“Mr. Westerfield said he thinks the stock could reach $75 a share,” reported The Wall Street Journal on December 8 in a story about Dow Jones & Co., the Journal’s publisher. The stock referred to was none other than Dow Jones. . . .
Just substitute ‘Internet’
“What’s Left of the New Era?” asked Business Week early in 1930, 70 years ago next month. The stock market was in a shambles, but not yet the world economy, and the magazine was raking the debris of what the bulls of that day, too, had called a New Era.
On December 8, a New York Stock Exchange-listed company received a buyout proposal. Here, at first glance, was a bull-market news item as unremarkable as the business of the target company (i.e., pre-engineered buildings). Amazement dawned on the second glance, however. . . .
The New Economy has been good to American media companies. Yahoo! and E*Trade, for example, have been committing more than half their revenues to advertising, as have many lesser Internet lights. Money seems to be no object: After all, topping off the ad budget is what secondary offerings are for.
We asked James Medoff, a Harvard economics professor, and Andrew D. Harless, a Needham, Mass., econometrician, authorities on the labor market, to contribute a comment on the ultra-tight job market.
Should bondholders be worried about a labor shortage? In sum, not yet. . . .
While it is true that the Fed may decide to raise its funds rate or tighten its “bias” in coming weeks, it is, in this holiday season, implementing one of the major credit expansions of the decade. . . .
In the United States, preparations for the millennium festivities have taken the curious form of massive credit creation. The Federal Reserve has been buying government securities at a rate that used to be called inflationary. Nothing like this extraordinary pace of money printing is in evidence at either the Bank of Japan or the European Central Bank (although growth in the BoJ’s balance sheet has recently accelerated). Evidently, Y2K is happening only in America.
Last month, the corporate parent of Grant’s reached a six-figure settlement with an institution that, from time to time, had been distributing to its employees more copies of Grant’s than it paid for.
What used to be Tenneco isn’t anymore. Only one business today bears the name of the former natural-gas pipeline, shipbuilding, plastic-bag, wallboard and agricultural equipment conglomerate. It’s Tenneco Automotive, one of the world’s leading makers of shocks and mufflers.
“Tyco,” writes James P. Samuels, equity analyst at Banc of America Securities, “like most of the better companies in the multi-industry sector, is in the business of delivering results as promised. Predictability, though, does not just fall from the sky or happen by accident. Companies have to work hard to have quarterly and yearly earnings materialize as planned.”
“To the sky” is the height that trees proverbially don’t reach, but timber has produced some of the best long-term investment results of any class of investment asset, including the kind printed on paper, which is derived from cellulose. Precious little of this historical performance is reflected in the valuations of listed wood and wood-products companies, however.
Yet another definitive top in high tech was signaled by a report in Tuesday’s San Francisco Chronicle that a partnership consisting of active and retired professional athletes will invest some $40 million in Silicon Valley’s leading venture capital funds (thank you, David Gale). Steve Young, Jerry Rice, Dan Marino and Barry Bonds are among the 99 star qualified investors; Benchmark Capital, ComVentures, New Enterprise Associates and Technology Crossover Ventures are among the 10 hot investees.
Turkeys stuffed with money
In the first three weeks of November, according to the Federal Reserve (via Morgan Stanley Dean Witter), currency in circulation climbed by $16 billion. In neither 1998 nor 1997, in the corresponding three-week period, did currency outstanding expand by even $6 billion.
Tuesday’s 25 basis-point increase in the federal funds rate (and corresponding boost to the discount rate) left the stock market even happier than it was on Monday. The Federal Reserve has let the word go forth that liquidity will flow like champagne over the New Year and into the new millennium.
It may or may not be coincidental that two of the least esteemed industries in America in 1999 are ones having to do with risk. Property and casualty insurance stocks (Grant’s, October 22), it’s true, have snapped back hard, but not so the likes of Lockheed Martin and Raytheon.
Over time, very cheap stocks have tended to outperform very rich ones, but not this time. Over the past 17 months, the most expensive 10% of the U.S. equity market has handily beaten the lowest-priced 10%. If this interlude conjures up the “Great Garbage Market” of 1968, then you are either very well read or middle-aged.
Tips, prophecies, omissions
Not one specific equity short-sale idea was put forward at last week’s Grant’s conference, which may give comfort to the bears. Nor did any speaker mention the derivatives markets, an especially timely subject after the recent combustion of Ashanti’s gold “hedge” book. However, the day did provide a number of long ideas, as well as a handful of macro-economic predictions.
There’s nothing inherently wrong with private equity, Frederick E. “Shad” Rowe told the Grant’s conference. On the contrary, he observed, the owner of a closely held business can control the management (and leverage the balance sheet) in ways that not even a major public shareholder could begin to do. On the other hand, the very popularity of this form of “alternative” investment makes it ripe for abuse.
The St. Regis Hotel, where room rates start at $425 a night, turned out to be the perfect venue for last week’s discussion of monetary policy and price inflation. Andy Carter, looking every inch the bond man (he was turned out in his trademark creditor’s three-piece suit, bow tie and handlebar mustache), held up a dollar bill to the crowd. “This,” he said, “is a wooden nickel rolled flat.”
If the Internet boom is a gold rush, observed Seth Klarman, our luncheon speaker, it’s a gold rush so far without the gold. The way to riches online in 1999 is not to operate a business but to start one, not forgetting to take it public at the earliest possible convenience. Klarman readily allowed that the Internet is a good idea. However, he recalled the dictum about good ideas: Every financial calamity is founded on one.
The award for versatility in investment analysis at the last Grant’s conference of the millennium went to Keith D. Bronstein, president and director of TradeLink LLC, Chicago, for his in-depth discussion of both genetically modified crops and Japanese government bonds.
