King in the land of the blind
What Procter & Gamble is to soap, the U.S. dollar is to money, only more so. It is the top monetary brand name. Rushing into dollars, the world has been streaming out of yen, won, reals, pesos (all kinds), gold bullion and Canadian dollars, among other assorted discount brands.
The general partner of a West Coast hedge fund winced when he heard that an investor was withdrawing his money, but he shuddered when he heard the reason why. Although a single story proves nothing, the one that follows may suggest a working hypothesis. What it suggests to us is that there is more leverage embedded in the stock market than can be easily weighed or counted. . . .
For that certain hard-to-please someone this Christmas, why not a new short-sale idea? We have three. The thread that connects them is the stock-market centeredness of their businesses or valuations or both.
Even the most glaring financial excess can go undetected, as the Koreadebacle illustrates. A popular investment asset does not become any less beloved if the market in which it is traded becomes manic—rather the opposite. Certainly, commercial real estate is no less prized today because of a record-smashing volume of issuance of securities on behalf of the real estate investment trusts in 1997.
“Someone may come in wearing shorts and long hair, and you might think he’s homeless, and then he’ll spend $10,000 or $20,000.”
“International investors said they likely won’t buy any of the $10 billion worth of bonds South Korea plans to sell in the coming year,” Bloomberg reported Monday, “no matter what yield premium the government offers on the debt.”
It’s at the peak or the depths of a market that the phrase “no matter what” seems to materialize. No sane person would want to buy a Korean stock or bond, regardless of price, the market recently seemed to think, because the prices were falling.
We revisit Korea with a heavy heart, as we turned bullish on it one year ago.. . .
The Bank of Japan has at last begun to panic, on the evidence of its November 30 balance sheet: its assets exploded, with growth at annual rates of 70.7% over the past three months, 31.4% over the past six months and 17.5% measured year over year. Notable in the summary details on page 6 is a surge in loans (mostly to banks), to ¥4.7 trillion, up from ¥834 billion on October 31. The numbers, although not unexpected, are dramatic. . . .
“Of course,” an investment executive at a big Japanese life insurance company told the Nikkei Weekly a while ago, “we are not happy buying government bonds at a high price. Interest rates are negligible and downward risk is huge. Nevertheless, bonds are better than putting money into stocks.”
We notice that the executive mentioned price only in the context of regretting it. Bonds are better than stocks, he seemed to be saying, because bonds go up, whereas stocks—as has been so clearly demonstrated —don’t. The nearly invisible yield on a JGB is the price one pays for safety, of which, he seems to suggest, one can never get enough.
Not every fixed-income investor is booked on the transcontinental flight to safety (about which so much has been written since the eruption of the credit troubles in Asia in late October). A sizable contingent of savers still gropes for basis points in the boom-time fashion, accepting greater than equity-type risks for less than equity-type returns.
They will be disappointed one day, we know. But—to judge by the successful IPO last week of Laser Mortgage Management— the day hasn’t come yet.
Of deflation itself, purely defined, there is next to none on planet Earth. Of deflationary symptoms, however, there are more and more. Prices, if not price levels, are turning lower in many different countries and markets—in the Canadian coal market, to name one (and in the U.S. wholesale used-car market, to pick another).
Although a whiff of deflation is said to be the creditor’s own Chanel No. 5, the truth of the matter is more complex. . . .
Philippines for sale & Without the cows
The president, the finance secretary, the trade and industry secretary and the central bank governor of the Republic of the Philippines all dropped into New York last week to give unbiased testimony about the state of their nation’s economy and financial system (to a man, they pronounced it fit). By coincidence, Ken Shirley of this staff was off in Manila investigating the situation for Grant’s.
Jollibee, the Philippines’ top food retailer, is a “100%-owned Filipino corporation,” as the annual report proudly notes. Under the law, it can be nothing less: Foreigners are prohibited from investing in local retail enterprises. However. . .
Jollibee, the Philippines’ top food retailer, is a “100%-owned Filipino corporation,” as the annual report proudly notes. Under the law, it can be nothing less: Foreigners are prohibited from investing in local retail enterprises...
The collapse of the shares of Manah S.A.—down 50% since August—is the kind of disaster that comes with its own ready-made opportunity. A leading Brazilian fertilizer company, Manah is trading today at little more than three times estimated 1997 earnings.
Merry Christmas, Detroit!
Kia Corp., the insolvent Korean automaker, constitutes a one-enterprise case study in the dynamics of a modern-day deflation. . . .
Bonfire of the currencies
More and more foreign companies are raising equity capital in the United States these days (though few with the éclat of France Telecom, which staged a fair on Broad Street last month on the occasion of its Big Board listing, complete with can-can dancers; hearing the strains of Jacques Offenbach from our office windows, we almost wished we were bullish). Expressed as a percentage of dollar volume, foreign IPOs comprised 23.3% of total IPO volume in the year through October....
General Electric, as big as the Great Lakes, earns upwards of $8 billion a year from continuing operations and generates $87 billion a year in revenues. “Arguably the world’s most successful company,” to quote Fortune. . . .
We turn to GE because the world has turned against it without Wall Street seeming to notice.
“I have been investing in Asia for eight years,” Ayer said, “and value investing as you know it has not been a good way to make money in Asia....The $64 million question is whether value investors will now be able to make money in Asia.”
Michael Clinger—THE Michael Clinger—was not at his desk the other day to receive his mail, three blank checks and a cheery letter of solicitation from a consumer credit subsidiary of First Chicago NBD Corp. He left the country some years ago.
The market is indifferent to many things. For example, it is increasingly indifferent as between holding an ounce of gold and an ounce of scrap metal . . .Yet we are still bullish—resolutely, if even more humbly.
