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December 22, 2000, Vol. 18, No. 24

Genius is failing again

A man who knows the nuts and bolts of hedge funds unburdened himself to colleague Jay Diamond the other day. Mr. X's message: There's more leverage in the system than you think. He ticked off some of the current tricks of the trade.

Labor's Day

Robert Tracy of this staff, who was among the first on Wall Street to reveal that Cisco Systems actually has a balance sheet, has made another startling discovery. Oracle Corp., the fabulously successful software company, is really a share-repurchase machine.

Public service announcement

Clear Channel Communications, the acquisitive media and entertainment company, has so far defied the credit cycle. Some of its bonds actually trade above par, though they are anything but full-faith-and-credit obligations of the United States government. They are rated Baa3/BBB-minus, which, in these jittery times, is no pedigree at all.

Interest-bearing currencies

No federal regulation prohibits U.S. banks from offering their retail depositors an alternative to the dollar, but few institutions choose to do so. Apply to your local Chase, Citibank or Bank of America branch for a euro-denominated CD, and confusion ensues, followed by the spoken word, "No." Everbank, an online institution just opened for business last January, is trying to fill the currency void.

The Stahl report

Murray Stahl, the author of probably the finest collection of self-published investment essays of the bull market era, holds a bachelor's degree in computer science and an MBA from Pace. However, a key to his investment thinking is a third academic credential he earned: a master's degree in history. Stahl, is not an historian but, rather, an investor with a grounding in history.

Fathers and sons

About 175 years ago, when the son of a former president last was elected president, John Adams tried to find the right words to say to his son John Quincy on the occasion of his bitter and close-fought victory. The result was far from the best example of the elder Adams's prose, but it exactly fits the season and the moment.

Watch what they do

On September 11, the Bank for International Settlements, or BIS, the central bankers' central bank, announced a compulsory tender for that portion of its common stock held by public investors.

December 8, 2000, Vol. 18, No. 23

Risk: a parable

Shares of W.R. Grace & Co., the asbestos-blighted chemicals and building-materials manufacturer, plunged by 5/8 of a point on Tuesday following the admission by CEO Paul Norris that earnings might come in a little light next year. ...Still, no one could claim that the stock was overpriced even before the downward guidance.

The DISH

In a market disenchanted with growth and fearful of debt, EchoStar Communications has certain drawbacks: It is a growth company with a leveraged balance sheet. Yet, it’s as popular as ever with its customers, the more than five million subscribers of the DISH network, as Echostar calls its direct broadcast system...

Abrams's Law

A dozen years ago, in the shank of another credit contraction, David Abrams observed that junk bonds seemed never to trade in the 80s, but, rather, plunging from par, bumped their way down to about 50 before coming to rest, approximately, in the 20s. It was an arresting image that brought to mind the picture of a bowling ball being flung down the staircase of the Butler mansion on the set of “Gone with the Wind.”

Hedge the dollar

Business activity is slowing, the stock market is swooning and credit spreads are blowing open. But there is one oasis of wealth in this weakened economy. The public sector is as rich as eggnog. The government that employs Alan Greenspan is taking in more money than ever before.

A glimpse of stocking

A week before Alan Greenspan set the Nasdaq on fire with the broad hint of a turn toward accommodation, the Fed entered the market to buy Treasury Inflation Protected Securities (TIPS). The Fed’s purpose was to add to the permanent reserves of the banking system, a routine mission it has performed only grudgingly this year.

November 24, 2000, Vol. 18, No. 22

New 'issues' boom

The bear markets in stocks and bonds have brought forth a new category of investment asset: the "Company With Issues." There is a CWI for every distress-tolerant investor. There are overleveraged CWIs and asbestos-blighted ones. ... As an emblem of the fast-expanding CWI marketplace, J.C. Penney, one of the nation's largest department store chains, is made to order.

A loan too many

There was more deference than shock in the tone of news reports that the partners of Hicks, Muse, Tate & Furst are preparing to guarantee an annual return of 20% on a portion of a new fund. However, we are shocked. The news smacks of desperation.

Boredom preferred

"Have you guys looked at Thornburg Mortgage preferred?" asked the e-mail from paid-up subscriber Larry Callahan, of Huntleigh Securities, St. Louis. "I seem to recall a mention of the common a year or two ago [Grant's, Jan.15, 1999]. The preferred, while a small issue at $65 million, is a $25 preferred paying $2.42 a year and goes ex-dividend mid-to-late December for a total of five 60.5-cent dividends in 13 months..."