“It’s not about being a bear,” said Jeremy Grantham, who is one (on the S&P 500, that is). “It’s about being a contrarian.”
Grantham, whose subject was the U.S. stock market, or, more specifically, the conspiracy to perpetuate the U.S. stock market bubble, seemed to speak for others besides himself when he described a distinguishing feature of his personality. “As soon as I feel any consensus,” he said, “I need to attack it.” The room seemed to radiate understanding.
Barrie Wigmore, who literally wrote the book on 1929 (“The Crash and Its Aftermath,” first published in 1985 and reissued in 1999 by Greenwood Press), advised the Grant’s contingent not to worry about, or, as the case may be, root for, a recurrence. That was then and this is now.
Inflationary symptoms abound: $25-per-barrel oil; a $300-billion-per-annum U.S. current account deficit; severe shortages of substitute teachers, school bus drivers and infantrymen (to name only three). Is there really no inflation? Or is there something wrong with America’s inflation detectors?
Junk-bond default rates hit a post-1991 high in the third quarter, Moody’s Investors Service reports. Fully half of the defaulting issuers are newcomers to the speculative-grade market, having issued rated debt within only the past three years. Not for the first time, a boom in issuance has coincided with a downturn in judgment.
A new report on Amazon.com from the securities affiliate of Bank of America is notable not only for the fact that the analyst’s 12-month price target looks like a typographical error; the redeeming value of this work lies also in the timing of its publication.
“Question,” poses Gert von der Linde, inveterate reader of fine print: “Is anybody ‘out there’ talking about these discrepancies between early 1995 estimates and actual outcome?
The blessing of a federal budget surplus hasn’t solved the long-running American fiscal crisis; it has only redefined it. As yesterday’s peril was runaway borrowing, so today’s is the recurrent net pay-down of the selfsame indebtedness.
Contemplating the generous valuation of the most favored segments of the U.S. stock market, paid-up subscriber William M. McGarr asked a question: What do businesses—actual, nonpublic operating businesses—trade for these days?
In turn, we put the question to. . .
General Cigar Holdings (MPP), about which Grant’s stifled a yawn last issue, is, in fact, a stunningly cheap stock, so a reader of ours contends, and so we are now persuaded. . . .
“With the insurance regulators restricting the company’s dividend paying ability at its life operations, Conseco’s banks appearing to lower their level of credit support. . .
Fifty basis points or bus
All signs pointed to a rise in the European Central Bank’s 21/2% benchmark interest rate as this publication climbed into bed Tuesday night. (All signs in the euro-denominated futures market pointed in the same direction as we stopped work on the issue two weeks ago.)
Machinations of certain foreign interests
Americans, being Americans, are prone to assume that the United States is the cause of all international phenomena, including the transatlantic rise in interest rates. However, there is another interpretation, and it happens to be the one we favor: The Europeans are leading this increase, the Americans are following. Like Roquefort, the bear market in U.S. fixed-income instruments is chiefly imported.
Two weeks ago, Grant’s published a bullish analysis of a check-printing company that is striving to become an e-commerce payments company. Deluxe Corp. was then a $34 stock; on Tuesday, it was quoted at $27. To emphasize, this was not a short-sale idea.
What happened? . . .
On October 6, Argentina was demoted to B1 from Ba3 by Moody’s Investors Service. Yet, on the very next day, $1.5 billion of new zero-coupon notes of the Republic of Argentina flew out the window. The explanation for this bullish anomaly was a partial guarantee by the triple-A-rated World Bank.
. . .
Any interest in the equity of a maker of an unhealthy product that the public has recently lost interest in? Would it help if we mentioned that the company in question is a holder of Russian bonds? Or that the management responded to our requests for information with a suggestion that we consult the 10-Q?
If this isn’t the top of the market, it could be, and perhaps ought to be. From the October 14 Financial Times:
“The second most senior Internet specialist in. . .
Promote James P. Samuels!
One of the revelations of the Tyco International affair is an analyst’s comment that was published eight months before the brouhaha even began. In it, James P. Samuels, of the Montgomery division of Banc of America Securities, endorsed what is commonly known as managed earnings—not the bad kind, he hastened to add. . . .
John Reed, scarred veteran of the credit cycle, took the pledge last Thursday before a risk-management conference sponsored by the Office of the Comptroller of the Currency. He said that Citigroup (successor to Citicorp, the stock that made short sellers temporarily well-to-do in 1990-91) carried, and would continue to carry, twice as much capital as the risk-management models indicated it should have.
Bearish on bonds, Grant’s has propounded a range of theories to explain the seemingly mysterious rise in interest rates in 1999 (a year in which inflationary fears have persistently outlegged inflation).
A short squeeze with a monetary subtext
Government manipulation is the way of the gold market. In 1933, Franklin D. Roosevelt marked up the price to $35 an ounce from $20.67. It stuck. In the 1960s, a consortium of central banks, doing business as the London Gold Pool, tried to hold the price at $35. It failed. In the 1970s, the U.S. Treasury and the International Monetary Fund both sold bullion, also in an attempt to beat down a rising market. They, too, came up short. Now come 15 European central banks promising to put a cap on their bullion sales and on the volume of metal they lease in the open market. If what they intended to cause by these actions was a terrific metals rally, they succeeded. . . .
The European Central Bank may or may not be preparing to raise its benchmark 21/2% intervention rate this week (it was expected to meet Thursday morning). Never mind: the European money markets are taking independent action.
The gold price has erupted, the dollar index has weakened and the bond market has contracted a case of what grandmother used to call the dwindles. Is a new inflation—i.e., a conventional one in which the CPI, instead of the S&P 500, is the index doing the heavy lifting—now descending on Alan Greenspan’s America?
