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December 18, 1998, Vol. 16, No. 24

1999 coming attractions

The Bloomberg glows like a yule log, and we leave for our two-week recess with a long glance back over the shoulder. Three clusters of events point to potentially big changes for the New Year: Higher bond yields for Japan (true, they couldn’t be much lower), reserve-currency competition for the dollar and reflation for the world.

Borrow what you want

“The Home Loan Bank System’s Office of Finance received authorization to issue debt, without limit, through March 31, 2000,” Dow Jones reported from Washington on December 2. The next day’s miniature news story in The Wall Street Journal was all too easy to overlook.


The concept of the inverse government bond has lately become a staple in these pages. We have been looking at securities that bear as little resemblance as possible to the 30-year U.S. Treasury. Which investments, we have been asking, depend least on the concept of macroeconomic perfection, as perfection is defined by a bond bull?

Virtual reality

A certain specialty retailer (no names, please, our source asks) has been thinking about spinning off its online retailing operations into a separately traded company. Wall Street, trying to be of assistance, has descended on the undecided management to promote a transaction. One set of bankers wanted to know the historical revenues of this prospectively publicly traded “e-tailing” business. Just $3 million, the company replied. “Three million?” the bankers scoffed. “That’s $2 million more than you need.”

Stock shopping

Just in time for Christmas, one of the world’s oldest retailers has opened a location in one of the world’s newest malls. You’ll find Hudson’s Bay Company, 328 years young, on the World Wide Web, at For that hard-to-please Canadian on your list, select a hand-forged, wrought iron, rust-finish moose door knocker for only C$79. You may feel a sense of déjà vu about the Internet onslaught, even if you weren’t born in the year 1670. Retailing is constantly reinventing itself.

And to all a good night

“Less than two years ago, judging by capital flows, the currencies of East Asia were the world’s best,” said Harry Bingham, of Van Eck Associates, at the San Francisco Gold Show last month. “Then virtually overnight, these currencies became virtually worthless for large transactions. Can this happen only in Asia? Is there really a magic quality about American and European paper that makes them perpetually indestructible, or are they forever protected from calamity by a Greenspan ‘abracadabra’?”

December 4, 1998, Vol. 16, No. 23

Low yield peril

The recent break in the Japanese government bond market holds a life lesson: A long-dated, low-yielding, high-duration, fixed-income security is not to be confused with a savings account. From its peak on September 17, the yield on the benchmark JGB has risen by 47.5 basis points, from a yield of a mere 0.665% to a yield of a slightly less mere 1.14%.

Hate the product

One broad hint why Octel Corp. changes hands at a price equivalent to less than three times trailing 12 months’ earnings is contained in the last three letters of its name. “TEL” signifies “tetraethyl lead antiknock compounds.” Octel manufactures these substances, but it won’t be manufacturing them forever.

The gift of cash

“Dear Patricia Kavanagh-Grant,” a senior executive vice president of MBNA addressed the lady of the house in a colorful holiday letter. . .

World’s worst asset

Tuesday’s setback in Japanese government bonds pushed the 10-year benchmark yield all the way up to 1.14%, a leap of 10 basis points. It must be understood that this amounted to almost 10% of the overall yield. The bulls were desolated. . . .

China to reallocate

On November 24, Reuters reported a major change in the climate of world monetary opinion: An official declaration of intent to reduce the dollar component of China’s reserve holdings and augment the gold portion.

Paper covers rock

Commodity indices are making generation lows; the Nasdaq Composite index is trading at a price-earnings multiple of almost 80 times (as we do the estimating). And the 4 1/4%, 10-year Swiss government bond on Tuesday changed hands at a price to yield 2.39%, a record low.

November 20, 1998, Vol. 16, No. 22

One for the paranoid

Jos Heuvelman, a functionary with the Dutch central bank, last week proposed that the European Central Bank invest its “excess” reserves in a manner more attuned to late 20th century portfolio theory. No need to husband low-yielding, liquid money-market instruments, Heuvelman said, when high-yielding, less-liquid assets are available at attractive pickups in total return . . .

Careful analysis

Walter Schloss, eminent value investor, lit up the room after lunch at the Grant’s conference, and passed around a souvenir to his admirers: the 10th annual report of Graham-Newman Corp., dated Feb. 28, 1946, which he himself wrote. It was hardly an accident that the investment philosophy espoused in the document was classic Graham and Dodd: Benjamin Graham was the firm’s lead name partner.

No monopoly money

One of the world’s great monopolies is about to be broken up, and Bill Gates isn’t the prospective loser. In six short weeks, the dollar will begin to meet significant competition from another currency for the first time in more than half a century. The coming of the euro is a defining monetary event. . . .

Trading up a storm

In response to our bearish analysis of Charles Schwab & Co. (Grant’s, October 23), the price of the stock went up. The rally prompted a man in the Schwab asset-management division to pick up the phone and make a constructive suggestion. Think of the company as an Internet stock, he said. It does help, we admit. . . .

Slick derivatives

Every derivative investment is under suspicion in the debris-strewn wake of Long-Term Capital Management, but a warrant on an oil company is extra contrary. So evidently hopeless is the energy business that DuPont, in the largest initial public offering of all time, has just sold 30% of its interest in Conoco . . .

Inflation in paper, deflation in things

When K-Tel International, Internet music retailer and stock-market beach ball, was notified Tuesday that it fails to meet the minimum tangible net asset requirement for listing on the Nasdaq, its shares had been trading as high as 211/4. At the price, the company’s equity capitalization was in excess of $170 million. Surely, observed a reader of ours, Jon Goodman, speculative history was then being made. . . .

November 6, 1998, Vol. 16, No. 21

Hair of the dog that bit you

“Growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future,” the Federal Reserve Board explained as it moved to lower interest rates on October 15.

Ayer we meet again

Although short of economic growth, optimism and ready cash, Asia does boast one investment attribute, at least: It is cheap. It was cheap last year, too, only to become much, much cheaper.

Give Europe credit

European credit spreads began to tighten last August just as American credit spreads began to widen. In the New World, the gathering global debt crisis caused a flight from risk—people bought Treasurys. In the Old World, the same unnerving events seemed to set off a flight from safety—people bought bank obligations.

