy a discounted holding company at a discount.” Little did we know. A San Francisco reader, Eric J. Fry, of Holl International, observes that it is possible to buy a discounted holding company within a discounted holding company within a discounted holding company. He likens the French corporate structure to the family tree of a character in a William Faulkner novel.

Treasurys under suspicion

The world’s monetary authorities have fallen in with the American mutual-fund-buying public in one important particular: Each has undertaken to reduce its gait of Treasury-bond buying. . .

July 5, 1996, Vol. 14, No. 13

Rates tug on the leash

The collective sigh of relief heaved by speculators in U.S. stocks and bonds Monday—the Fed would not raise the funds rate this week, it was telepathically communicated to them—diverted attention from one discordant fact: Money-market rates have been rising on their own.

Yield on gas

Natural gas royalty trusts are, if possible, even less sought after than natural gas. (Gas prices have risen, all right, but the market doesn’t seem to believe it,) They are derivatives of obscurity.

Bull-market baby

The cabdriver who picked up the publisher of Grant’s Interest Rate Observer outside New York Hospital at 5 p.m. on June 26 could read the news of the birth of Charlotte Diamond (6 pounds, 9 ounces, full head of hair) all over his fare’s happy face.

Stocks de luxe

Like snakes’ eggs, bull markets are self-nourishing. Thus, in Dallas in the mid-1980s, the surging population of architects, developers, appraisers, bankers, salesmen and promoters of real estate required new office space itself. This intramural demand helped to instigate more building and the hiring of further drafts of real-estate -related manpower. One thing led to another until the lights went out. So with the great bull stock market. . .

End of cycle

The burst of merger-and-acquisition activity in the money-management field constitutes another reminder of how the world has changed in only 15 years. It was in 1981—the year the bond market stopped falling—that the partners of Salomon Brothers elected to sell out to Phibro and that the partners of Goldman Sachs & Co. voted to spend more than a quarter of their hard-won capital. . .

Call it coincidence

[I]t is the size of the mutual fund population that makes the stock market go up. Create more funds—stock, bond and income, money market—and the Dow seems to take care of itself. Inspired by a paid-up subscriber, a trader at Smith Barney, Harris Upham & Co., Chicago, this clarifying perception may launch a new school of technical analysis...

What Hamaka wrought

Did the gentleman from Sumitomo take the copper market where it couldn’t have gone without him?

June 21, 1996, Vol. 14, No. 12

Organized support in nearly everything

Central banks, no friends of gold bullion, have moved in to support the free-falling copper market, according to Monday’s Financial Times.

Stepping slowly

Ultratech Stepper, a San Jose (Calif.)-based maker of photolithography steppers, is getting into the leasing business. (Note to non-geeks: Steppers are used in manufacturing semiconductors.) “Under this new financing strategy,” says the Ultratech press release, “chip makers will be able to lease the lithography tools they require, with minimal commitment to the capital outlays typically associated with major equipment purchases.” If anything has fallen faster and farther than the price of copper, it’s the price of a dynamic random access memory chip....

Rooting for winter

Natural gas lacked a big investment following even during the decade-long Northeast winter of 1995-96, and its claque hasn’t grown in the run-up to the summer solstice.

Shortage of failure

The 1990s will go down in history even if we have to write it ourselves. Speculation and investment are booming not because the economy is resurgent but, to a crucial extent, because it isn’t. (Or seems not to be. The exact truth about the 1996 economy will come to light following some future revision of the GDP. In the meantime—please!—be patient.) The story of the decade is one of dual economic speed limits. . .

Ingenuity unchained

We quote from the term sheet describing a bond option tied to the U.S. presidential election. The proposition being bet on is that yields go up before the election, but right back down again after it. CIBC Wood Gundy is the proud inventor. . .

'Due to the exceptional demand. . .'

The stock market may be drunker than the bond market, but that does not necessarily make the bond market sober. A case in point (thank you, Lisa Hess) is last week’s $100 million Eurobond offering for Morgan Stanley do Brasil Ltda. . . .