‘Faster, cheaper, better’
Deluxe Corp., which your forebears knew as Deluxe Check Printing, is embarked on a digital makeover. Even today, on the brink of the millennium, it prints checks on paper. Although management has no plans to abandon this lucrative original business line—forecasts of a “checkless society” have failed to pan out for as long as they have been uttered, which is about 25 years—it sees its future growth in a microchip.
On Oct. 6, 1979, the chairman of the Federal Reserve Board, Paul A. Volcker, stood before a highly unusual Saturday press conference to inform the bewildered journalists that the Fed had changed its operating procedure. As hard as it may be to imagine in the Greenspan imperium, the prestige of the Fed was then at low ebb. Inflation was endemic, the dollar exchange rate was weak and monetary policy—on the evidence of the comprehensively unsuccessful tenure of Volcker’s immediate predecessor, G. William Miller—was impotent.
Carlton Center, the tallest building in Africa, changed hands last month for 32 million South African rand, the equivalent of $5.3 million. The cost of construction in 1973 was 84 million rand. (What happened to the rand in the intervening period, we don’t know, but any meaningful appreciation can be absolutely ruled out.)
Fifty stories high, the complex consists of 785,842 square feet of office space, 559,778 square feet of retail space, 1,300 parking bays and 660 hotel rooms. Estimated replacement value, according to a Johannesburg real-estate investor to whom we spoke over the very long-distance telephone, is 750 million to 1,000 million rand (i.e., $123 million to $165 million).
In the bond market last week, a benign inflation report seemed to neutralize a malign current-account deficit report. Experts in these matters advised The Wall Street Journal that the happy CPI bulletin (inflation was little changed, ex-energy prices, ex-house prices, etc.) had removed the likelihood of an immediate Federal Reserve tightening.
So saying, however, they missed the point, we think.
The price of oil will go up, down or sideways, depending on certain imponderables. Humility is the best policy in oil-price forecasting, we feel, especially after the surprise 1999 bull market. (Grant’s is proud to have been bullish. In the announcement by DuPont of the sale of its once precious Conoco subsidiary last year, we correctly saw a major, even a poetic, buy signal.)
The oil market, because it sets the inflation tone for the non-Internet portion of the economy, is a second home to every fixed-income investor. . . .
Yen strong? Or dollar weak?
The yen is the currency that’s strong, according to received high-level opinion (as monitored in these offices). And so it might be. Observe, at the bottom of the page, the shrinkage in the balance sheet of the Bank of Japan.
The parable of the Reichmanns
There is no inflation. If there were, our government would certainly tell us about it. Yet, the 10-year Treasury note yields not 4.9%, as it did last autumn, but almost 6%. And a barrel of West Texas Intermediate crude oil costs $22.60, up from $14.30 a year ago. Is there an economist in the house?
Surveys show that most American teenagers have never heard of George Washington and don’t know how to open a window. These children have parents, of course. And now a survey by Fannie Mae reveals a portion of what the mothers and fathers of America’s youth don’t seem to understand.
“Most Americans don’t realize that delinquent bill payments can seriously affect their ability to obtain a mortgage,” according to the August 16 National Mortgage News, reporting on the Fannie Mae results. Or, perhaps, many Americans know the mortgage industry better than Fannie Mae does.
“Stock prices could double, triple or even quadruple tomorrow and still not be too high. . . ,” contend James K. Glassman and Kevin A. Hassett, the authors of the new book, “Dow 36,000” (a lengthy, a very lengthy, excerpt from which appears in this month’s Atlantic Monthly; it’s the cover story). “Stocks are now, we believe, in the midst of a one-time-only rise to much higher ground—to the neighborhood of 36,000 for the Dow Jones Industrial Average.”
Even if Dow 36,000 were not “too high” in the judgment of theorists and stockbrokers, might it not seem a trifle rich to the population of potential sellers?
As an addendum to the piece on REITs in the previous issue of Grant’s (the one before we went to the beach), we present the accompanying roster of REIT convertible preferreds. The issuers were selected by rating quality (at least Ba3 by Moody’s, except for the unrated SL Green), call protection and current yield.
On August 23, when the staff of Grant’s was monitoring events from locations outside the office, John C. Bogle, founder and senior chairman of the Vanguard Group, published, on The New York Times op-ed page, a cri de coeur against speculation. . . .
The late co-founder of Teledyne, Henry E. Singleton, had a unique approach to investor relations. It was to say as little as possible, confining his interactions with the shareholders to making them rich. His financial policy was to buy his stock when it was low and sell it when it was high. Interestingly, it worked.
We thought of Singleton when we read about the proposed acquisition of a closely held financial PR firm by a little tiny maker of golf equipment . . .
As dinner was being served out of a shopping bag in this office Wednesday evening (we are closing this issue 24 hours late, on account of Labor Day), news of the surprise strength in second-quarter Japanese GDP crossed the tape. Instead of a decline, there was an 0.2% expansion. . . .
A scripted financial entertainment
On the first anniversary of the credit crisis of 1998, fixed-income investors are taking measures to ward off a recurrence. In the dealer community, these precautions chiefly consist of not owning bonds. On the buy side, they mean not bidding.
“We know what paying down the debt means for America’s families,” bluffed President Clinton last week in disclosing the administration’s plans to buy back billions of dollars of U.S. securities in the open market and, as an earnest of coming achievements, to skip the November 30-year bond auction.
In pursuit of the perfect anti-bond, Grant’s has investigated royalty trusts, gold-linked preferreds, inflation-indexed Treasurys (TIPS) and real estate investment trusts. The object of our desire has been an upwardly mobile yield, supported by a steady income stream and a solid balance sheet. . .