Inhospitable lenders

Like the flu, the credit contagion deals misery far and wide. The 1998 contraction has cut a swath not only through leveraged Wall Street, but also through not-so-leveraged Middle America. The owner of a Midwest hotel complex described his plight the other day (he spoke freely over the phone in exchange for immunity from personal or corporate publicity).

Not Graham and Doddsville

New light on the thwarted Warren Buffett bid for Long-Term Capital Management was shed by the Financial Times in a scoop now almost two weeks old. However, as the news is still intriguing, we hereby reprise it.

October 23, 1998, Vol. 16, No. 20

The roar of the pits

Concerning hunger in Indonesia, The Wall Street Journal on Tuesday quoted Douglas Ramage, Jakarta director of the Asia Foundation. “It’s absolutely stunning to me that after all these years, rice once again is the issue on which the government will rise or fall, but it is,” said Ramage. “It’s not so different from in the days of ancient Javanese kingdoms.” So, too, after a fashion, on Wall Street: The recent panicked flight out of any credit instrument not actually issued by the Treasury was a souvenir of an ancient time, e.g., 1907.

Dial ‘911’

Is the hot-air balloon of the S&P 500 successfully relaunched? The gondola is suspiciously full of passengers. Kathleen Fahey of this staff reports: “A call just came in from a friend; let’s call her Beth. Beth dates a New York City cop; let’s call him Mike. Beth calls and asks if I have ever heard of American International Petroleum. I tell her no, but I will look it up on the Bloomberg for her. According to Mike, this is the hot stock pick of the NYPD. All the cops are buying it. He doesn’t know anything about it [Bloomberg shows five consecutive fiscal years of net losses; the stock is quoted at about 11/4 —ed.], but says she should sink any and all spare money into it. I read to her from the Bloomberg screen, ‘The company explores for oil and gas in western Kazakhstan and refines oil and gas in Louisiana.’ Are you nuts?”

Sell Charles Schwab

It’s a rare global monetary and credit crisis in which a brokerage stock can make a new high, but this is that rare crisis. The Charles Schwab Corp. did it on Monday.

Canadian yield export

The new J.P. Morgan forecast of a “mild recession” in Canada next year will astonish no holder of the orphaned shares of Legacy Hotels Real Estate Investment Trust. The price of the biggest Canadian hotel REIT has been sawed in half since it came public almost exactly a year ago.

Double feature

Entertainment Properties Trust—EPR on the New York Stock Exchange—is the first real estate investment trust to specialize in financing megaplex movie theaters. There’s nothing like the megaplex experience: you, the movie-goer, can actually look down at the top of the head of the person sitting in front of you. It’s like being in the upper deck of Yankee Stadium without the baseball game. We turn to EPR because it offers a 9.4% yield (a reader pointed this out). Also, in a more high-minded vein, it constitutes a parable of yield, credit and the credit cycle.

Central bank foibles

At last week’s Grant’s Asia Observer conference, Esmond Lee, chief New York representative of the Hong Kong Monetary Authority, rhetorically asked why the HKMA intervened in the Hong Kong stock market last summer. And he answered himself, “You can be sure that Hong Kong is fully committed to free-market principles, but we are against the sort of collusive behavior of some manipulators in the second half of August.” No such statement of principle accompanied the unexpected, curiously timed, intra-FOMC meeting cut in U.S. official rates that followed shortly after Lee finished speaking. . . .

October 9, 1998, Vol. 16, No. 19

The perfect storm

In the past eight or 10 weeks, the financial world has been turned upside down. Credit has contracted and stock prices have fallen. Risk, until recently an abstract, almost academic, idea, has seemingly become the only idea. A year ago, Alan Greenspan was God, Bill Clinton was unassailable and John Meriwether was rich. Now look at them.

Missing ‘d’

A half-century ago, Alfred Winslow Jones, a Harvard-educated sociologist who overcame an early career in financial journalism to achieve success on Wall Street, invented the modern hedge fund. Phoenician sailors earned a share of the profits of a successful voyage, Jones would later say (he was a fine raconteur). By the same token, a risk taker was entitled to share in the profits he made on dry land. The share that Jones selected was 20%.

Barrels of yield

The creditor class is beside itself. In the wake of the Meriwether panic, the yields on long-dated government securities resemble the posted rate on a 1961 Christmas Club account. High-yield alternatives are available, of course. However, to cite a suddenly timely adage, no yield comes for free.

Convergence trade

Early in 1988, with the previous year’s stock-market crash still interrupting nighttime sleep patterns, gold traded at $431 an ounce, 40-odd percent above the all-in cost of production in the mines of the Western world. Simultaneously, the U.S. stock market, as measured by the Standard & Poor’s 400 index, was trading at 309, a 12% discount to its estimated replacement cost value. Now the two markets have changed places.

Let’s assume 100%

Dell Computer, the wonder stock of the decade, is even more than a stock (as if that weren’t enough!). It is also a manufacturing corporation. Its computers light up the homes and offices of millions. Over the past year, according to Bloomberg, earnings per share have grown by 92%, sales by 59% and book value per share by 72%.

Businessman’s risk

What the domestic junk-bond market is up against isn’t only homegrown fear and loathing, but also the foreign import. Thus, the October 2 edition of This Week in High Yield from Merrill Lynch made bold to recommend six “Emerging Markets” securities for purchase. Simultaneously, it swept 33 more under the rug of a footnote, which read, “The following credits were removed from the recommended list due to market conditions.” Maybe one of these days, a brokerage house will forthrightly recommend a security on the grounds of “market conditions,” or on the even more forthright grounds of “underwriting fees,” “bonuses” or “interdepartmental rivalry.”

Long safety, short risk

Now the cry is out of risk and into safety. The fixed-income trade of the 1990s is unwinding. During the long expansion, “risk,” to the professional investor, was chiefly defined in career terms. It was impossible to keep a job (as our sources patiently told us) while trying to do the opposite of what everyone else was doing. One’s employer, one’s investors and even one’s spouse refused to put up with nonparticipation. The only course of action was to sell Treasurys, buy anything else.