Since 1995, the long-dated Treasury bond has twice threatened the 6% barrier, yet Treasury-bill yields have fallen nowhere close to 3%. Mirroring the federal funds rate, the three-month bill rate was quoted around 3% in 1992 and into early 1993. Its yield today (expressed in bond-equivalent form) is 5.30%.
The bill rate still mirrors the funds rate, of course, but the rest of the yield curve is the market’s servant. And it pleases the market to make things flat
Case of the missing defaults
Over the course of a dozen years, 1985-96, the default rate on U.S. high-yield bonds averaged approximately 4.6%. After charitably eliminating the financial plague years of 1990 and 1991 from the calculation, notes Wilbur L. Ross Jr., partner at Rothschild Inc., defaults averaged 3.5%. Yet, the 1996 default rate was a mere 1.6%. This brilliant performance --so harmonious with the theory of the New Paradigm--begs the questions: Is the world so much more solvent than it used to be? Or, is the expansion phase of the credit cycle even more manic than the old-paradigm contingent believes it to be?
Robert M. Bleiberg, the longtime editor of Barron's who died in New York on Tuesday, at the age of 73, was a bear of a man. He stood 6 feet 1 inch tall and weighed more than 200 pounds. His voice boomed, and the effect of the profanity that sometimes issued from his mouth was all the more striking because of his flawless diction. . . .
"What happens when sales per square foot tumble, yet retail square footage skyrockets?" asks the front page of the October 30 edition of WWD. "Analysts and observers say retailers across the nation soon will find out. And the results may be ugly." . . .
In a long-distance telephone conversation with our value-minded associate Ken Shirley, a portfolio manager reflected last week on the low estate of the Japanese over-the-counter market. ". . . [T]here is simply no appetite for small-cap Japan," . . .
Newspapers far and wide awarded their own Investment Medals of Honor after the record-breaking up day that followed the record-breaking (at least in Dow points) down day. Notably, the heroism that the editors saw fit to recognize was exclusively on the long side. One such sample, this from the October 29 Atlanta Journal Constitution, follows:
Greenwich, Conn., headquarters of the Eastern U.S. hedge fund industry, is setting a bull-market peak with the construction of a $7.75 million speculative house within the town limits. The most notable feature of this enterprise (besides the price) is that the developer has no particular buyer in mind. He is highly confident (to steal a phrase from the 1980s) that Wall Street will send him one.
Among the "seven real pros" on whom The Wall Street Journal last Friday conferred the Investment Medal of Honor for bravery in the face of enemy fire was Lawrence R. Ricciardi, chief financial officer of IBM. It was Ricciardi, without regard for his own safety and thinking only of the price of his employer's stock, who issued a 64-word press release during an attack of the bears at the New York Stock Exchange the previous Tuesday morning. It will be remembered that the Dow Jones Industrial Average had fallen by 7% on Monday of that week.
In our recap of Lewis Lehrman's speech before the Grant's Investment Conference, the dynamics of the natural gas market were misquoted.
In his capacity as chairman of a commission to make the Social Security System solvent, Alan Greenspan was instrumental in causing the level of employment taxes to rise. That was in the early 1980s. The same Alan Greenspan, in his capacity as chairman of the Federal Reserve System, has been instrumental throughout the 1990s in causing the level of stock prices to rise.
Buy a bar, a brick or a share
It's not just the currencies of Asia that have taken sick (the South Korean won most recently). Credit in the region is also unwell. As many as a quarter of all mainland Chinese ban loans may now be nonperforming--the equivalent of $200 billion's worth
Mr. X (let's call him) buys Treasury bills
The love affair between a certain gentleman and the stock market has been long-running and hugely profitable. He has managed money since Dwight D. Eisenhower was in the White House and blue-chip stocks yielded more than the long-dated Treasury bond. He has generated vast, above-market returns for himself and his clients--among the highest ever recorded, in fact--for decades on end. He has never wavered in his belief in U.S. equities, whatever the economic, political, interest-rate or valuation setting.
And now this great stock picker is turning bearish. It is a 40-year first. "For him to take this position," says a man who knows him well, "you could have knocked me over."
The bullish case for the inflation twins of the 1970s has little, if anything, to do with inflation, the Grant's conference-goers heard. In 1997, the best friends of gold and oil are supply and demand.
In the residential mortgage market in 1997, the way to go upscale is to go downscale. Conversely, the way to go downscale is to go upscale. Lending to the speculative grade American home buyer is today regarded as one of the few profitable, legal sub markets left in consumer credit.
Excellent value adventure
Touring distant places on the Bloomberg is easy even if it isn't broadening, and it took Ken Shirley of this staff less than 24 hours to conduct a statistical inspection of five storm-damaged Asian stock markets. What he found were investments cheap by any measure.
Six out of 10 companies report that their wage costs are going up like a rocket. This finding, in fact, is not the result of a scientific survey. The six are six, and the 10 are 10, exactly.
We know about this little universe of companies because John Britton, who graduated from a job at Grant's to a job on Wall Street, recently paid it a visit. . . .
The euro won a provisional endorsement the other day from an unexpected quarter. If the new money rolls off the presses as planned by Jan. 1,1999, stated the Philippine central bank, dollars or yen might be sold to make room in the national reserve portfolio. At present, disclosed Bangko Sentral, "only a small portion" of the Philippines' monetary reserves is denominated in European currencies.
Closer to home, another new monetary medium is gaining currency. . .
The valuation of equities and the value of security analysis will both be put to the test next week when Intel discloses its third quarter results. If bad results are met with open arms (as they were this week with Motorola), there will be as much soul-searching as short covering.