June 7, 1996, Vol. 14, No. 11

Workers of the world: Call your brokers

Some of the fastest-rising stocks in the great bull market belong to the temporary-labor brokers, hiring halls of the virtual age. The nonpareil is the equity of AccuStaff, Jacksonville, Fla., with appreciation of 1,643% since its market debut in August 1994.

Here to eternity

In the case of an isolated company, an ultra-high multiple may imply superb management or a brilliant product. Applied to sprawling fields of companies, however, it implies either a form of speculative derangement or a new era. In place of “new era,” the bond market may read, “higher interest rates.” What 43 times earnings on the Nasdaq Composite Index would emphatically seem not to imply is a depression.

Ad whacker

Another reason not to overpay for an Internet stock is set out in the May 20 edition of Inter@ctive Week (“the single source for the Internet, infrastructure & digital commerce”). “At a time when Web sites are just starting to reap revenue from electronic advertising,” the magazine relates, “a small Internet startup has introduced a means to block ads from appearing on screen.

Holding pattern

Short on mutual funds, long on bargains, the Paris bourse is almost the mirror image of Wall Street. The oxymoronically named France Growth Fund changes hands at a 19.7% discount to net asset value, and Societe Generale, the grand French bank, changes hands at a 93% discount to its estimated year-end book value.

Et tu, bullion?

Gold stocks, being common stocks, have followed other stocks into orbit, but the price of gold itself has clung to earth like a fog bank.

'Pull the ads!'

The Knickerbocker, a rising 22-story condominium on East 72nd Street off Second Avenue in Manhattan, is the real-estate equivalent of an Internet IPO. Slated for completion in October, the 75-unit building presented itself to prospective buyers last month.

'A policy for cowards'

Friends of reflation stared at computer screens this past week trying to reconcile theory with current events. The Japanese business recovery faltered (Japanese bond prices rallied), the gold price broke, oceangoing shipping rates turned lower and the Los Angeles Times cut its daily newsstand price to 25 cents from a half-dollar.

May 24, 1996, Vol. 14, No. 10

Issue shares, build plants, lose money

Growth in investment in U.S. manufacturing capacity leapt to a quarter-century high in 1995, rising by 4.3%, according to new Federal Reserve data. The boom was led by investment in autos and parts (up 5.5%), industrial machinery and equipment (up 11.6%) and—no news here—computer and office equipment (up 26.9%).

Contrarian alert

For the scrapbook of contrary opinion: a Clinton administration economist opines on the prospects for price inflation:

Wall Street twister

The stock market is just as overwhelming as it is overvalued, and we are almost as awestruck as we are bearish. We are very bearish, of course (no more so than two weeks ago), but our purpose in this issue is to put astonishing market facts in the perspective of what formerly stood as remarkable or even unprecedented market facts....

Hail to the bear

The Russian stock market—up 50% in the past two months—seems as impervious to political risk as the American market is to any risk.

Beating the bull

“Human nature is interesting,” a fictional character in a Las Vegas casino is caused to observe. “People think they’re playing it safe when they’re making big, fundamental mistakes.” It may be no coincidence that the character sounds like the man who created him. John C. Boland, of Baltimore, writes mysteries at the rate of 500 words a day, seven days a week (“and I count the words, too”). Simultaneously, with the stock-picking portion of his brain, he manages a small, high-earning hedge fund....

Thighs, breasts, loans

Boston Chicken isn’t the only investor-owned poultry enterprise with an interest in spread lending. Linda’s Flame Roasted Chicken, a loss-making, five-restaurant New Jersey chain (three are owned, two are franchised), has refashioned a part of its Cranford, N.J., headquarters into a loan production center, the American Banker reported...

Transpacific even keel

Biggest central-banking development of the past fortnight was a May 15 bulletin from Tokyo. In effect, the Bank of Japan and the Ministry of Finance jointly and discreetly suggested, there will be no news: Monetary policy will continue accommodative in the extreme. Future tightening measures, always known to be inevitable, are no longer deemed imminent...