Groundbreaking

The edifice theory of stock market cycles yielded another bearish signal on Tuesday when CNBC broke ground on a new headquarters. The year got off to an ominous start with the opening of the gaudy Nasdaq tower in Times Square. Now, the "recognized global leader in business news" is figuratively walking under the same ladder.

Debt-free leverage

The aptly named The Contrarian Research Report has just published an analysis of a company that, over the past decade, has generated more revenue growth than the institutional icons Fannie Mae, Intel or Coca-Cola. On the other hand, it has generated less growth than Microsoft, but there is no dishonor in that. The principal product of the company in question has depreciated against the dollar since the dawn of the personal-computer era. That company is Franco-Nevada Mining Corp., of Toronto, and its baggage is obvious in its name.

What a difference a year makes

Twelve months ago, the Federal Reserve was force-feeding the banking system to nourish it for the rigors of the coming computer-clock crisis. The crisis passed without having come, and the fortifying diet was immediately discontinued.

November 10, 2000, Vol. 18, No. 21

Grand tour de junk

The junk-bond market has reached a milestone: At today's levels, it is ugly enough to be interesting. Since 1986, spreads in excess of 800 basis points over Treasurys have pointed to outsized subsequent investment returns. Spreads today are estimated at 800 to 840 basis points.

Pair of poisons

On October 25, Armstrong Holdings, the floor, ceiling and insulation company, was struck and knocked to the ground while walking across the intersection of Asbestos and Debt. The first blow, delivered by the company’s banks, was the decision not to renew a maturing $450 million credit facility...

Bonds for visionaries

One day, perhaps, the euro will become cheap enough to provoke a reversal of transatlantic monetary flows. In anticipation of such an event, a reader has asked, could we compile a list of euro-denominated bonds from which a dollar bear, or a euro bull, might shop?

7.6 billion shares

Possibly the most amazing fact in capitalism is the Cisco Systems share count. For the first fiscal quarter calculations, there were 7,580,000,000 fully diluted Cisco shares in existence...

Unions labor

Periodically comes news of a wage settlement so lush that it brings to mind the inflationary 1970s and the original "Charlie's Angels." Last month, for example, United Airlines' pilots approved a contract that stipulated an immediate raise of as much as 28.5%.

That’s entertainment

At the Grant's conference, Bill Bernstein, a doctor of medicine and a student of markets, contrasted "growth" and "value."

Size hurts

"The theater got bigger but the doors got smaller" was the other memorable theatrical metaphor at the Grant's conference. It was delivered by Jeffrey Rollert, president and chief investment officer of ALM Advisors, Pasadena, Calif. Rollert was describing the investment-grade--repeat: the investment-grade--corporate bond market, in which he specializes.

Elephant in the room

Although the theme of the Grant's conference was credit, the focus frequently wandered to equities. James A. Bianco, eponymous chief of Bianco Research, contended that fear of a so-called reverse wealth effect--a crimp in consumption brought about by a bear market--was premature and overblown.

Par for the course

Golf Trust of America, though at the top of nobody's list of credit-market bellwethers, may have something to teach about the ease of raising a loan in the fall of 2000. The lesson: It's hard.

October 27, 2000, Vol. 18, No. 20

Enter without knocking

Even a meteorologist who can’t forecast the weather knows if it’s raining outside. Economists are not so perceptive. “My late mentor, Geoffrey Moore, said that if, as a forecaster, one can predict a recession when it is beginning, one is doing very well,” relates Anirvan Banerji, director of research at the Economic Cycle Research Institute. The purpose of the following paragraphs is to handicap the likelihood of an imminent recession.

'Why service stinks'

Accompanying the release of the September CPI was news that washing machines and clothes dryers will lengthen the list of hedonically adjusted products in the government’s principal inflation gauge. Thanks to the march of progress, it is believed, higher nominal prices may not reflect “inflation” at all, but rather a higher degree of manufacturing excellence.

No upside

No doubt, today’s late-cycle bearishness toward corporate bonds will be taken to absurd extremes, just as the preceding bullishness was. Already, hysteria is displacing securities analysis in the junk market....