Now on display in Room 68 of the British Museum is the unplanted seed of what might have been the world's greatest fortune: 1,750 gold and silver coins that have lain fallow-yielding nothing except a numismatic glow-for some 300 years.
"We are bearish on Vornado" was the unequivocal, somewhat premature judgment in the July 4 issue of Grant's. At the time, the Vornado Realty Trust changed hands at $72 a share, a price to yield an inadequate 3.5%. Today, the self same Vornado is quoted at $89 a share (having leapt by $15 in a single day's trading last month), a price to yield a more audaciously inadequate 2.9%.
Nowadays, real estate investment trusts are even hotter than real estate.
There is much to deplore in the mayhem of Asian finance, yet there is also much to celebrate. At last the long-thwarted American disciples of Benjamin Graham and David Dodd have a bear market to call their own, even if the values so violently erupting are denominated in pesos (in the case of Universal Rightfield) or Singapore dollars (in the case of Robinson & Co.) or rupees (e.g., Crompton Greaves) or won (e.g., Hyundai Fire & Marine) or baht (e.g., I.C.C. International). There is room for gratitude even if a foreign investor must-as in the cases of India and South Korea jump through hoops to buy local shares at local prices or settle for the higher-priced global depository receipts (GDRs).
Even with the resources of the Grant's Market Timing Dept. at our disposal, we doubt if we will anticipate the bottom of this speculative mine shaft.
"DLJ's Tenth Annual Growth Stock Conference. . .was an event," writes a not-impartial investment strategist for Donaldson, Lufkin & Jenrette, the sponsor.
With last week's 25-basis point boost in the Canadian bank rate (and with more such moves promised), the ultra-low-interest-rate club may soon be one member short. . .
Bull market quality control
So bright is the cyclical sunshine that investors in junk bonds can hardly see to read the prospectuses. However, according to Wilbur L. Ross Jr., all that is going to change. His credit forecast is for sunshine giving way to clouds, snow, sleet, hail and freezing rain, with lower prices and the chance of an earthquake.
For those in search of an explanation for the fact that the Japanese benchmark government bond yields less than 2%, we suggest a look in the rearview mirror.
Yield-starved investors last week clamored for shares in the initial public offering of the Manalta Coal Income Trust, the latest and largest and hottest of the income-producing royalty trusts to tumble off the assembly lines of the Canadian investment banks. Many of the hungry were turned away.
Minorco is a highly diversified, semi stateless and largely invisible commodity producer. Domiciled in Luxembourg and headquartered in London, it answers to a mainly South African ownership. With mining operations from Ireland to Chile, it is everywhere and--as it has so often seemed to its public investors--nowhere.
In a great and lusty bull market, not even $1 billion is everybody's idea of big money, money so big that it shouldn't be lost, scorned or given away. Thus, news of the astonishing inflation of the value of the Bankers Trust-Alex. Brown merger rated only one brief paragraph in the September 3 Wall Street Journal. . .
The boom of the 1990s brings to three the number of certified new eras in this, the American century. Predecessors in prosperity—perpetual prosperity, as so many believed at the time—were the 1920s and the 1960s. High growth, low inflation, rising stock prices and contagious optimism characterized both of those decades, just as they have the 1990s. However, as the 1920s were followed by the 1930s (a deflationary decade with falling interest rates) and the 1960s by the 1970s (an inflationary decade with rising interest rates), the 2000s may yet disappoint somebody—the bulls, perhaps, for a change.
Owing in part to the net liquidation of equities over the past year, the stock market is making new highs. Yet despite the steady reduction of federal borrowing over the past four years, bond yields are far from their lows. Do the investors in senior securities lack in imagination?
Money leaves Wall Street cold
Members of the Shadow Open Market Committee, monetary-policy sidewalk superintendents since 1973, admitted last month that they could find nothing wrong with Federal Reserve policy. The works of Alan Greenspan had rendered them mute. There was, indeed, nothing to say, and they therefore called off the semiannual meeting they had scheduled for September. It was the first such cancellation on record.
If you ever have the opportunity to relive Jan. 15, 1991, please don’t forget to buy every available share of Clear Channel Communications, today’s biggest freestanding, investor- owned radio-broadcasting company.
The American Banker, pretending to be too young to remember the 1980s, reported Monday on a milestone of the present-day leveraged lending market: “High-yield bond issuers are increasingly embracing a newfangled security in their quest for capital: ‘pay-in-kind’ preferred stock.”
“Newfangled?” The PIK was as much an institution of the last cycle as Michael Milken or the deferred interest junior subordinated debenture.
After producing an epochal overvalued bull market in the 1980s, Japan brought forth a seminal overvalued bear market in the 1990s. Even though it is down by 52% from the peak, the Nikkei 225 index is quoted today at the equivalent of 84.8 times earnings. Multiples like that seemed high enough in boom times; they do not seem much lower now in the slough of despond. Not even a 2% government bond yield can fully explain them.
Not such a perfect new era
Interest rates are going up in Switzerland, of all places: Since July 7, the yield on the Swiss 41/2s of 2007 has climbed to 3.55% from 3.23%, a striking reversal. Like Japan, Switzerland, with its contracting credit, unsalable real estate and chronic joblessness, has been a modern deflation workshop. However, all bad things (for creditors, all good things) must come to an end, as Hans Meyer, chairman of the Swiss National Bank, affirmed last week.
Inflation draws nigh: Buy bonds
The people who explain financial events for a living are virtually unanimous about the recent bond-market troubles. The cause is an excess of growth, they tell the newspapers. This regrettable development points to a rise in the inflation rate, which presages a tightening of monetary policy and thus a rise in bond yields.
They may have a point about yields, at that. . . .
A combined 38 years in the money management business failed to prepare the principals of Van Sant & Mewshaw Investment Counsellors, Lutherville, Md., for the sights and sounds of the 1997 stock market. They say they are thunderstruck.