September 25, 1998, Vol. 16, No. 18

Value restoration project gets under way

A bear market in credit has begun. Bull markets in a variety of assets—debt securities of all makes and models, for example, real estate and real-estate equities—have ended. The connection between the two developments is the sudden withdrawal of the marginal dollar of financial leverage from speculative portfolios. The adjustments are taking place worldwide. We blame the crash in credit mainly on the boom that preceded it. . . .

Gold coin standard

Last Friday, the U.S. Mint sold 23,500 ounces of gold in the form of American Eagle coins, the only gold coin that the U.S. government officially certifies with respect to content and purity . . . So big was the day’s volume that the head of the Mint’s coin program, Jack Szczerban, reported the results to this office with an exclamation point at the end of the sentence. . . .

Bullish on chips

Not every commodity on the planet is in a bear market: The domestic Chinese price of wood chips (quoted, by the way, in Bone Dry Metric Tons) has been going sideways. Yet the common stock of Sino-Forest Corp., the company that produces them, has been going down. . . .

Japan declares inflation

It just isn’t true that everything in Japan is deflating. The negative approval rating of the cabinet of Japanese Prime Minister Keizo Obuchi climbed to 60.2% last weekend, the highest such result since the deadhead government of Kiichi Miyazawa scored 78.6% on the disapproval scale in June 1993.

September 11, 1998, Vol. 16, No. 17

The chairman drops his handkerchief

The bull market in central banks, like the bull market in common stocks, is becoming narrower and narrower. Some years ago, former Fed chairman Paul A. Volcker, speaking in Manhattan at a Dow Jones forum, expressed polite amazement at the lofty reputations of the people who had succeeded him in the business of managing currencies. We don’t remember the date, but advancing monetary reputations still held a sizable lead over declining ones. Now, we think, decliners lead advancers.

Bonfire of the dollar

“As President and Mrs. Clinton prepared to retire tonight at the Marriott Hotel near the banks of the Moscow River,” reported Michael Wines of The New York Times in a September 1 dispatch from Moscow, “a car pulled over not far from the hotel entrance. The doors opened, and Vladimir Zhirinovsky, the ultranationalist who controls a bloc of seats in Russia’s Parliament, climbed out. “Mr. Zhirinovsky turned toward the hotel and yelled, in so many exceptionally unprintable words, ‘Clinton, you are an idiot!’ After applying the coarsest description of sexual relations to the President, he added, ‘Your dollar is dirt, and this dirt is all over the world.’

Buy oily junk

The bear markets in junk bonds and common stocks are occurring simultaneously but not synchronously. Mr. Bear seems not to worry about the timing. In laying waste to a company’s capital structure, it pleases him sometimes to start with the senior debt securities.

Wrong numbers

Recently, a 7% interest in a big Russian utility—it would be medium-size in America, said the American buyer—changed hands for $500,000. The price of the stock was down by 99% from the peak, our source reported, adding, without stammering, “I still think you’re supposed to do that.” The trouble with bargains is that it’s bear markets that create them. When opportunity comes knocking, most investors can be found under the covers with a flashlight.

He’s golden

The Gold Stock Analyst’s index of North American gold stocks recently fell to an all-time low of 18.74. For perspective, the 1987 peak was 223.84. The index is price-weighted, and it consists of 52 names. (The Philadelphia Stock Exchange Gold and Silver index, which is slightly less gravity-prone, is capitalization-weighted, and it consists of 10 names.) The loss from the top is 91.5%.

Dollar to lose shelf space

The U.S. dollar, as much a monopoly brand in the monetary realm as Windows is in software, is about to relinquish market share in Asia. “The People’s Bank of China, which held sway over about $140.6 billion in reserves at the end of July,” reported The Asian Wall Street Journal on September 4, “is considering investing in Europe, and specifically in the euro, to be launched Jan. 1, to insulate itself from a possible recession in the U.S., Chinese government officials said.

August 14, 1998, Vol. 16, No. 16

From Russia with yield: call it 25%

The latest edition of Standard & Poor’s CreditWeek was a tonic, if one’s trembling hands could hold the pages steady. The featured cover story was all about the improvement in the creditworthiness of sovereign debt, an improvement that was not readily apparent to a reader of the week’s Bloomberg headlines, e.g., “Russia’s Khristenko Rules Out Default as Bonds Tumble.” The Russian deputy prime minister will be gratified to read the S&P analysis. . .

Counting money

The latest edition of Standard & Poor’s CreditWeek was a tonic, if one’s trembling hands could hold the pages steady. The featured cover story was all about the improvement in the creditworthiness of sovereign debt, an improvement that was not readily apparent to a reader of the week’s Bloomberg headlines, e.g., “Russia’s Khristenko Rules Out Default as Bonds Tumble.” The Russian deputy prime minister will be gratified to read the S&P analysis. . .

DuPont sells Conoco

Market conditions permitting, E.I. du Pont de Nemours & Co. will shortly spin off its energy subsidiary, the famous Conoco Inc., which it acquired (as it may seem to those of a certain age) only yesterday.

Chip shots

The periodic headlong rush into semiconductor stocks brings to mind the schematic of a Labrador retriever’s brain by the American artist Stephen Huneck. Two subdivisions of this very specialized region are particularly relevant to an understanding of the recurrent semiconductor frenzy: “selective hearing” and “barking for no reason.”

Beware falling interest rates

The anomalous thing about the federal funds rate is that it is still administered. In the golden age of the American free market, a federal bureaucracy determines the cost of carry.

July 31, 1998, Vol. 16, No. 15

He sold without selling

Daniel S. Pecaut, president of Pecaut & Co., a broker and money manager in Sioux City, Iowa, has written the clarifying analysis of the landmark transaction agreed to last month by Berkshire Hathaway and General Re. In what would be the biggest deal of his life (by a factor of 10), Buffett, you’ll recall, has proposed to lay hands on the biggest American reinsurer. Or perhaps you don’t recall. . . .

Price is no object

A dozen years ago, when the public loved gold-mining stocks (try to imagine that), a reader dreamt up a new business. Let’s organize a mining company, he said. We’ll buy some gold, bury it, dig it up and sell it. Considered as an investment, this enterprise was only slightly more daffy than some of the extant gold mining companies. Now the same reader, Paul J. Isaac, has once again risen to the occasion of a generous valuation. He is wondering if the investors in have thoroughly considered the prices they’re paying.