Frederick E. “Shad” Rowe, self-styled recovering short seller, recently described, for the benefit of his investment partners, his experience on a golf excursion to Lake Tahoe. Rowe, who abandoned the bear business in the early 1990s to invest in the long side of the stock market (what was he thinking?), related that he was in the casino long enough to lose $20 at blackjack. The scene before him, he wrote, was a metaphor of the speculative bull market: Gamblers staring raptly at the images on CNBC. . . .
The sale by DuPont of its Conoco subsidiary did, in fact, very nearly ring the bell in energy (Grant’s, Aug. 14, 1998). You may remember the poetry of the situation. Way back in 1981, when oil was the asset that would ostensibly never depreciate, DuPont bought Conoco, then as now a major exploration and production company. It was the largest corporate acquisition of all time. . .
Two pictures, one subject
“No one will sell chaos,” said an astute market watcher the other day in making the case that no reenactment of the Long-Term Capital Management disaster is likely this summer. . . .
Fresh from his capitalistic missionary work with the Colombian guerrillas, Richard Grasso, chairman of the New York Stock Exchange, has promised a revolution in American finance.
What does the chairman of the Federal Reserve Board see when he surveys his monetary domain? Only the 50 states, or the deflation-challenged portion of the world beyond? Does his field of vision encompass the recession in Argentina and the financing crisis of Daewoo, South Korea’s second largest conglomerate? Does it include the price of corn, the Japanese GDP and the none-too-steady Chinese renminbi? If it does—as we think it must—does it not cause him to lie awake now and then wondering about the advisability of even one more quarter-point boost in the federal funds rate?
The issue of Time magazine dated May 30, 1932, which chronicles stock manipulation, falling commodity prices and contracting bank credit, among other events, has just arrived in our mail (through no fault of the post office; reader Eric Pepper only recently discovered it). It might have been published this week.
Who put the “New” in the New American Economy? Don’t forget to thank the Russians. After the collapse of the resource-squandering command economy of the Former Soviet Union (FSU), Russia has produced more and more even as it has consumed less and less.
The Daewoo liquidity crisis prompted an emergency call to Steve Persky, professional buyer of Asian corporate debt—not desperate debt, but obligations of the kind of lower-rated issuer that has not had to apply to the government of South Korea for a bailout.
Belated praise for a fine and futile call
According to the Federal Reserve’s own stock valuation model (as maintained and interpreted by economist Ed Yardeni), the S&P 500 was 50% overvalued in early July. In recent congressional testimony, Alan Greenspan brushed aside the risk that a crash would cripple the U.S. economy. In effect, said the chairman, America could work through it.
Japan, of course, has not worked through it. . .
The dog is barking (ask him why)
Flaws in the context of near perfection are easily overlooked (though not around here). Yet, a fact is a fact. In this, the solar system’s greatest economy, junk-bond defaults and nonperforming loans are on the rise. The tangible financial result of this strange occurrence will be a decline in banks’ reported earnings growth and a higher incidence of holes in speculative-grade bond portfolios.
Gabe Whatley, an outfielder for the Richmond Braves in the South Division of the International League, retired from organized baseball last Sunday. He was hitting .271. His 36 doubles last year tied him for second place on the all-time Richmond Braves single-season doubles list. He insisted that he didn’t want to quit. . . .
Shopping for himself, the man who has everything, Stephen M. Case, founder and chairman of America Online, passed up the sizable gift assortment available in the New Economy and turned instead to the old one. His surprise selection was a 41.2% equity interest in Maui Land & Pineapple, a business so old that its founding preceded the World Wide Web.
Almost 33,000 Japanese took their own lives last year, the most ever and a number greater than the latest annual suicide toll reported in the United States, a country with a population more than twice as large as Japan’s. In other Japanese social news, the word “happy” is becoming a fashion mantra, especially among young people.
The term “gold rush” has lost some of its punch with the barbarous relic at $250 to the ounce, but it’s the phrase that springs to mind to describe the appeal of the Internet in 1999. Corporations and individuals are investing in it not only because they want to, but also because they feel they have to. Some are obeying a compulsion.
Price Enterprises, the REIT featured in the May 7 issue of Grant’s, made the news again on May 12. On that day, Price disclosed that it was being acquired by Excel Legacy Corp. (XLG). The terms of the amalgamation are complex. Then, again, complexity is sometimes where the value hides.
If the Japanese economy is recovering, it’s no thanks to lending by Japanese banks (volume was down by 5.7%, year-over-year, in June—see page 9). Nor is the Bank of Japan carrying much reflationary water.
The great asset arbitrage
Why, in an economy so often described as inflation-free, are interest rates rising? A partial answer was provided by The Wall Street Journal two Wednesdays ago. If you remember, the prevailing customer-to-customer lending rate in certain quarters of the day-trading community is one-tenth of 1% a day, or 36.5% a year.
Compare this rate to the federal funds rate . . .
The last shall be first, and the first shall be last, says the Good Book, but Wall Street doesn’t believe it. Small-cap stocks are the cheapest they have been in relation to big caps in at least 25 years, and possibly for all time, according to Steve Leuthold, eponymous head of the Leuthold Group, Minneapolis. They are cheaper than they were even during the Nifty 50 big-cap infatuation of the early 1970s.
It is very nearly gospel in 1999 that the Internet is a cheaper medium of commerce than what used to be called the “store.” It is no such thing, according to a fascinating case study published by The New York Times
Having written in 1998 that the euro would challenge the hegemony of the dollar almost immediately upon its January launch, we have decided that the readers of Grant’s are entitled to a bonus currency prediction in 1999. Here it is: The continental unit is now making a bottom against the dollar. Presently, it will begin to rally (vagueness as to timing is intended).