Besides being extravagant, the greatbull market is evenhanded. It has smiled on Mail-Well, of Englewood (Colo.) just as it has on Microsoft. The difference between the two companies is that Mail-Well is in the envelope business.
The problem: common stock affordability—prices are moving out of range of the average investor.
The solution: stock splits.
The authority: Sanford C. Bernstein.
“[S]plits help performance,” the author of a new Bernstein report, Michael Sommer, tells the American Banker. With the average stock price all the way up to $46.70 (up from the “historical norm” of $40.50), “there’s a pent-up demand for splitting,” he says. The Banker’s story, which appeared on Monday, continues. . .
A second quarter leap in per-share net income accompanied by the announcement of a stock split sent the Kellogg Co. bulls into raptures on August 1: the stock climbed by 59/16 a share, to close at 977/16, an all-time high. As we ourselves are non-rapturous toward Kellogg (Grant’s, July 18), we conducted a search of the numbers to see what we’d missed. . . .
New this cycle from the American financial services industry: the 90% margin loan and the 125% mortgage loan. Never before, on the authority of Heather Timmons of the American Banker, has a lender knowingly written an initial mortgage for a value greater than that of the house being hypothecated. And rarely, we think, at least since the advent of modern Federal Reserve regulation, has a margin loan been available in an amount equivalent to 90% of the value of the underlying collateral. We examine these wonders in turn.
As the nation’s bond dealers were setting borrowing records this summer (the better to carry positions, hedged or otherwise, in government securities), the nation’s banks were hoovering up money with which to fund their busy balance sheets.
The deutschemark, resembling a tobacco stock or a gold brick, is setting 71/2-year lows against the dollar. “The dollar’s hitting on all cylinders.” a New York-based currency salesman perkily told the International Herald Tribune the other day. “The U.S. fundamentals are stellar, while the expectation of a weak euro is an anchor around the mark’s neck.”
Two renowned moneymakers head separate public companies anchored by insurance businesses. One of the two capitalists is bullish on the stock market, the other is bearish. One of the two stocks is an icon, the other an also-ran.
The stock market parable of the shoeshine boy—in which Joseph P. Kennedy cannily turns bearish on the eve of the Crash because a bootblack has the effrontery to give him a tip, as if that imbecile knew, or could know, anything at all about the subject at hand—has brought only grief to Kennedy’s speculative descendants, the so-called sophisticates of the 1990s.
A triumph of American ingenuity is coming to market: $184 million of securities backed by overdue credit- card loans. The collateral is the residue of consumer credit: loans written down to zero by the originating lenders.
The trouble with prosperity, as we were saying, is that it can’t stand up to speculation. The infectious idea of a New Era makes lenders and borrowers (and investors, too) forget themselves. In their zeal, they compress credit spreads and bid up stock prices to such an extreme degree that the return of the unhappy Old Era is virtually guaranteed.
It’s a bird, it’s a plane. . .
In a world so grudging of nominal growth as this one, people learn to make adjustments. Thus, corporations buy back their stock and nations devalue their currencies, both in the interest of making a given ration of income stretch farther.
For a manic spell in late 1989, the Spain Fund, a closed-end investment trust listed on the New York Stock Exchange, traded at more than a 100% premium to the value of its underlying assets. It did not achieve this bizarre distinction by itself. Nomura Securities, lately disgraced but then the master of all it surveyed, bodily lifted it.
In the house of the bull market, there are many rooms, and in these rooms, there are many treasures. There is the Nasdaq Composite Index,for example, at approximately 50 times trailing net income, Coca-Cola Enterprises, at 78 times, and At Home, the new PC/Internet interface enterprise, at 1,991 times revenues (repeat: 1,991; repeat: revenues). And there is Kellogg Co., which is to the American breakfast what Moet-Hennessy is to the French dinner, at 30 times earnings (repeat: earnings).
The bear market in gold is the mirror image of the bull market in credit. To define terms, and to make a clean breast of prejudices, we hereby define credit as the promise to pay money and gold as money itself (or an original, now mature, brand of money).
In a putatively perfect world, asks the designer of the accompanying graph, Gert von der Linde, why are real interest rates so high? What entitles the holders of long-dated Treasurys to almost 5% returns (after inflation but—regrettably—before tax)?
Independence from cycles?
Wachovia Corp.’s acquisition of Central Fidelity Banks last month for the equivalent of three times book value (a very fancy valuation) raises a philosophical dilemma. Is there free will on Wall Street? More particularly, what is the range of choice available in the greatest bull market of all time?
An everyday inflation is a monetary phenomenon. A bull-market inflation—a rise in the prices of earning assets—is a financial phenomenon. To simplify, money makes the CPI go up; interest rates make the stock market go up.
New signs of the times: A junk-bond issue from a bankrupt company; another junk-bond issue from a development-stage company; billions of dollars of new federal-agency debt that offers little or no yield pickup vs. Treasury debt; and a boom in variable- rate annuities at the expense of the fixed-rate kind. Whether or not the business cycle is dead, the credit cycle would seem to be very much alive.
A few years ago, Albert H. Gordon, the former chairman of what used to be Kidder, Peabody & Co., reminisced about his 6 1/2 decades on Wall Street. No library research was necessary; Gordon, whose next birthday will be his 96th, had seen it all himself, starting with the bracing Coolidge boom.
“In the so-called good old days,” said Gordon about the 1920s, “we had virtually self-regulation in the securities business; that meant issues could be conceived and issued in 48 hours. We would write the prospectus one afternoon and that evening form the syndicate and make the offering the next morning—a far cry from today. . . .”