Stunted profits

“As we look ahead,” said Louis V. Gerstner Jr., IBM chairman and chief executive officer, on the occasion of the release of the company’s miserable second-quarter results, “we feel very good about the momentum of our growth businesses, and we believe that some of the problem areas will begin to show improvement over the course of the year.” Possibly, the fundamental source of these “very good” feelings (since when did the International Business Machines Corp. have any feelings?) was the imminent announcement of a fifth-generation mainframe computer. Or perhaps it was the premonition that the stock market would care more about the company’s continuing, vast stock-purchase program than about its subpar financial results. . . .

Wealth through study

From the summer 1998 catalog of The Learning Annex, a course to deliver every New Yorker from the bondage of 9 to 5 labor. . .

Destination: Big Board

If all goes according to plan, the shares of a big, new, dividend-paying South African multinational will shortly begin to trade on the New York Stock Exchange. Strictly by the numbers—operating costs, earnings, debt, dividends, etc.—there would seem to be nothing not to like about this enterprise. Similarly, by the rhetoric: Management says exactly those things that managements are expected to say in 1998, up to and including the phrase “to multi-task workers in teams, through appropriate training interventions” (MBAs will understand). There is one fly in the ointment, however: The new company is in the gold business.

Accounting wars

Coca-Cola Enterprises, which does the borrowing and the heavy lifting in the house of Coca-Cola, shocked its non-Grant’s-reading public on July 22 by disclosing plans to ramp up its capital spending. Over the next 31/2 years, the company said, it will invest $5.3 billion, almost double the $2.89 billion of actual outlays it recorded during the preceding 31/2 years.

Beans to the Nth

For some, heaven on earth could be defined as a glut of food, including soybeans, coupled with a shortage of bad commercial real estate debt. These are the good old days. Just how good may be inferred from the high incidence of speculative optimism.

July 17, 1998, Vol. 16, No. 14

Monetary brake failure?

Recently, the highest point on the U.S. dollar yield curve was the overnight wholesale borrowing rate. At 5.6%, mighty Libor (i.e., the London interbank offered rate) towered over every other government interest rate, including the 30-year bond yield. It’s borrowing short and lending long that actually makes the world go round. . . .

One in 50 billion

General Electric Co. earned in the second quarter exactly what analysts had somehow known it would earn: $2.45 billion, or 74 cents a share. In the house of John F. Welch Jr., total quality management extends even to the quarterly earnings report. As in jet engines, light bulbs and financial services, zero defects and absolute reliability are the orders of the day (you know how Jack hates surprises!).

Bulls at work

A July 8 research bulletin on Yahoo! from CIBC Oppenheimer Corp. (not satirical, the analyst insists) lists the “Top 10 reasons investors are buying YHOO and other Internet stocks”:

Wane of the dollar

A global currency crisis is under way. Then, again (to provide historical context), it would almost be news if one weren’t. Monetary upheaval is the way of the late 20th century. We are thinking now of the multiple-devaluation crisis of 1949, the French franc crisis of 1957, the British pound crisis of 1967, the gold-convertibility crisis of 1971, the dollar-devaluation crisis of 1973. . .

‘What isn’t his’n’

“Gold no longer plays a significant role in the international financial system,” pronounced Peter Costello, the treasurer of Australia, just more than a year ago. As the Thai baht crumbled and its neighboring currencies began to implode, the Reserve Bank of Australia defiantly disclosed early last July that it had been busy unloading two-thirds of its gold reserves.

July 3, 1998, Vol. 16, No. 13

Mark the date: June 30, 1998

By coincidence on Tuesday, the new European Central Bank opened in Frankfurt as a new gold mutual fund opened in New York. The fund was the first such venture in the United States in approximately four years. The pan-continental bank was the first of its kind in Europe, ever.

From the grass roots

Sheer necessity is precipitating financial reform in Japan from the bottom up. While the world awaits big-screen, G-7 action—e.g., the resuscitation of the yen and the mercy killing of the dying Japanese banks—investors and corporate managements are proceeding to effect improvements all by themselves. By “improvements” we mean the kind of change that will tend to cause a bull market in your editor’s Japanese stocks.

‘Stock’ spoken here

The cultural, financial and cyclical gulf that separates Japan from the United States widened on Monday when STB Systems, a Richardson, Texas, maker of printed circuit boards, unveiled a plan to reward its key customers with warrants to purchase shares of its stock.

You can’t lose

A guaranteed positive rate of return on a Japanese equity investment is a rarity in 1998—as it was from 1990 through 1997. However, a paid-up subscriber, Mark Bilski, has discovered the Nikkei 225 Index Securities.

Heaven sent

EchoStar Communications Corp., based in space above planet Earth and on the ground in Englewood, Colo., is an organizational miracle of the late 20th century. Engineers designed and built its direct-broadcast satellites (the latest of which was launched in May from a cosmodrome in the former Soviet Union—a late-20th century event if there ever was one). Leverage artists assembled its balance sheet.

Interest rate farming

Farmer Mac, whose given name is the Federal Agricultural Mortgage Corp., was created in 1987, overhauled and supercharged in 1996 (thanks to the Farm Credit System Reform Act) and denounced in 1998. It was in May, at a conference sponsored by Ralph Nader, that Rep. Jim Leach (R., Iowa) condemned the agricultural lender for allegedly abusing the people’s credit.

The global economy rides the waves

Unlike Supertanker America, which never pitches, rolls, yaws or heaves, the world economy continues to ship water. The graph plots oceangoing shipping rates expressed in terms of the Baltic Freight Index. The latest plot is the lowest in 11 years, if not longer.

June 19, 1998, Vol. 16, No. 12

More contrary opinion: sell the dollar

At the end of the great inflation of the 1970s, 30-year U.S. government bonds went begging at towering yields because investors didn’t trust the dollar. Now, after more than a decade and a half of disinflation, it’s investors who go begging: What they want is Treasurys, record-low yields notwithstanding. Nobody doesn’t like the dollar.

Opportunity in junk

The junk bond market, overstuffed with money and unread prospectuses, is finally becoming the investment opportunity that Wall Street has always insisted it was. It is turning out to be an A-No. 1 short-sale candidate.