May 10, 1996, Vol. 14, No. 09

Speculation displaces baseball

We write late on the night of a red-letter day: On May 7, a New York Stock Exchange seat was sold for $1.45 million, more than the previous record high of $1.25 million set on February 5 and matched on March 8. The February 5 price had been the highest paid for a seat since the $1.15 million record set on Sept. 21, 1987, four weeks before the October 19 panic.

Upstaging Treasurys

[A] quasi-governmental agency created in 1987 to recapitalize the leaking Federal Savings & Loan Insurance Corp., may or may not default on $9 billion of debt; the risk is clear and present, but reasonable readers of the same newspaper stories might disagree on how to handicap it. In the federal agency bond market, however, there is something like unanimity...

Mortgage 'stocks'

The 1996 bear market has mowed down Treasury-bond prices. It has cut an even wider swath through mortgage parts. By mortgage parts we mean the securities derived from pools of everyday home mortgages: floaters, inverse floaters and targeted amortization classes, among others, securities that sometimes, at the bottom of market cycles, make surprise, dramatic appearances on "60 Minutes." Known generically as mortgage derivatives, they are characterized affectionately by a Kansas City reader of ours as "options with coupons."

No strangled cries

In what must be a postwar cyclical first, a violent deceleration in the rate of Federal Reserve credit creation has failed to call attention to itself, much less to provoke street demonstrations against the Federal Reserve Board.

Levitation 101

In the past two years, a University of Texas investment fund has averaged a 22% rate of return by working from the top down, staying fully invested, ignoring the art of market timing and trying (successfully, as things have turned out) to beat the Standard & Poor's 500 index. The portfolio managers are M.B.A. candidates.

Pick 'em

Two companies in more or less the same business ballpark share approximately the same stock-market capitalization: about three-quarters of a billion dollars. What the companies don't come close to sharing are other key financial variables: revenues, balance-sheet size or stock-price trajectories, to name three. Also, they do not share success. One stock goes up, the other doesn't...

Asia resurgent

"Exports of PVC (polyvinyl chloride) have been on the sharp rise since the outset of this year...," reports the May 6 Korea Economic Weekly in a bulletin calculated to hearten commodity bulls...

Dream boats

"In almost a perverse way," the May 3 Dean Witter Money and Bond Market Comments sets forth, "an argument could be made to suggest monetary policy is contributing to the squeeze in the gasoline markets..."

April 26, 1996, Vol. 14, No. 08

'D' is for strength

When the finance ministers and central bankers of the world's top industrial nations served notice Monday that the 1994 Mexican bailout would most likely not be repeated--henceforth, international capitalists would be expected to act the part of capitalists, even to the point of absorbing a loss--Mexico itself seemed above financial suspicion.

The greatest deficit

Paradoxically, borrowed money finances the bond market to a greater extent than it does the stock market. Bonds may be the more dignified asset, but they are also the more leveraged....

Discount broker

ED&F Man, the British commodity broker that traces its origins back to 1783 (the year the American rebellion came to such a bad end), only got around to going public in 1994. To judge by its current stock-market valuation--less than eight times earnings along with a dividend yield of 6%--the news is still a Man family secret. A commodity-minded reader of ours called to let us in on it.

Have to have it

"Japanese feed-millers need to buy Iowa corn no matter what the cost, a visiting group of Japanese millers said on a visit to Iowa." So reported The Des Moines Register on Sunday, only 48 hours after the U.S. Agriculture Department disclosed that there are about as many cattle eating regularly in the United States as there were a year ago, the rally in feed prices notwithstanding....

BZW warrants

What is the appropriate option for the risk-averse commodity speculator (if that is not a contradiction in terms)?

Blowing smoke

A subsidiary of a subsidiary of the Brooke Group, of which Bennett S. LeBow is chairman and chief executive officer, borrowed $20 million in Russia last fall for one year at an effective interest rate of 35%. The calculation of this startling cost includes a $4,044,000 payment to a "third party" who, according to the newly released Brooke 10-K, "arranged" the transaction. (Suggestion to Affinity Technology: Install an automatic loan machine in Moscow.)