Nothing succeeds like stagnation
The rate of acquisition of U.S. Treasurys by foreign central banks—that acquisition, at least, that is measured by the Federal Reserve Bank of New York—has slowed dramatically in recent weeks.
The Americanization of valuation
In Europe, overnight money rates range from three-quarters of 1% in Switzerland to 3% in Germany and France to 613/16% in Italy. Although not so low in relation to the growth in European consumer prices, they are deeply discounted in relation to the growth in European stock prices. Certainly, there is nothing burdensome about a 3% guilder call rate as long as the Amsterdam index climbs.
What about the incongruous boom in consumer bankruptcy? a senior executive at Visa International was recently asked. As many as 1.5 million filings are expected this year (up from 1.1 million last year), the rising stock market and the falling unemployment rate notwithstanding.
The credit-card man replied that it doesn’t worry him, because recessions have been rendered obsolete. “You have to understand,” he explained to a friend (who, in turn, explained it to us), “that we are in a new economy.”
The S&P 500 and the GDP are joined by no law, treaty or regulation, and the two can keep company or not. Recently, of course, they have not, as the blue chips have veered off from the trend of GDP growth to establish a new record in what may politely be called overvaluation. In relation to the track of long-term, postwar growth in the national economy—7.37%, on average, from 1949 through 1996—the S&P 500 has never been higher.
Porsche AG, which figuratively was up on concrete blocks only a few years ago, has become the automobile maker to the bull market. In a startling symbolic resemblance to the Nasdaq Composite, the Porsche 911 Turbo can accelerate from zero to 60 in just 4.4 seconds, and it can reach a top speed of 180 miles per hour. Its price (if you have to ask) exceeds $100,000. At Anderson-Behel Porsche in San Jose, Calif., it is known as “the IPO car,” . . .
Mention of TVX Gold in the last issue of Grant’s prompted a call from a paid-up subscriber who asked if we had looked at the mining company’s recent convertible bond issue—the 5% gold linked convertible notes of March 28, 2002. We hadn’t, so we did.
The initial public offering of Peapod, a kind of virtual supermarket, and the proposed initial public offering of Coinstar, a pioneer in the loose change industry, together indicate a heating up of the IPO market, only months after it had seemed to go cold. Even when Americans become disillusioned nowadays, they don’t stay disillusioned. Returns to doubt in this market are uncompetitive.
The IPO business is, and always has been, cyclical. . . .
Gateway 2000, a direct marketer of personal computers, makes its home in North Sioux City, S.D., but has its heart on Wall Street. Bang-bang last month, if disclosed a 2-for-1 stock split, a new Big Board listing, and the repurchase of up to 10 million shares of its common. This financial light show was being conducted for the benefit of—who else?—the stockholders.
Two years ago, low interest rates, strong stock markets and high semiconductor prices combined to induce a wave of expansion by the world’s chip makers. Result: a cornucopia of computer memory but a bear market (even steeper than it might otherwise have been) in semiconductor prices.
Now . . .
Once more into the breach
Although we almost hate ourselves for starting to write this essay, we would hate ourselves even more for not writing it—if the gold price ever went up again. To those readers who find that they can’t stand the sight of the word “gold” on the printed page anymore (on this page or the one on which their brokerage-house account is printed), may we say that we understand completely and that the rest of the issue, which is very good, begins on page 2?
It was William McGarr, general partner of the McGarr Fund, who conceived the graph that, in the last issue, plotted the divergence between the prices of semiconductor-company stocks, on the one hand, and the earnings of the same companies, on the other. (If you remember, the stock prices were going up while the earnings were going down; McGarr said that he could hardly believe it. )
Why Americans don’t spend more of the wealth that Mr. Market has so generously bestowed on them is the mystery of the moment. “The wealth effect seems to be working at about half force,” Chris Vavares, economist at Macroeconomic Associates, St. Louis, mused to The Washington Post the other day.
The economics profession will be interested to know that the wealth effect is working at full force at U.S. Filter. . .
Investors who invest in emerging markets to escape the gravitational force of the S&P 500 may or may not succeed, notes a new report from Robert Fleming Securities, London. . . .
At 3-1/4%, Canadian money-market interest rates are lower than American rates (5-9/16%), British rates (6-3/8%) and even Singaporean rates (4%). Stunningly—could this be the same Canada, with the same salubrious year-round climate?—they are only slightly higher than German rates (3-1/16%).
Today’s Canada is the very model of the creditor-friendly nation-state. . . .
The condition of being underinvested in common stocks is a kind of pathology, according to recent journalistic research. Nonparticipants in the great bull market are deficient in the basic form of sensory perception that permits a competent person to distinguish up from down. They are unwell. . . .
Every central banker a genius?
The previously unimaginable is presented below in a diagram: the Italian rate of price inflation has, since last November, been lower than the American rate. . . .
“There’s no inflationary smoking gun,” said a Wall Street economist Tuesday afternoon in explaining why the Federal Reserve stood pat. No inflation, that is, except for the kind that caused Alan Greenspan to be invited to pose, and apparently to agree to pose, for the cover of the May issue of Money magazine. His face lends prestige to the magazine’s headline: “Your Six Best Investments Now.”
In this cycle, the semiconductor boom is mainly taking place on Wall Street. Growth in the earnings of the 16 component companies of the Philadelphia Semiconductor index has plunged to the accompaniment of a rise in their stock prices.
Coca-Cola Enterprises, whose 43,200 worldwide employees work in 310 buildings (which sometimes need painting) and drive 32,300 vehicles (which periodically require new points or plugs or windshield wipers) and maintain more than a million vending machines, dispensers and coolers (which occasionally stop cooling), has managed to persuade Wall Street that wear and tear is an accounting fiction.