Sitting on cash

Ernest Monrad, who reported to work at Northeast Investors Trust on Jan. 2, 1960 (he had been invited to join the fund on New Year’s Day; the founder, Hollis Nichols, sweetened the offer with the gift of a slide rule), has seen credit cycles come and go. He likens the boom of the 1990s to the Drexel-financed boom of the 1980s, except that a decade ago the names of the issuing companies were usually recognizable. Today, he says, he is frequently stumped.

Carbonated net income

It’s the other secret formula that ought to concern the investors in Coca-Cola—not the century-old soft-drink recipe but the accounting principles under which Coca-Cola Enterprises, Coke’s largest bottling affiliate, is allowed to represent itself as something it would seem, in substance, not to be: an independent corporation. This is an essay about an accounting abstraction. . . .

Credit spiral

The serial credit troubles of 1998—i.e., Asia, South America, Russia and (suddenly) the U.S. junk-bond market—are not discrete, we think, but interrelated. A recent quoted remark about the rescheduling of $80 billion’s worth of private Indonesian debt underscored this proposition. . . .

BIS on the cheap

“Noticeably overvalued” is the description the Bank for International Settlements reserved for the U.S. dollar in its recently published annual report—words that have a familiar ring both to readers of Grant’s and to regular members of the audience of the staid Basel, Switzerland-based institution.

June 5, 1998, Vol. 16, No. 11

And the first shall be last

Dramatic new lows in the peso-dollar exchange rate on Monday failed to make the newspapers—The New York Times, The Financial Times, The Journal of Commerce, The New York Post, Women’s Wear Daily, The International Herald Tribune or The Wall Street Journal—on Tuesday. It has come to this in monetary affairs. The currency that turned the global financial markets upside down in 1994-95 can’t seem to buy its way into the papers in 1998.

Buffett on margin

The greatest living investor is on margin. He admits it. “The financial calculus that Charlie [Munger] and I employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return,” wrote Warren Buffett in his booklet for investors in Berkshire Hathaway, “An Owner’s Manual.”

Adieu, Goldilocks!

The greatest living investor is on margin. He admits it. “The financial calculus that Charlie [Munger] and I employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return,” wrote Warren Buffett in his booklet for investors in Berkshire Hathaway, “An Owner’s Manual.”

Trouble by the ton

Distress, and the financial opportunities attendant upon it, today come in all varieties and in many different time zones. There is currency distress, economic distress, credit and interest-rate distress, social distress and nuclear nonproliferation distress. There is Asian, South American and Eurasian distress. No longer must the value-seeking investor settle for so-called relative values; the absolute, compelling kind more and more litter the ground. Which brings us back to Russia. . .

Those wacky Swiss

How to interpret last week’s news that the Swiss National Bank may sell as much as 1,300 metric tons of gold (the equivalent of half of its reserves), pending approval in a referendum and by a parliamentary vote?

May 22, 1998, Vol. 16, No. 10

So cheap is the stock, they buy it

Record-high unemployment, record-low business confidence, record-high business failures (expressed as a number of corporate casualties) and record-low, record-weird government bond yields do not begin to exhaust the list of recent Japanese economic and financial disasters. And all the while, the personal bull market of Taichi Sakaiya continues unchecked.

Hyper Home Loan Banks

“The Federal Home Loan Bank system, a government sponsored agency that keeps a low profile despite its ubiquitous presence in the bond market,” Dow Jones reported last month on the occasion of a public- finance milestone, “has [toppled] the Treasury as the biggest issuer in the bond market.”

Insurance standoff

When John Hancock Mutual Life Insurance Co. announced plans on May 12 for a full demutualization, in effect turning over the keys of the company to the policyholders, the battle over the ownership of the mutual life insurance industry appeared to have taken a decisive turn.

It’s a bubble

The editorial page of The Wall Street Journal, unstintingly hospitable to the ideas of the New Era (including, late in March, the theory that the S&P would not be overvalued even at 100 times earnings) on May 14 published an instant classic of the bull-market genre, “Let’s Burst the ‘Bubble’ Theory,” by Alan Reynolds. It was a loss for the Journal’s readers that Reynolds, director of economic research at the Hudson Institute in Indianapolis, ran out of space before he could define the phenomenon he was disparaging, or elucidate the theory he was trying to debunk.

More is less

In a feat of poetic compression, the American Banker last week distilled the current moment in credit in a two-column headline: “Regulators Say Loan Standards Weak, But Portfolios Healthy.” (Someday, the Banker should publish the story that would take a variation on that headline, i.e., “Regulators Say Loan Standards Weak, And Lenders Lucky.”)

Surroundings conducive to bubble thoughts

“Certainly,” opines the May 6 edition of Merrill Lynch’s Global Market Trends, “we do not believe the U.S. is experiencing an asset price bubble. Bank lending growth and asset price gains are robust and this may be worrying the Fed. But as our U.S. economics team has recently noted, every major indicator of domestic activity declined in March and evidence of an asset price bubble is most ambiguous at the real estate level. . . .” Perhaps we are reading too much into our work environment,

May 8, 1998, Vol. 16, No. 09

John Succo doesn’t work here anymore

Speakers at Grant’s conferences have often made news, but never before by losing a job. Two days after his appearance at our April 28 spring gala, John Succo was dismissed from his post as trading manager of Lehman Brothers’ New York equity derivatives volatility trading desk.

Hauling money

When United Road Services was incorporated last July, the cost of a share of its stock was three cents. By 4 p.m. last Friday, the day of the initial public offering, the price of a share of the same stock was $18. Neither last July nor last week was the company actually generating any revenue. What it did produce, on the other hand, over just nine months, was a 59,900% capital gain.

Sell the dollar

Chris Sanders, the proprietor of Sanders Research Associates (which he operates out of the U.K.), observed that the number of liquid currencies circulating in economies almost as large as America’s has just doubled, to two. For the first time in monetary annals, an established reserve currency, i.e., the dollar, is facing serious competition from an aspiring reserve currency, i.e., the euro.

A little bit nutty

Wilbur Ross, the well-known bankruptcy and workout specialist (he is senior managing director of Rothschild Inc. and chairman of the Rothschild Recovery Fund), predicted lush times for corporate salvage. The volume of junk-bond issuance, the kinds of companies doing the issuing and the kinds of investors doing the buying all point to a repeat of the bankruptcy bulge of the early 1990s—except that, he told the Grant’s conference, in the coming bear market, the debt holders can look forward to even greater losses than they suffered the last time around.