Princes of money

At this week's G-10 meeting in Washington, according to Bloomberg, the heads of the central banks of Germany (President Hans Tietmeyer) and the United States (the one and only) exchanged bouquets. "Tietineyer praised Greenspan as 'the central banker of the decade,'" the bulletin said. "Greenspan called Tietmeyer 'one of the most extraordinary public figures the 20th century has ever seen."


Consumer installment debt outdid itself in the fourth quarter, going where it has apparently never been before. Consumers incurred an extra 84.6 cents of installment debt for every additional dollar they spent...

April 12, 1996, Vol. 14, No. 07

Limousines line Wall Street

Risks characterize every kind of market. The difference in a bull market is that they typically do not seem very risky. Transportation risk, for example--airborne, land-based or electronic--is a timely case in point.

Next up: beans

Two issues ago, Grant's sounded a cautionary note on the grain markets. A truism of any commodity is that rising prices constitute an incentive to produce more and consume less. What wheat and corn had gained in momentum and public celebrity, we said, they had given up in value and equilibrium. In short--another truism--the bull markets were bringing closer the inevitable, succeeding bear markets. Now we sound another kind of cautionary note:

Japanese lift-off

In March, the Bank of Japan worked overtime to advance the cause of world reflation. Aiming for one-half of one percent overnight money market interest rates, it expanded its assets at the typographical-error-look-alike rate of almost 19%, year-over-year. To repeat: 1/2 of 1%; almost 19%

16% off sale

Fleming Natural Resources Fund is a London-listed, commodity-oriented, closed-end equity fund that trades at a 16% discount to net asset value. Unlike BZW Commodity Trust (Grant's, March 29), which actually owns commodities, Fleming invests in the shares of the companies that gather them up.

Inefficient markets

The guiding theme of the Grant's conference was that active management is better than passive management or no management at all. In particular cases, the conference-goers heard, improved real estate beats unimproved real estate and managed equity portfolios outperform stock market indices.

Reform for keeps

Conference-day prize for the most contrary career decision went to Dan Cloud, a speaker of Chinese and one-time analyst of the Chinese stock market who, in 1992, decamped from China to seek his fortune in post-Communist Russia. Nowadays, as the portfolio manager of the Firebird Fund, which has $25 million of private capital invested in Russian equities ($10 million less than the cost of the stocks, incidentally), he is a part-time resident of Moscow. He addressed the question of whether he wished he had never left Beijing.

Bond unfriendly

A note on the most stunning data we publish: holdings of Treasurys by the New York Fed in custody for foreign central banks. The rise in the volume of these securities has become a wonder.

March 29, 1996, Vol. 14, No. 06

A kind word for solvency

Newspaper reports on the new General Accounting Office critique of the Federal Reserve System described a "surplus account that 'could be safely reduced or returned to the Treasury." The shadowy fund to which the document refers was none other than the Fed's retained earnings.

Bottom of the shoe

Gum Tech International, Phoenixbased manufacturer, distributor and marketer of "Love Gum," "Buzz Gum" and "Repose," brands designed to alleviate marital lassitude, general lassitude and "certain" premenstrual symptoms, respectively, proposes to go public in a $7.2 million offering that will test the already bulging frontiers of American speculation

Latent energy

Commodities on sale

The BZW Commodities Trust is a closed-end fund on the London Stock Exchange that changes hands for 81 cents on the dollar--or, more exactly, 81 pence on the pound. It has been trading at a discount for 12 long months, at least.

Burning book

Barnes & Noble made no enemies on Wall Street by disclosing a $123.8 million pretax write-down for the just-ended fiscal year: Its stock price rallied 2-7/8 in the face of it.

Crass commercialism

The Age of Regret in American commercial real estate, spanning approximately 1991 to 1994, was marked by the liquidation of debt. In the boom years, 1988-89, developers borrowed at annual rates of $40 billion or $50 billion; in the slump, they repaid mortgage indebtedness (or walked away from it) at annual rates ranging from $10 billion to $48 billion. Now they're borrowing again...