Continued bad news on the credit card front—notably, in rising chargeoffs, and shrinking “excess spread”—has made no visible dent in the prices of securitized credit cards. Such “tiering” as exists in the fixed-rate portion of the market between top-rated and bottom-related issuers, our spies relate, amounts to no more than four or five basis points.
Why not more?
The clear resemblance between the balance sheet of UST Corp. and a virgin forest did not go unnoticed by the readers of the previous issue of Grant’s. The maker of the Skoal and Copenhagen brands of smokeless tobacco is virtually debt-free. In this, as in its retrograde and unwholesome product, it is an American antique.
A violent selloff in a half dozen little currencies on May 14 was lost in the shadow of dollar-yen. However, for those who hold a torch for gold, it was at least marginally encouraging that speculators were prepared to hate the Thai baht or the Czech koruna as much as they can (and so often do) the barbarous relic.
Coming soon: unpredictability
The biggest gold-mining scandal since the invention of the shovel has occurred in a world that does not believe in gold. What it does believe in, devoutly, are central banks, managed currencies and the frightening power (for good or ill—it’s for Chairman Greenspan to decide!) of the federal funds rate.
The Wall Street-friendliest feature of the first quarter results of International Business Machines Corp. wasn’t revenue (up 4.5% from the year-earlier period, or by little more than half the rise in nominal U.S. GDP). Nor was it net income (down by 1.2%), nor gross profit margin (down by 2.8 percentage points). Neither, for that matter, was it the 14% dividend increase or two-for-one stock split. The Prozac in the press release was rather the directors’ authorization to buy back another $3.5 billion worth of the company’s own stock.
Stories in separate newspapers on April 23 provided a rare, disturbing glimpse of the psychology of the California branch of the great bull stock market.
The new-era enthusiasts are right about one thing, at least: People are eating better and more frequently. Also, farmers are eating better by feeding them.
A paid-up subscriber affectionately describes the attributes of one of his favorite investments: “If you had bought [it] six years ago, you would be down more than 25%. The P/E used to be more than 20 times six years ago. Now it is 10 times. It used to yield 2%, now it yields 61/2%.” (In fact, following a rally on Monday, it yields 5.7%, and its P/E is 11.4 times.)
Less ‘ultra’ than they used to be
Japanese bond yields, perhaps responding to the rally in yen-denominated commodity prices, hit 2.52% the other day, the highest since January 10.
At 1:58 p.m. last Friday, Reuters carried the shocking report of a defection to the bearish stock-market camp by one of the greatest bulls. Although that bulletin was subsequently discredited by Sir John Templeton himself (“That’s ridiculous,” he informed The Wall Street Journal), he did change his mind in one startling respect. Just the other day, Sir John confirmed (on this, Reuters was as right as rain), he turned bullish on Treasurys. He says he’s buying them now.
Emerging markets, the direct nomenclatural and cyclical descendants of Backward Countries, Less Developed Countries and Third World Countries, have contributed a steady 45% to 50% of Citicorp’s net income over the past decade. Now, we think, they are poised to contribute a great deal more, in the process making Citicorp a different investment than it was in the era before the nonpayment of credit-card debts became an American staple.
The yeast in the bull market of wheat is demand, according to our agricultural agents. Freezing wet weather in the Great Plains, in Eastern Europe and in the Ukraine are merely ancillary bullish features. The overriding long-term strength for wheat is the fact that more and more people in the post-communist world can afford to eat.
The cost to Intel of purchasing 7.7 million of its own shares in the March quarter—a period of only three months, it bears remembering—was $1.2 billion. That was the equivalent of 42% of quarterly operating income and 60.5% of net income.
The cost to Microsoft of purchasing 20.4 million of its own shares in the same period was $2 billion. . . .
A paid-up subscriber (with a short position in the security under discussion) writes:
“Bio-Plexus Inc. (BPLX; $5 on the Nasdaq Small Capitalization Market) is a self-described ‘development-stage company’ that has thus far failed in its attempts to capitalize on a patented ‘self-blunting’ needle aimed at reducing the risk of accidental needle sticks among hospital workers, nurses and, more recently, catatonic momentum investors and the like.
The March 28 issue of Grant’s attached the wrong price-earnings ratio to the shares of Allied Capital Corp. The correct P/E was 9.77 times. (For the record, it is 9.70 times at this writing. Each ratio is computed on the basis of trailing net income.)
What matters isn’t so much the level of the federal funds rate as its perceived trajectory.
A sample of comments gleaned by the staff of Grant’s from the managements of leading temporary-labor companies on the bond-market bogeyman of “wage inflation”:
The Albanian financial catastrophe may or may not be fairly laid at the feet of the United States (to a certain kind of former communist, the difference between a pyramid scheme and a rising market must be nearly undetectable), but the spread of the gospel of equity investing in Europe is clearly an American import.
“So where are we now?” asked Michael Steinhardt, the former hedge fund manager who has retired from managing other people’s money but not from speculating with his own. “I have held an overarching perception for a number of years that I call the idyllic world view,” Steinhardt told the standing-room only Grant’s conference at the glamorous St. Regis Hotel.
“Markets are more interconnected than ever,” Seth Klarman observed to the Grant’s audience. “And swaps, futures and derivatives make the exposure of most investors and financial institutions quite opaque to outsiders and even to their clients. On a recent trip to South America. . .
“A bear market is but a future bull market in gestation,” Eric Fry, president of Holl International, San Francisco-based money manager, assured the Grant’s audience. “Put another way, there is always a value worth buying.
The most remarkable footnote in the public sector discloses the volume of Treasury securities held in custody by the Federal Reserve Banks for the accounts of foreign central banks.