Like Charles de Gaulle

“To paraphrase Benjamin Graham,”Jean-Marie Eveillard, star portfolio manager and president of The SoGen Funds, told the Grant’s conference, “the market seems high, it is high, and it is as high as it seems.”

The dog died

Many eminent economists have tried to elucidate the difficult concept of asset inflation. Our luncheon speaker, Gordon W. Ringoen, broke new rhetorical and theoretical ground.

Live from Hong Kong

J. Mark Mobius, the old Asia hand and portfolio manager (he’s with the Franklin Templeton Group), was a bullish specter at the Grant’s conference. His disembodied voice and his ethereal image were beamed into the St. Regis via satellite from Hong Kong. It was 10 p.m. in one former British colony; it was 10 a.m. in another former British colony. Our speaker was two meals ahead of the people who were listening to him.

Virtues of growth

Christopher C. Davis drew a knowing laugh from the Grant’s audience when he quoted his late, great, money-making grandfather, Shelby Cullom Davis: “You may be right to be bullish, but you’ll always sound smarter if you’re bearish.”

Just for insurance

As expected (Grant’s, April 24), the New York State Assembly’s Committee on Insurance turned thumbs down on legislation under which a mutual life insurance company domiciled in New York would be able to sell stock to the public through a newly created mutual holding company.

Weird yields: a pair

The characteristic financial excesses of the world’s top two economies were made manifest in the pricing of debt securities this week.

April 24, 1998, Vol. 16, No. 08

Now trading below book: security analysis

On April 16, Anthony Elgindy, chiefanalyst at Key West Securities, of Hurst, Texas, drew a line in the sand concerning K-tel International, the record company that the stock market was then reinventing as an Internet company. (Going straight up, the stock has traded as many as 14 million shares a day, an impressive premium to its 1 million-share float.) “Although KTEL has announced plans to offer their products via the Internet,” Elgindy declared, “this hardly supports an increase of 300% in market capitalization. . . .

Revolution now

Tuesday’s Financial Times brought new evidence that the revolution in Japanese corporate governance (Grant’s, February 27) is no mere pie in the sky.

Escrowed to trouble

In the 1980s, companies that could not afford to pay interest at the going junk-bond rates issued zero-coupon debt instead. In effect, the interest bill was payable when the bonds matured (by which time, as every bull agreed, the borrowers would be able to pay it).

Like the stock market

“Sultry Miami, home to the thong bikini, may not be the first venue that springs to mind when one thinks of skiing,” Newsday reports. “But New York land developer David Plattner of Original Ventures Inc. said. . .that he wants to build a domed winter entertainment complex—including a pair of man-made mountains covered with snow—on a subtropical island owned by the City of Miami.”

‘‘Ownerless’ equity

The chairman, president and CEO of the mutual life company of which Snoopy is the public face testified before a committee of the New York State Assembly last fall. “. . .I am not a robber baron,” said Metropolitan Life Insurance Co.’s Harry Kamen. Suspicion to the contrary was provoked by a piece of legislation that had come before the committee with MetLife’s full endorsement. . . .

Central bankers clutching pins

“[L]oan receivable growth remains difficult as prepayments and competitive pressures are causing industry loan standards and pricing to fall below levels that we consider prudent. . . ,” according to Richard M. Kovacevich, chairman and CEO of Norwest Corp., . . .

April 10, 1998, Vol. 16, No. 07

Capitalizing speculation

The merger of Citicorp and Travelers Group would create a financial institution with a balance sheet 40% larger than that of the Federal Reserve System. So it was almost an act of noblesse oblige for John S. Reed and Sanford I. Weill to call on their counterparts in Washington recently—the chairman of the Federal Reserve Board, the Secretary of the Treasury, the President of the United States—to tell them what they were going to do before they did it.

Ultra-low reward

At last report on March 20, the footings of the Bank of Japan were up by 50.9% from a year before. To achieve this troubling and unprecedented expansion, the bank monetized assets equivalent to 5.5% of Japanese GDP, or $207 billion using the rate of 134 yen to the dollar. What it created in just one year is the equivalent of 44% of what the Fed possessed at its last statement date. To monetize means to turn into money; literally, in just 12 months, the Bank of Japan has created $207 billion. As far as we know, there has never been a central-bank credit expansion like it before. It is a first in the history of the printing press.

Sleep Awareness Week

A money manager writes: “I alone have been blessed with an unambiguous sign of the top. (No, I really mean it this time.) My very first client called yesterday to close his account. He informed me that he is going to move all of his retirement funds (my client is 75 years old) into the Vanguard S&P 500 Index Fund. My client explained to me somewhat apologetically that he was making this move because, ‘I just need to sleep at night.’” Already, as our money-manager source continues, the timing of the client’s exit appears questionable.

The big fix

Inflation in the United States is rampant mainly in the capital markets: on the New York Stock Exchange and the Nasdaq Stock Market, for example, or—just a few subway stops uptown—in the fabulous Times Square real-estate district. At the Crossroads of the World the other day, a pair of development sites (said to be the last such parcels available) were marked for sale at the equivalent of $180 a buildable square foot, twice the amount paid in a comparable transaction less than six months ago.

Regulation ‘T’: RIP

“Tearing down barriers erected after the 1929 stock market crash,” the American Banker reported a few months ago, “the Federal Reserve Board [has] made it significantly easier to borrow to buy certain securities. “Effective April 1, banks may lend up to 100% of the purchase price of so-called small cap stocks listed by Nasdaq. The margin requirement in Regulation U had prevented buyers of many of these securities from borrowing more than half the purchase price from a bank. . . .

One basis point of anxiety

For the futures market’s money, the successful launch of European Monetary Union is almost foregone. What is even more absolutely inevitable, according to the congress of speculation, is the success of EMU once it gets under way.

March 27, 1998, Vol. 16, No. 06

The secrets of 1777 F Street, N.W.

Not until May will the world get a peek at the year-end 1997 balance sheet of the second-largest issuer of government securities in Washington, D.C. Until then, interested parties will have to control their curiosity, satisfy themselves with the September 30, 1997, statement of condition, or make do with the vague phrase that turns up in the infrequent press story, i.e.: “the $325 billion-asset bank system.”