As Alan Greenspan is irreplaceable, the Secret Service has begun to protect him. Yet, so little regarded is the Bank for International Settlements (BIS) that the discount of its shares to their net asset value is as deep as 80%.
The chairman of the Federal Reserve Board may or may not be personally overbought.
Rogers Sugar Income Trust (RSI-U on Toronto) was featured last issue among other dull and steady income-producing trusts. It immediately proved to be neither dull nor steady.
Future inflation at a glance
In the left-hand column on these pages is a summary balance sheet of the European Central Bank, superintendent of the soon-to-recover euro. Down on the lower right is the “Future Inflation Gauge,” . . .
Monetary policy in the age of cartels
On Tuesday, the editors of The Wall Street Journal advised the Federal Reserve Board against raising the federal funds rate for the ill-considered reason that economic growth is incompatible with price stability.
Grant’s filed suit against BankBoston Corp. in U.S. District Court in Massachusetts last month for copyright infringement. The complaint seeks an end to illegal photocopying of Grant’s as well as damages for past illegal copying. . . .
There are reportedly no fewer than 100 Internet-related IPOs awaiting clearance for takeoff from the Wall Street International Airport to the shining city of Windfall. “If one fact is glaringly clear in stock market history,” wrote the late John Brooks, “it is that a new-issues craze is always the last stage of a dangerous boom—a warning of impending disaster. . . .”w
In Japan nowadays, seeing is disbelieving. A surprise resurgence in economic growth? A bullish and precedent-shattering M&A transaction? With few exceptions, Western observers of Japanese developments in mid-1999 are from Missouri.
Thus, the Financial Times commented last week on the victory of Cable & Wireless, a British company, in the contest to buy International Digital Communications, a Japanese one. . .
Thanks to the Internet, the phrase “foreseeable future” has become an even purer oxymoron than it was in the dead tree era. For instance, there was a surprising addendum to Merrill Lynch’s recent historic embrace of e-trading. . . .
http://grantspub.com/pdfssky/articles/1469.pdfIn 1994, the bond market blew up. The incendiary element was not so much the “fundamentals” (inflation and/or scary GDP growth) as it was the speculative architecture of the market itself. . . .
The economic consequences of air conditioning
On Wall Street’s authority, the Internet is the most important innovation of all time. The brokers and bankers say this without qualification, and they would have us invest in the same spirit. In general, they advise the purchase of Internet stocks without regard for price or valuation on the ground that, to them, the principal long-term financial risk associated with the worldwide web is not being invested in it.
“Our basic premise,” says Eric Bushell, portfolio manager of the C$260 million BPI High Income Fund, Toronto, “is that we are looking for low-growth businesses that have low sustaining capex requirements and stable cash flows.”
Canada is just the place to look. . . .
No survey of the Canadian income scene would be complete without a visit to Legacy Hotels (LGY-U), a REIT spun off in 1997 from the Canadian Pacific hotel chain and given up for lost only eight months ago. . . .
Leslie H. Wexner, the founder, chairman and largest stockholder of The Limited Inc., is also the apparel chain’s “creative force” (The Limited’s own PR department attests to this).
In January 1996, a long-dated call was struck between Wexner and the Columbus (Ohio)-based retailer. Last month, it was most creatively unstruck. The story of the making and breaking of this contract is a parable of the greed portion of the stock-market cycle.
In the past week, the Japanese two-year yield has more than doubled, to 14 basis points from six. Expressed in terms of the time required to double one’s continuously invested money, the rate has moved to 495.5 years from 1,155.5 years. (All quoted magnitudes are, of course, pre-tax.)
A new high in the prestige of modern central banks was recorded two Fridays ago when Britain waylaid the gold market. Without warning, Her Majesty’s government announced the sale of more than half of the U.K. gold reserve, formerly called “treasure.”
The price of a share of priceline.com is up eightfold since March, enough to give the fledgling Internet company a market cap larger than that of one seasoned American retailing establishment, at least—Sears, Roebuck & Co.
Behind the curtains at the back of the St. Regis conference room, a couple of uniformed hotel employees sat in front of a personal computer. Apparently, their attention was not directed to the Grant’s speakers, some of whom gave erudite presentations on risk, but rather to the Ameritrade online account page that lit up their screen. According to an eyewitness, the two exchanged high fives after the stock market came back from the micro bear market that followed the resignation of Robert Rubin. Later in the day, they cleared away the cups and glasses.
Day-trading during a Grant’s conference always puts the distracted party at risk of missing opportunities for profitable (or, indeed, unprofitable) investing. So it was during our 1999 spring event. Chris Sanders, principal of Sanders Research Associates, a U.K.-based independent research and consulting firm (and a director, too, of Union WorldInvest) stood before the crowd and prophesied a rising inflation rate and a big spill in the U.S. bond market.
Many of those who did not get to the Grant’s conference instead filed into a big auditorium at the Equitable Building in midtown Manhattan to hear Louis V. Gerstner Jr. expound on the state of IBM. The state of the company is brilliant, said the chairman, essentially. . . .
A page-one investigative story by The New York Times on May 12 detailed the wholesale transfer of cash from official Chinese institutions, including the People’s Bank of China, to an obscure California bank for no known reason except, perhaps, to finance espionage operations, buy political influence or (rounding out the list) to conduct “legitimate business dealings.”
Long before the Federal Reserve changed its mind, or “bias,” the yield curve was in motion. Since the turn of the year, the spread between the one-year Treasury bill and the 10-year note has widened to 75 basis points from 9.75 basis points, a kind of fixed-income seven-bagger.