In the past year or so, for the first time in half a decade, growth in broad-based money supply has been decisively faster than growth in GDP. Through most of the early 1990s (thank you, Paul Kasriel), M-3 crawled ahead at annual rates of 2% or less. Now behold it: measured year over year, it is expanding by 7%.
A couple of weeks ago, the John Hancock Regional Bank Fund barred its doors against the monetary equivalent of the rising Ohio River. In less than three months, the fund’s assets had surged by $1.4 billion, to $5.2 billion. It is, at this writing, without question, the biggest specialty, or “sector,” mutual fund of all time . . .
Finding money on the sidewalk of the capital markets, Sirrom Capital Corp. alertly picked it up. Between 1992 and 1996, it borrowed all it was able to borrow from the Small Business Administration. This money it proceeded to re-lend to a small-business clientele at an interest-rate markup of approximately 100%. It issued stock, not once but four times, in a market that, at this writing, voluntarily chooses to pay $36 for each and every dollar of Sirrom earnings. . . .
The vice president of finance for a $300 million Dallas credit union, James Horton, hears stories that nobody has ever heard at the bottom of the stock market, and he says that he’s hearing them more frequently.
Sample No. 1: “Could you,” he quotes a customer asking him, “recommend a stock for me? I have $500 that I do not need for about six months and your rates are too low.” . . .
The two-year Treasury note is unlikely to double in price, to be tendered for by Rupert Murdoch, or to be split two for one. A government-issue investment, its speculative coloration is olive drab. Its principal investment attributes, safety and yield, apparently went out of fashion during the Bush administration.
Only 15 months ago, CMG Information Services was a $50 stock; now it’s finding support (we are trying to be bullish) in the neighborhood of $12. Only last summer, Advanced Micro Devices was a $10 stock; recently, it encountered resistance (we are trying to be bearish) at prices close to $50.
This is the story of price momentum. . .
Two of our favorite investments— United International Holdings and the South Korean stock market—have been sinking lately. . . .
Tuesday’s rise of 25 basis points in the federal funds rate represents 50% of the prevailing Japanese call rate. The difference between the two countries’ key money-market interest rates—a 51/2% funds rate in the U.S., a 50-basis-point call rate in Japan—today amounts to no fewer than 500 basis points. . . .
Even more free advice for Warren Buffett
“We intend to do as well as we can in managing the internal affairs of the business,” Warren Buffett wrote to his fellow stockholders in Berkshire Hathaway in the inflation-wracked year of 1979. “But you should understand that external conditions affecting the stability of currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.”
The rise of Berkshire during the next eighteen years is one of the greatest achievements in the history of flight. . . .
The bond market has everything it could want except a bid. It has falling oil prices, stable rate of price inflation, a rising dollar exchange rate and a narrowing fiscal deficit. It has Robert Rubin himself in his capacity as co-supreme financial authority of the world (an office he shares with Alan Greenspan). Yet for all of these things, long bonds have generated a smaller total return than Treasury bills over both the past 12 months and over the past three years.
Ciena Corp., a small, Maryland- based Internet technology company, quietly joined the investor-owned list last month with an opening-day capitalization of $3.44 billion. The New York Times wrote a news story about the fact that this incredible feat almost escaped the bull market’s jaded notice.
The Federal Reserve turning bearish on the great bull stock market; investors turning bearish on the Federal Reserve; the upswing setting daily records in valuation, longevity and fearlessness; skeptical professionals losing money to credulous amateurs; “buy and hold” replacing “I love you” as the most popular three words in the English language. . .
Boomtown, China, goes public
Flash from the pits: On Monday, the oil market moved into contango for the first time in two years. Contango is an alignment of prices reflecting an excess of immediate supply, i.e., too many barrels. Thus, the nearby contract month, in this case April, is cheaper than the neighboring contract month, in this case May. . . .
The drug of 40 basis points
What the world’s leveraged speculators have most to fear from the Japanese debt predicament isn’t a new crisis. It’s a resolution of the old crisis. When, on February 19, a Japanese newspaper leaked a government proposal to unfreeze real estate prices, thus to restart the stymied process of lending and borrowing, blood ran cold in every world financial center.
Chamber of commerce weather last weekend proved no competition for the first Los Angeles Times Investment Strategies Conference, which drew some 6,000 Angelenos out of the sunshine and into a downtown hotel. Paying $25 a day ($35 for the weekend), the throng sat at the feet of the likes of Bill Gross, Muriel Siebert, the Motley Fool and Garrett Van Wagoner. . . .
To feed the masses during the yield famine of the early 1990s, Wall Street popularized “term trusts”: leveraged, closed-end funds holding mortgages and other investment-grade securities, plus mortgage essences, i.e., derivatives. “Term” signifies the length of time until an investor and his principal are reunited. Assuming, of course, that they will be reunited: there have been slipups.
In keeping with the hypothesis that the credit cycle is rolling over—subscribers may still be plowing through the full-length essay in the last issue that developed the argument—we turn now to Green Tree Financial, a St. Paul (Minn.) consumer lender with a forte in mobile homes.
Grant’s, which for some time has been bearish on the depreciating Swissfranc, has reconsidered its stance in thewake of Monday’s front-page, feature-style Wall Street Journal story on the cute permanent depression that is ravaging the country whose army has given the world such a fascinating jackknife.
The fax machine is the source of an undated article from Weekly World News in which an “independent researcher” and “astrophysicist,” claims that NASA knows a secret: “They don’t want the public to know the truth, that Mars is a virtually limitless source of the precious metal we scientists call ‘Au’— gold to the layman.”
Scientists can write all the gold calls they want, if that’s their little game, but the latest storage data from the Comex (in lower Manhattan on planet Earth) . . .