Stuff ascendant

Inflation may or may not be on the rebound--the commodity bulls at Goldman happen to be agnostic on the subject (as, indeed, are we). What the divergence does point up is that over a 12-month period (see the table at the bottom of page 6), tangible assets have outperformed financial ones.

March 15, 1996, Vol. 14, No. 05

'No recession. No inflation. No voodoo.'

"Thank God for Alan Greenspan," said the first sentence of the second paragraph of an article in the March 18 Fortune magazine that proceeded, after that thanksgiving, to present a truly flattering portrait of the newly reappointed chairman of the Federal Reserve Board. Fortune's interpretation of Greenspan's monetary policy was rendered in the three short sentences reprinted at the top of this page.

'Quest for growth'

The March/April issue of Perspectives, a publication written for the prosperous clientele of the United States Trust Co., contains a remarkable investment manifesto. Its thesis: no price is necessarily too high to pay for the shares of a good growth stock. Reading these words, a seasoned observer may feel his eyeballs grow a size....

Paper tigers

Flow-of-funds data released by the Federal Reserve Board last Friday confirm the public's attitude toward financial assets. It loves them. Measured as a percentage of household assets, the value of stocks, bonds and cash leapt in 1995 as the value of real estate, autos and soybeans (if any) declined.

Chicken a la debt

Citicorp has made a brilliant recovery, but it still doesn't trade at the standard 1996 quality-growth multiple, 50 times earnings. One quasi-financial institution that does is a noted purveyor of home cooking and franchise credit, Boston Chicken.

Next stop, Germany?

As the standard monetary indicators continue to droop, the financial ones go from strength to strength. Thus, although the Fed has let the rate of expansion of the adjusted monetary base slip to a bare 2% annual rate, the rate of deposit turnover at U.S. banks (especially the caffeinated ones in New York) continues to show handsome year-over-year gains.

March 1, 1996, Vol. 14, No. 04

Every man a Peter Lynch

In the Nixon years, it was said triumphantly that only a Republican could have opened China. Perhaps the Clinton administration believes that only a Democrat can open Wall Street. On February 17, The New York Times disclosed that a federal advisory panel will recommend an epochal change in Social Security policy: investing billions of dollars of payroll taxes in the stock market.

Bonds vs. banks

Global short-term interest rates are the lowest in a quarter-century. Commodity prices are rising, certain presidential candidates are openly advocating a rate of economic growth in excess of slow, and the surviving employees of IBM Corp. are gratefully anticipating the receipt of an 8% raise-cum-bonus from Louis V. Gerstner Jr., the man who hasn't fired them yet. No wonder the overvalued Treasury market has fallen apart.


The year is 1996, but Deb Shops is still unvirtual. It is a 297-unit retail chain that sells its sportswear, dresses, coats, lingerie, accessories and shoes to girls and young women who must get in a car and drive to the mall to buy them. Nowadays, as a rule, the clientele does not get in a car and drive to the mall, because it is still figuratively walking a picket line in a multiyear strike against attire not cut from denim. Perhaps the Buchanan administration will pass a law to restore the Eisenhower-era American custom of wearing real clothes.

Tale of two rates

The U.S. federal funds rate only tends to weaken, yen-denominated money-market rates only tend to strengthen. The collapse in oil inventories, by lending weight to the idea that the world is veering off from disinflation into growth or inflation (or some combination of the two), may suggest that the economic fundamentals support Japan. However...

February 16, 1996, Vol. 14, No. 03

Leap from the cellar

Japan, which created the world's biggest bubble and then produced the world's smallest interest rates, now is accumulating one of the world's greatest debts.

Yield to sure thing

Free basis points in the municipal bond market, like dead letters at the Post Office, often go unclaimed. For example, extra yield goes begging in tax-exempt securities collateralized by Treasurys....

Not in hibernation

"Our approach to investing differs from that of most money managers," Seth A. Klarman, president of The Baupost Group, Cambridge, Mass., wrote in his annual 1995 investment letter. "To us, investing is not a sport, a relative-performance derby where money managers are the jockeys and stocks are the horses. Investing is not a test of one's hormone level or (newly discovered) adventuresome gene....