The low U.S. unemployment rate is old news. So, too, is the low U.S. factory capacity utilization rate. The new and untold story is the two of them
Loews Corp. is a collection of businesses so varied and heterodox that they might have met by accident in a bus station. Under thehttp://grantspub.com/sgadmin/newsletters/dsp_editarticle.cfm?nlid=214&artid=1449 corporate roof of the House That Tisch Built are property and casualty insurance, cigarettes, oil drilling, hotels, wristwatches, oceangoing shipping, telecommunications, office real estate and (as a special bonus for Grant’s readers) a bearish mind-set toward the overvalued American stock market. . . .
A credible case for the short sale of Staples Inc., the nation’s No. 2 office-products retailer, could rest on one fact only: the grand opening of a shiny new headquarters building situated on a street in Framingham, Mass., that bears the retailer’s own name. There’s something about the smell of wet paint that can put an otherwise dynamic organization into a deep sleep.
Beholding a mountain whose slope anticipated an arithmetic plot of the 1999 Dow Jones Industrial Average, George Mallory set out to climb it. When asked why, he said, “Because it is there.”
The Dow is there, too, all right. Then, again, so are innumerable sources of investment income. The difference is that the latter-day George Mallorys are all up on Mount Dow; income is lying unclaimed on the sidewalk down below.
What follows is another installment in our irregular series on income. . . .
A magnifying glass, please
At the bottom of the bond bear market almost 20 years ago, the majority of investors spurned record-high yields because they didn’t believe the numbers. A yield that was represented to be 14% or 15% was actually—after allowances for inflation and income tax—much lower, the argument went. “Yield to maturity” was a red herring; it was the adjusted yield that allegedly mattered.
So, too, today, but in reverse. . . .
The coming shortage of hard currencies
“I just came back from Switzerland,” relates Yves Mojonnet, a San Francisco investor and paid-up subscriber, “and I have witnessed a shift in public perception about the long-term benefits in joining the [European Union]. And I would put some money on it that, sooner or later, the Swiss will be in favor of this.”
The Swiss joining Europe? Without their precious franc? In exchange for the sinking euro?
“We are the largest broadband telecommunications and cable television multiple systems operator in Spain operated under centralized management,” says the Ono Group, addressing the would-be buyers of its new junk bonds. The Ono debt prospectus, just out, constitutes a milestone of the current credit cycle.
“More than one-third of the entire population is immediately at risk of insolvency if almost anything financially negative happens to them,” said Stuart A. Feldstein the other day, referring to none other than the American population in this, the new economy.
Rock Financial Corp. is a debt-consolidation company, home equity specialist and residential mortgage lender. Now, at nine times book value, it is also a newly discovered Internet residential mortgage lender. On the authority of one of its own press releases, it happens to possess “the most user friendly and easy to use mortgage site on the Internet.”
Easily the most inspiring page of the new Goldman Sachs prospectus is the inside back cover. Scenes of social betterment are presented in a sunburst of full-color photographs. Bright and eager Goldman Sachs employees wield the tools of good works—brooms, hammers, circular saws. Young analysts and associates, who, in the ordinary course of their grim professional lives, might never see daylight, pose outdoors in corporate T-shirts, baseball caps and smiles. The camera records so many wonderful scenes: teaching, building, cleaning, playing, planting, living—caring!
We don’t, either. A forgettable 1998 production by Metro-Goldwyn-Mayer and starring Robert De Niro, “Ronin” is one reason the famous studio must soon do lunch with its bankers. It’s running out of cash.
One new feature of the new economy is its temperature. It is cooler. Although the economic expansion is well along in years, the factory capacity utilization rate has hit a six-year low. Nowadays, U.S. productive capacity is really the combined capacity of the American trading partners (and not a few of those trading partners are in recession, or near it). Small wonder, then, that the price-inflation data read like somebody’s campaign biography.
First there was J. Pierpont Morgan
The March 30 edition of The Wall Street Journal, with its unique page one makeup and exultant Dow 10,000 headline, fairly jumped off the newsstands, and the quotes of the bullish equity strategists almost leapt off the page. Top American corporations will command even higher valuations in the future, said one, because they constantly reinvent themselves. “What price do you want to pay for a Matisse?” he asked.
USA Today memorialized Dow 10,000 with a page one story on March 31 about the inertial American saver. The headline reproduced above strongly suggests that money not earning a competitive rate of return might as well have been buried in the compost heap.
Coca-Cola Co., one of the world’s greatest growth companies, has lately stopped growing. Coca-Cola Enterprises, the biggest Coca-Cola bottling company, has also come up short recently in the earnings department, despite enormous infusions of cash from its imperial parent. And as if this weren’t enough, the Financial Accounting Standards Board (FASB) is proposing to require the full consolidation of all “controlled” corporate entities. Such a rule, if applied to Coke (as it ought to be), would force a fundamental change in the way the relationship between Coke and Coke Enterprises is presented to stockholders and creditors.
Global Crossing (GBLX), the hot undersea optical-fiber cable company, has a stock-market capitalization of $18 billion, or $9 billion for each year of its existence. The same monetary and credit forces that have lifted the price of used Hermes ties (they’re traded on eBay), Silicon Valley real estate and the S&P 500 have also smiled on the telecommunications industry. “It’s like Monopoly money,” a real estate broker told the Mercury News about her own corner of the asset inflation. . .
When Amazon.com CFO Joy Covey recently refused to say what additional merchandise the giant e-tailer might consider selling, a frustrated analyst asked her instead what the company wouldn’t sell. “Cement,” she quipped. “It costs too much to ship.”
Very funny. The Internet literati may laugh, but the Monarch Cement Co., of Humboldt, Kan., unlike certain online retailers, happens to show a net profit.. . .