Soap opera

Coinmach Laundry Corp., which operates laundry rooms in apartment buildings and harvests the quarters and dollar bills, is a creature of the credit cycle. Highly leveraged and loss-making—yet fast-growing, too—it has been able to borrow every dollar it thinks it needs to borrow. Even if the Fed isn’t running an ultra-expansive monetary policy, the banks that belong to the Federal Reserve System (and to the Home Loan Bank System, too) would certainly seem to be doing their best.

Adam Smith-san

The idea of buying Japanese equities must, by now, seem almost as farfetched as the idea of not buying American equities. The reason to be bullish on certain Japanese companies is—to repeat—that they are cheap.

Buy fear

Late in the 19th century—decades before the federal safety net was rigged underneath the high-wire act of American banking—George Gilbert Williams, president of the Chemical Bank, was asked for the secret of his success. “The fear of God,” he replied, quietly but firmly. Today, fear—the fear of just about anything—is in headlong retreat. Courage is on the march. Anyone temporarily lacking courage can find it in the stock market or by watching the daytime television programs in which the stock market outshines even the dazzling Susan Lucci.

Value of enterprise

What about a multiple of enterprise value? more than one reader asked after putting down our bullish analysis of Southland Corp. in the Friday the 13th issue of Grant’s. No such calculation accompanied the story, which concluded that the biggest U.S. convenience-store chain is cheap at the price. The price used to reckon cheapness was the price of the common stock alone. Combining common stock with debt would yield a very different gradation of cheapness for any leveraged enterprise, of course.

Back to the 1930s; back to the 1980s

“Hong Kong real retail sales are contracting at a 27% annual rate,” according to the indispensable morning fax from International Strategy & Investment. It was in the light of news just this Depression-like that the Reserve Bank of New Zealand last week relaxed monetary policy, at the same time conceding (a rarity for that institution) a “slightly higher inflation track in the next two years. . . .”

March 13, 1998, Vol. 16, No. 05

Speculation: made in Japan

In the last edition of Grant’s, we reported that the growth in the assets of the Bank of Japan was hurtling along at a year-over-year rate of 24.4%, the kind of stimulus usually associated with banana republics during election season. Now, at the latest reporting period (one comes along every 10 days), the growth of the balance sheet has climbed to a rate of 42%.

Thank heaven

Almost a decade ago, Southland Corp.’s high-yield debt was priced as if for disaster. Today, it’s the common that trades as if there were no tomorrow.

Sell advertising

“First Union is buying a brand name,” an analyst recently ventured in explanation of why a bank would pay a king’s ransom to buy the sub-prime mortgage lender for which Phil Rizzuto used to play shortstop. What created the brand called the Money Store? The power of advertising. What caused the top investor- owned advertising stocks to soar by 60.8% last year? The power—we now shift gears—of asset inflation.

‘Do earnings matter?’

Those portions of the Mississippi delta not now given over to casino gambling are sometimes planted in cotton and soybeans. Delta & Pine Land Co. is a developer, breeder and purveyor of cotton and soybean planting seeds. And so powerful is the gambling impulse of the new Mississippi delta that even the seed industry has entered its orbit; Delta’s stock changes hands at 286 times trailing net income.

Latent bond bulls

“The dividend constituency has vanished,” writes Peter Bernstein, consulting economist extraordinaire. Not since 1949, the half-century for which he has examined the data, has the dividend-payout ratio been so low as it is today: 35%. And never before has the bond-stock ratio (five-year note to S&P 500 yield, as we calculate it) been so high.

Something stirs in Bern

For the first time since in more than 20 years, the line item for gold bullion on the balance sheet of the Swiss National Bank has registered a small change. It was Kathleen Fahey of this staff who noticed the deviation from the norm (reflected in the summary data below), and we promptly called Bern for clarification. Has the SNB been playing in the gold market?

February 27, 1998, Vol. 16, No. 04

Red-hot world deflation

All eyes, please, to the graphs on page 2. The first plots the startling leap in worldwide “liquidity,” i.e., M-1 and other monetary aggregates in 26 member countries of the OECD, from the United States to Germany to New Zealand and points in between, plus Hong Kong, Singapore and Taiwan. (The murkiness of the definition is owing to the variety of countries and monetary measurements incorporated in the list.) The other graph traces the steady rise in the net borrowing of the leading U.S. bond dealers. Observe that global liquidity is growing faster than it has since 1972, at least.

Making common currency

For the first time in a half-century, the dollar is facing a serious competitive threat. The monetary challenge doesn’t concern exchange rates, at least not immediately. The issue is one of market share, or shelf space.

Gain without pain

Thrift is a noble virtue, but it isn’t the main source of the great American bull market. The numbers lay this puritan misconception to rest.

Hustling the East

Almost a decade ago, The Economist proclaimed a revolution in Japanese corporate finance. “Barely believable but true,” the magazine marveled in the summer of 1989, “Japan is making it easier for foreigners to buy its companies. [Japan’s civil servants] are hurriedly rewriting the rules to make American-style mergers and acquisitions more acceptable in Japan.” But The Economist marveled too soon. . . .

Continental fall guy

Mexico’s preliminary trade deficit for January turned out to be $565 million, smaller than December’s $733 million (after revisions) but bigger than the shortfall that the average forecaster on the case was predicting only a few weeks ago.

February 13, 1998, Vol. 16, No. 03

Desperately seeking safety

Living up to their hard-won reputation for not buying low, and for no selling high, Japanese money managers have been redeploying funds. True to form, they have been migrating out of cheap markets, which they regard as perilous, into rich ones, which they feel are safe: from Asia into the United States and Europe. Right or wrong, Grant’s Interest Rate Observer has been migrating in the other direction.Living up to their hard-won reputation for not buying low, and for no selling high, Japanese money managers have been redeploying funds. True to form, they have been migrating out of cheap markets, which they regard as perilous, into rich ones, which they feel are safe: from Asia into the United States and Europe. Right or wrong, Grant’s Interest Rate Observer has been migrating in the other direction.