Star of the recent annual summit at Davos, Switzerland, was the United States of America, its institutions, people and markets (especially its bull market). “Whether it was Bill Gates of Microsoft or Andy Grove of Intel or Lawrence Summers of the U.S. Treasury,” wrote Thomas
L. Friedman from Davos in last Sunday’s New York Times, “when Americans were on the dais, people seemed to stay a little longer, listen a
So far in 1997, the slump in the Goldman Sachs Commodity Index has mirrored the new highs in the S&P. Intel and Microsoft have become the gold and silver, the wheat and corn, the gas and oil, and the meal and beans of the New Year. However, we think, it would be wrong to extrapolate recent speculative trends indefinitely.
“The analysis of these irregularities is being hampered by the disappearance of the company’s Principal Accounting Officer, who has been relieved of his duties,” said Mercury Finance Co. in a January press release that also disclosed the disappearance of one-half of 1996 net income. It seems that the missing 50% never existed in the first place.
A growing portion of the vast stomping ground of Grant’s Asia Observer is wheezing under the burden of debt. The crisis of the Japanese banking system is old news, but current events— last week’s default by a Thai property developer on $80 million of Eurobonds and the new suspicions surrounding the health of Korean banks in the wake of the Hanbo Steel failure, for example—combine to raise a troubling question: Has Asian finance taken a deflationary turn?
Evidence in support of financial outcomes not prophesied in these pagescontracting debts, shrinking economies, falling interest rates and tumbling commodity prices has become a little too abundant in recent weeks.
Available now: 6% after tax
Investment-grade, long-dated New York City and New York state obligations, insured and uninsured, were priced to yield approximately 6% on Tuesday. The pretax equivalent yield to the most heavily taxed New Yorker would amount to about 11%. In the past 70 years or so, observes a bond- minded reader of ours, Timothy J. Healy, stocks have returned an average of 10%. Now that the stock market has broken almost every valuation record. . .
Americans are drinking again, and not just Gatorade, orange juice and Perrier. They are tossing back whiskey. They are drinking vodka and gin, too, and even liqueurs, and they are smoking cigars and eating red meat and buying Nasdaq stocks at 50 times earnings and asset- backed credit-card deals at perhaps five basis points over the Treasury yield curve.. . .
“The recent rally in equity prices has captured considerable attention,” is the unobjectionable opening sentence of the lead essay in the December issue of National Economic Trends, a publication of the Federal Reserve Bank of St. Louis. “. . .[T]he recent rally in stock prices is not particularly unusual when compared to the historical record since 1971,” is the incredible closing sentence.
In the middle, the Federal Reserve essayist seeks to allay the concern that rising stock prices are inflationary. . . .
In South Korea, more than in most countries, the Church of Valuation and the Church of Momentum are in daily ecclesiastical strife. Stock prices continue to fall (though not yet through the 1996 lows). People blame the usual suspects: politics, the won, the economy and labor relations. Equally, they could blame the consequences of business-as-usual: the overstaffed, overleveraged and overregulated state of Korean enterprise. . . .
Eramet, the Western world’s third- largest nickel producer, after Inco and Falconbridge, and through its Erasteelsubsidiary, the world’s leading maker of high-speed steel, and through a Gabonese subsidiary, one of the world’s top manganese producers, is a French industrial enterprise with a number of French characteristics. . . .
Just the other day, Edward R. Serros, M.D., paid-up subscriber of San Bernardino, Calif., called his Merrill Lynch broker to place an order to buy Krugerrands. For new readers, a Krugerrand is a South African gold coin. Also, to fill in the background, gold, element No. 79 in the periodic table, is a metal. Formerly a monetary substance, it has gradually turned into a capital-loss substance . . .
On Thursday, January 23, futures markets in stocks and gold each veered off in experimental directions, stocks falling and metals rising. The chart patterns they described in so veering elicited oohs and aahs from the trading pits. . . .
The Bank of Japan, featured in these tables for the first time, crystallizes the conundrum of the global credit analyst. The data would seem to suggest that Japanese monetary policy is as loose as it could ever be.
Disclosure of the sale of 300 tons of gold by the Dutch central bank on Monday has deepened the gloom of the people who happen to be on the wrong side of the universal optimism trade. The optimism trade, although inspired by one thought, is implemented in different ways. . .
Stone Container, the leveraged paper products company that has been juggling its debts since the first junk-bond revolution, disclosed just before Christmas that its banks had relaxed the terms of its borrowings (presumably not because it could easily meet them). . . .
If, as expected, the brand-new Oppenheimer Real Asset Fund achieves liftoff next month, it will be the first domestic commodity mutual fund. Or, more exactly, it will be the first domestic commodity-derivatives mutual fund. It will be an instant success, by definition, since it will occupy the one and only spot, the top as well as the bottom, in its own Lipper category. . . .
“Since the late 19th century,” wrote L.L. Wade and B.S. Kim in a 1978 book entitled “Economic Development of South Korea,” “Korea has been beset by successive calamitous events which have brought destruction and profound distress to all portions of society.” Our pre-vacation issue updated this history with a partial list of current calamitous events: bear stock market, threatened general strike. . .
J.P. Morgan & Co. released terrific fourth-quarter results Monday (trading profits surged, analysts nodded approval, the share price did a grand jete). Overlooked in all the excitement was a footnote to a footnote on page 12 that could force a reappraisal of the adequacy of an institution’s allowance for credit losses. . . .
There’s a deal making the rounds that goes right to the heart of the 1997 stock-market valuation drama. Samsonite Corp., the leading luggage maker in America, if not the world, still highly leveraged three-and-a-half years out of bankruptcy. . .
Every investor picks his poison: the dram of choice at the moment, the data on these pages suggest, is risk—credit risk and stock market risk, in particular. . . .