From the people who brought you warrants on PetroFina S.A. (Grant’s, Nov. 20, 1998), a new idea on a leveraged way to play even a slight improvement in the global economy: warrants to buy IMC Global, formerly International Minerals & Chemicals, the world’s largest maker of phosphate and potash fertilizer, and purveyor of certain other commodities not to be confused with government bonds.
“Global GDP growth has bumped along at an extraordinarily sluggish pace since the middle of 1997,” observes the second-quarter edition of Morgan Guaranty’s "World Financial Markets," “with weakness unusually concentrated in the emerging economies.”
“To own a company like AOL,” a portfolio manager recently advised The Wall Street Journal, “you had to throw out traditional measures of valuing companies. We had to say we have to own what we think is the dominant franchise in the Internet. It was a space that as a money manager you simply have to be in.”
For a company that actually possesses a website, Concordia Maritime AB (CCORB on the Stockholm Exchange) is quoted cheap. At a price of 11.1 Swedish kronor, it trades at the equivalent of 2.5 times 1998 earnings and 0.4 times year-end 1998 book value. It yields 4.5%.
We chanced on Concordia . . .
Your editor’s father, a Julliard-trained percussionist, was hired by the Pittsburgh Symphony, and on the concert stage one Friday evening he reflected on the years of study that had brought him this achievement.
Dressed in white tie and tails, he reflected, too, on the absurdity of his immediate situation. . . .
On Monday, the editor of Grant’s gave a talk to the American Council of Life Insurance, in Tuscon, Ariz. The text of his remarks follows:
I have a big subject to address, and big shoes to fill. As you know, I am here today only because Peter Bernstein couldn’t be. Peter, who is ailing, literally wrote the book on risk—his splendid Against the Gods appeared in 1996. You’ll agree that anyone who could make an international best-seller out of the history of risk in the speculatively charged 1990s must be a very formidable intellect indeed.
The Bank of Japan is a throwback: a tranche of its shares is publicly quoted. The institution of central banking (considered grandly and conceptually) might be in a bull market around the world; not so the common equity of this one specific institution. . . .
Credit is free in Tokyo—overnight interest rates have been ratcheted down to almost zero percent—and reflation is the order of the day. No longer a byproduct of an expansionary policy, the depreciation of the currency has become a policy itself. . . .
Winner of the “Coolest Book Site of the Year” award at the Fourth Annual Cool Site of the Year Awards in New York was not the obvious entrant. Barging past Amazon.com, with its $20.5 billion stock-market capitalization, was Best Book Buys, which has no stock-market capitalization at all.
The singular feature of this most perfect economy, according to Paul L. Kasriel, is that it is so old-fashioned. Low inflation, which has delivered low interest rates, is no mysterious gift from Intel, Michael Dell or the World Wide Web. You could have predicted it with a pencil.
Pinched for cash and struggling to build a global satellite wireless phone system in which anyone with a lot of money can place or receive a call anywhere on Earth (except, for the most part, indoors), Iridium LLC turned to the public equity market. And the market generously responded. . . .
Clarity in central banking
After only a few months on the job, Wim Duisenberg seems to have found his professional voice. Following a meeting of the Governing Council last week, the president of the European Central Bank vouchsafed “there was consensus that some of the risks identified earlier, in particular with regard to real GDP growth, had materialized in the fourth quarter.” . . .
Like Liz Taylor or The Wall Street Journal, the stock market is always the same, yet always different. Every great cycle is like some preceding great cycle, yet each one is unique.
In this sense, the late 1990s resemble the late 1960s. Then, as now, high technology and an apparently limitless economic expansion seemed to usher in a new age of wealth and beauty. Then, as now, trading volumes broke records, stock prices zoomed and speculative IPOs proliferated
The Grant's Asia Conference, scheduled to be held in New York on March 3, has been canceled by reason of apathy. A series of appeals to the greater Grant's family (a group not known for lack of imagination on any investment subject) has netted an uneconomically low response.
The Securities and Exchange Commission recently criticized what a judgmental layman might call "accounting fraud." And the Financial Accounting Standards Board is beginning the process of writing "finis" to the pooling-of-interests method of accounting for corporate mergers. All in all, the accounting and regulatory environment in the United States is becoming more critical of creativity--and of the bull market's favorite merger-and-acquisition technique, to boot.
Although not a great book, Lisa Endlich's "Goldman Sachs: The Culture of Success" (Knopf, $27.50) is a book of many fine moments. One of these is the story of how Goldman blundered in the Penn Central failure of 1970. . .
Now that even a press release in contemplation of a stock split drives the market mad, leave it to a gold-mining company to engineer a reverse split. Actually, Randgold & Exploration (RANGY in ADR form, RNG in Johannesburg) did what it had to do. It announced a three-for-one reverse split last November to save its Nasdaq listing: Its stock price had fallen below the allowable minimum.
Does George Soros, speculator, philosopher, author and international benefactor, traffic in inside information? Paul Krugman, the chronically quoted MIT economist, recently so claimed--and then, suddenly, claimed otherwise.
The policy--still--is inflation
Over the past month, the macroeconomic policies of the Japanese government have rolled west like a fog. . . .
The double-Time indicator flashes twice
Paul Macrae Montgomery, market technician first class, speaks with particular authority on the Time magazine cover indicator, since he invented it. "What I have found," Montgomery explains, "is that whenever a financial cover appears, the market tends to go in the direction indicated by the cover for about a month. The accuracy on that was minimal, maybe 60%. But 85% of the time, a year after the cover the situation was the opposite to the one indicated on the cover. . . .
In rare, generous moments, Mr. Market has been known to give away option value--for example, by pricing the senior and subordinated portions of the same capital structure as if there were really no difference between them. However, in our experience, he has never actually given away yield. . . .