Overpriced T-bills

Jonathan Goodman, managing partner of Concentric Capital, Ryebrook, N.Y., is a man in search of an explanation: Why is the nearby Treasury bill contract so richly priced? Specifically, he asks, why is the bill that's due on June 27 priced to yield 4.7% or thereabouts?

Tech wreck II

The collapse in computer-memory orders, disclosed after the close of trading Monday in the shape of a decade-low reading in the semiconductor book-to-bill ratio, was as widely doubted on Wall Street as the rising price of gold had been....

Virtual money growth

The Federal Reserve is monetizing so little debt that the year-over-year rate of growth in its balance sheet amounts to less than 2%. (For those whose Wall Street experience began after 1975, the graph on these pages resembles what was known as a bear market.)

February 2, 1996, Vol. 14, No. 02

Dawn of the weird currencies

If the European establishment gets its way, the poetically named Euro may constitute legal tender on the Continent by the turn of the century. If another set of politicians succeeds, the renminbi, lawful currency of mainland China, may presently monopolize the function of money in the one true China, a nation defined by Beijing to include--besides the mainland--Hong Kong, Macao, Taiwan and Tibet, as well as the uninhabited Spratly Islands.

Very hot agency

CKS Group of Cupertino, Calif., is an American advertising agency valued at what used to be described as a Japanese multiple. However, 325 times trailing earnings is, today, an American multiple. Approximately 113 times--the estimated valuation on the first section of the Tokyo Stock Exchange--is a Japanese multiple.

Dialing for dollars

In 1990, when WinStar Communications was incorporated as a holding company for a marketer and distributor of sports apparel, the American credit environment was vexed and contractional. In 1992, when the holding company branched out into personal-care and beauty products, it was little better. However, by late 1992, when WinStar made a strategic decision to enter the telecommunications industry, lenders and borrowers were regaining their courage. Now look at them.

French banks: 'Oui'

If Helmut Kohl, the German chancellor, gets his way, European monetary union--the plan to create a new, pancontinental currency called the Euro, and a new central bank to go with it--will proceed on the dot of 1999. If the former French president Valerie Giscard d'Estaing has his way, it won't.

Record inflows disappoint

Since August, despite mammoth mutual-fund purchases, the Investor's Business Daily Mutual Fund Index has lagged behind the rise in the broad market.

The market dissents

The recent 10-point (almost 25%) rally in the shares of First USA introduces an element of cognitive dissonance into the analysis of credit-card companies. On the one hand, the stock market is confident; on the other, some of the news is poor.

The Bank of Japan disrobes

Whatever one's verdict on the Federal Reserve's monetary policy (the FOMC had taken no action when we went to bed Tuesday morning), there can be no verdict on its stock; it doesn't trade.

January 19, 1996, Vol. 14, No. 01

Collapse of an empty suit.

No bond bull could have written a more inspirational script for Barneys than Barneys did for itself: A hugely overextended retailer files for bankruptcy--not during business hours but at 10:56 p.m., as if to suggest a state of national economic emergency.

Credit history

A penniless--correction, formerly penniless--18-year-old illegal immigrant from the United Kingdom learned a little something about America last Friday.

Old maid finance

This year marks the 25th anniversary of the nameless international monetary standard that succeeded the Bretton Woods system in 1971. The fact that the system lacks a name is no accident. It also lacks a structure, or, as the retailers say, a concept. "...

Non-recession recession

"I can tell you I think the cycle is getting close to a peak," related David Gladstone, chairman of Allied Capital Corp., on Tuesday. Gladstone meant the credit cycle, for which Allied has a front-row seat.

Bank under surveillance

"Silicon Valley Bank lived by the high-tech industry, but it nearly died by the real estate industry," led off a laudatory piece in the American Banker last week. . .

Earnings leakage

The brilliant run of growth in corporate profits in recent years does not settle the question of where the earnings went. Some were paid out as dividends, of course. But a much larger share was written off as . . .

Money sits down

The monetary world returned from vacation in much the same lead-footed spirit in which it left in December. Monetary expansion in the United States continues to crawl. . . .

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