Mexico, Act II

The disastrous peso devaluation of Dec. 21, 1994, shocked the non-Grant’s-reading portion of the world. Now the world—paid-up subscribers, especially—is put on notice again. Signs of a new Mexican financial crisis are thickening fast.

Speculation in Omaha

“Barbra Streisand and her financé, James Brolin were there,” reported The Washington Post on the glittering list of attendees at last Friday’s White House dinner for British Prime Minister Tony Blair, “as were John Kennedy Jr. and Carolyn Bessette Kennedy, Tom Hanks, Harrison Ford, Steven Spielberg, Ralph Lauren, Tina Brown, Anna Wintour, Carol Channing and Warren Buffett.” Warren Buffett? In his capacity as speculator? Or in his capacity as investor? Maybe the White House itself wasn’t sure.

High on credit

“Heroin chic” is out, according to Calvin Klein, who made it fashionable; “sunny-side up” is in. “The real big change for me is that everything is prettier, healthier, cleaner, attractive,” the designer told The New York Times the other day in describing the new advertising campaign in which the models will bathe before they come to work and smile on camera. Thus, the fashion cycle is in harmony with the stock-market cycle, and the stock-market cycle is in harmony with the presidential approval cycle. All of these things are in harmony with the credit cycle, which has achieved a state of bliss qso intense that (at this writing) the shares of Chase Manhattan Corp. have risen for 10 days in a row.

One bankruptcy more

Even in a pliant credit environment, accidents can happen. The February 2 bankruptcy of Bruno’s Inc., the Birmingham (Ala.)-based supermarket chain purchased in 1995 by Kohlberg, Kravis, Roberts, is one such mishap. What does it mean that Bruno’s has become a Chapter 11 statistic?

Pick of the litter

Yield-free, scandal-plagued and recession-wracked, Japan is now snowbound, too. You can see it in the Olympic coverage on television. Small wonder that an index of small-cap Japanese stocks recently made a 15-year low. On the mounting evidence, the scandals will long outlast the snow. Every day brings new confirmation of the essential corruption of regulated Japanese finance.

A neutral answer to a burning question

Not once in the past 10 years have U.S. exports (as measured by the National Association of Purchasing Managers) fallen as they fell in January.And never before—not in a hundred years—has the Dow gone up by as much as it’s risen in the current great bull market.

January 30, 1998, Vol. 16, No. 02

Contrary opinion: sell the dollar

“The Almighty Dollar is back,” reported The Washington Post two weeks ago, when the newspaper of Woodward and Bernstein could still find space for general-interest material. “With Asian financial markets in turmoil, Europe in an economic funk and the price of just about everything falling around the world, it seems everyone wants to have and hold dollars.”

Less at the margin

Much smaller cap

The severity of the Asian slump is apparent at ground level as well as from the macroeconomic heights. Last October 24, Grant’s featured a list of 25 small-cap Asian stocks, five in each of five bear-market countries: Indonesia, Korea, the Philippines, Singapore and Thailand. (Japan we covered on September 12.) Low-priced at the time, the stocks have become ultra-low-priced. What we set out to do was apply a value-type discipline to bear-market investing. We purposefully did not pick the biggest and most liquid and most institutionally palatable names in a market. Our reasoning was that they were too rich (and so they remain, it seems to us).

No sellers, no buyers

Last Friday’s rally in the gold market—up by $9 an ounce, which looked like a typo—elicited a remarkable interpretive comment: “So many people have sold gold that there is a liquidity issue,” a trader told Bloomberg. “When someone enters the market to place a large order, it becomes difficult to find someone who can match it and prices jump.” If that explanation sounds familiar, it’s because it’s versatile; it has worked like a charm in reverse, too.

Excess capacity

According to Inside B&C Lending, an authority on the subject, new originations of sub-prime mortgages last year totaled $124.5 billion. That was up by a striking 28% from 1996 and was double the volume of 1995 (all of the numbers are estimated by Inside B&C Lending). One source of growth identified by the publication was the “influx of new players.” Such an influx is rarely good for profit margins. . .

January 16, 1998, Vol. 16, No. 01

Physician, heal thyself

As lesser nations continue to receive the priceless counsel of ranking U.S. government officials on the Asian monetary dilemma, the outlines of the next American credit crisis are taking clearer shape. Anybody with a pair of reading glasses can see it coming. The underlying cause will prove to be excess capacity in the business of creating credit, it seems to us.

Euro fever

Only last March, a lira-denominated bank deposit outyielded a deutschemark-denominated bank deposit by 250 basis points. Now—astoundingly—the yield premium attached to the lira is just 27 basis points. Moreover, it has hovered in the neighborhood of 25 basis points since October. In other words, as a friend observes skeptically, the odds attached to successful European monetary convergence improved by 10-fold in approximately seven months.

The year is 1984

In 1995, exactly one Japanese corporation announced a plan to repurchase its own shares, according to Bloomberg, which would know. In 1996, the grand total of buyback announcements was 13. In 1997, by the actual count of our own Ken Shirley, the very grand total was 115. One reason for the growth in popularity of this previously un-Japanese corporate stratagem is the continuing fall in Japanese stock prices.

Gold rush

Gold equities are in notoriously ample supply, but not—interestingly enough—gold itself. Thus, for example, according to a Sunday dispatch from Reut, there aren’t enough coins and bars to go around in Dubai.

Nobody isn’t bullish

The population of investors still unconverted to the Church of Mutual Funds continues to shrink alarmingly. From page one of Tuesday’s USA Today: Wendell Doman wasn’t your typical embezzler. A Mormon and father of seven, Doman didn’t steal from corporate coffers to fund a wild spending spree, trophy mistress, gambling or drug addiction. . . .

Proud to be ‘Morgan’

The population of investors still unconverted to the Church of Mutual Funds continues to shrink alarmingly. From Up until just the other day, J.P. Morgan & Co.’s mutual funds didn’t bear the J.P. Morgan name. They were, elliptically, the “JPM Pierpont Funds.” It had always seemed to us that our neighbors down the block didn’t have their hearts in the levitating stock market, but maybe we were projecting our own prejudices . . .

Asian interest-rate roundup

If the world’s formerly fastest-growing continent has temporarily stopped growing and taken a step backwards, 1998 interest rates will help to explain why. Take Korea, for instance (please).

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