The dream-visualization method of long-term investing comes out of the shadows in the February issue of Ticker, a stablemate of Individual Investor magazine. (Ticker is targeted mainly to brokers and financial planners, i.e., a solid, feet-on-the-ground professional audience.) "All you need is a few thousand dollars and a dream," it says in a feature called "Face Value: Personalities Behind Industry News."
Wider than the generation gap is the valuation gap between the New Economy and the Old. To judge by the prices now being paid, the Internet is priceless, and becoming more so. Not so the non-Internet portion of the list, to judge by the deteriorating New York Stock Exchange advance-decline line. . . .
Christopher Fildes, financial correspondent for The Spectator, London, harkens back to a precursor to the Internet mania in this reminiscence from the January 30 issue. As Fildes credits his "railway correspondent," I.K. Gricer, so shall we--whoever he or she might be):
We have been here before. A new superhighway, a revolution in communications, a runaway market, new investors piling in--we saw them a century and a half ago with the great railway boom, and what a thump there was when they hit the buffers! . . .
Not even the boldest bull on Asian debt would unconditionally claim that the worst is over in that storm-tossed market. The Chinese might devalue, the Brazilians might re-devalue or the Japanese might slip into a geriatric coma. "Foreign banks have accelerated their retreat from China," The Wall Street Journal reported Monday, striking a familiar chord, "in some cases asking for repayment on loans before they are due, fearing rising defaults as the country's economic growth slows."
"Worst case," says Joseph Stilwell about one of the investment partnerships he manages, "it's an expensive money-market fund."
Not every hedge-fund manager could make this claim in 1999. Then, again, this particular Stilwell fund bears no resemblance to Long-Term Capital Management. It's a partnership dedicated to cashing in on the expected transformation of the American mutual life insurance industry. . . .
The already encyclopedic list of bearish influences on the gold market was slightly enlarged Tuesday when a declaration to inflate by none other than the president of the Swiss National Bank actually tipped the bullion price slightly lower.
Many years ago, Richard S. Wilson, then a dean of the Merrill Lynch corporate bond corps, observed that call protection was often priced for free in a bear bond market. Watching yields rise, investors couldn't ever imagine needing it again. So, today, with inflation protection. Implicit call options on the CPI are yours for a song.
Richard Russell shakes his head over the low estate of the once-mighty dividend. "I just received that latest Outlook publication from S&P," writes the irreplaceable editor of Dow Theory Letters. "Their year-end issue recommends 26 'top-pick' stocks for 1999. Of the 26, 15 have zero dividends, five have dividend yields of 1% or less and only one boasts a dividend yield of as much as 2.8%. So I ask myself, 'Is this investing or hoping?' And remember, this isn't some fly-by-night outfit, this is S&P."
The biggest borrower in the greatest debtor nation is not the Treasury but the Federal Home Loan Bank System. Through the first nine months of 1998, the system's dozen banks borrowed $1.8 trillion to the Treasury's $1.4 trillion. They are almost certain to out-borrow the Treasury again in 1999 (a feat they will partly accomplish by borrowing again and again at intervals of as little as a day or a week). Last month, the banks got the green light to run up all the debts they want through March 31, 2000.
The Standard & Poor's 500, the Dow Jones Industrial Average and the Nasdaq Composite might be even more than fully valued, but no such characterization applies to the portfolio of the small hedge fund managed by John C. Boland, of Baltimore. So cheap are the stocks in Remnant Partners L.P. that an affluent investing population today can hardly be bothered to bend down to pick them up off the sidewalk.
So rare is a surplus in the federal accounts that the black ink in which the 1998 numbers are printed looks as if someone in the Office of Management and Budget forgot to read proof. The previous surplus was booked in fiscal 1969, during the honeymoon of the Nixon administration. Of the 52 fiscal years since the end of World War II, 43 have shown red.
Inquiring minds will therefore want to know: Is the current surplus a harbinger of a fundamental change in fiscal trend or merely an aberration?
The January issue of Los Angeles Magazine--the Special Real Estate Issue--whisks us back in cyclical time to the great bull market of the 1980s:
"There are lenders who are getting very creative today," says Matt Douglas, a principal at Venture West Funding. "They believe in California real estate again."
The graph below sums up financial market's sentiment toward price inflation: There is hardly any sentiment. As noted on page one, inflation-indexed 10-year Treasurys were recently priced to yield only 82 basis points less than the benchmark 10-year bond.
More shares are more better
“In this roaring bull market,” said a newspaper ad for a stock-split-alert beeper service two summers ago, “stock splits are today’s most exciting way to profit in the stock market.”
Chronicling this absurdity, Grant’s asked: Of what significance are stock splits?
The Fed lowered the funds rate three times last fall to support and rehabilitate the credit markets. True to the law of unintended consequences, it thereby fomented an Internet mania.
The arrival of the euro last week provoked an isolated and unexpected outpouring of nostalgia. “Our glorious lira,” Carlo Azeglio Ciampi, the Italian treasurer, declared—“somewhat improbably,” as the Financial Times noted.
Such is the way with currencies: Even the worst of them can get under your skin.
In Japan, an unprecedented rate of central-bank expansion continues to be neutralized, or nullified, by a record rate of commercial bank contraction.
“China has just proudly announced that its 1998 GDP almost reached the official government target of 8% (the number ‘8’ is really a big deal in Chinese culture),” writes Andrew McGrath, a reader who travels the Far East.
Tom Waldeck, professional commodity speculator, of Greenwich, Conn., implied a forecast the other day without actually making a prediction. He said that he’s finding more long-side opportunities than short ones lately.
This is a change for Waldeck, who has been bearish on commodities for many a moon.