Tale of two dollars

The New Zealand dollar recently plunged to less than 39 cents against the U.S. dollar, an all-time low and 45% below the 71-cent peak seen only five years ago. On the foreign exchange market these days, new lows routinely outnumber new highs. It’s the greenback that is appreciating against most monetary assets, from the euro to the Philippine peso to the old yellow dog, gold bullion.

Inflation, Inc.

Next month, J.P. Morgan proposes to bring to market an inflation-indexed security called Consumer Price Indexed Securities (CPIS), Series C Preferred. Without such accoutrements of the Information Age as derivatives and computers, there could be no CPIS, as there would not be enough hours in the day to perform the necessary calculations. The question is: Can the Information Age produce an investable inflation?

October 13, 2000, Vol. 18, No. 19

Inflation for President

Given the sizable pay-down of the marketable public debt and the strong performance of the Treasury bond market, what would you suppose is the net change in the federal government's interest expense through the first 11 months of the just-ended fiscal year? The answer to this trick question: a positive 3%.

No loan for you

Even without an admitted recession, the doors to the debt market are slamming shut. The market for corporate credit is less accessible to the low-rated borrower than it was even after Long-Term Capital Management turned its pockets inside out two years ago. There is no shortage of proximate causes to explain the sudden turn for the worse.

Best of times

Fannie Mae, the federally chartered, triple-A-rated mortgage behemoth, has died and gone to cyclical heaven. So strong is the national real-estate market that the company's repossessed houses actually constitute a profit center.

Dilutions of grandeur

The analysis of the uber-stock Cisco Systems in the September 15 issue of Grant's closed with a trailer calling attention to the imminent release of the fiscal 2000 10-K report. With that document in hand, we again turn to Cisco, the costliest company in the U.S. not headed by Jack Welch.

Britain recalculates

Two months ago, the Bundesbank revealed a hitherto unsuspected reason for the relative weakness of German economic performance compared to that of the United States. German investment in information technologies significantly lags the U.S. pace because, in part, German statisticians employ no hedonic adjustments to calculate imputed improvements in product quality. By adopting American statistical methods, German investment would appear significantly bigger, and faster-growing, than it does in the official data. Last week, Britain disclosed similar findings: By doing as the American statisticians do, British manufacturing output would undergo a dramatic and pleasing face-lift.

Saturday night special

On October 28, at 9 p.m. EDT, the History Channel will air a two-hour documentary on the 1929 Crash, featuring, among others, your editor.

Saving up

As long as stock prices rose, people didn’t have to save. Mr. Market did it for them.

Many, many euros

After raising its benchmark interest rate seven times in a year--the latest move, to 4-3/4%, came on October 10--the European Central Bank may seem excessively vigilant against a still-creeping inflation rate. Vigilant or not, the ECB is busily manufacturing credit.

September 29, 2000, Vol. 18, No. 18

Seeing is disbelieving

Core meets headline

Management manages

Industry recall?

So far, yet so near

Raise the debt ceiling

September 15, 2000, Vol. 18, No. 17

Transatlantic pair trade

Take two companies, "A" and "B," identical except for A's manipulative chief financial officer. Purely through the art of accounting, he has caused A's income statement to grow in unnatural ways. Company B, although jealous of A's resulting stock market success, stands firm on principle; it continues to report apparently mediocre, although substantively adequate, results (results, in fact, economically identical to A's). In a case like this, who would not want to be short the company with the clever CFO and long the one with the stick-in-the-mud? This does not--repeat, not--describe the exact positions of the United States and Europe in the world currency market, but the point survives the metaphor.

Cisco's systems

Cisco Systems is not only the worldwide leader in networking for the Internet--the proverbial No. 1 seller of picks and shovels to the miners on Internet Mountain--but also a force for imagination and innovation in accounting. Generally accepted accounting principles it seems to regard as pedestrian and inexpressive. To tell its story in its own voice, a voice it knows Wall Street always longs to hear, Cisco has evolved its own reporting conventions.

BuyandWhat.com?

It's a funny old world, at that--stock-crazed, action-driven, momentum-minded. Yet, in this very world, a new and improbable Wall Street success story is taking shape. A brokerage firm dedicated to the ideal of not trading (and, therefore, of not opening margin accounts, not lending stock in the lucrative stock-loan market and not writing lots of profitable, unnecessary tickets), has burst forth on the Internet scene.

The 1980s pale

"Back then," recently said Mike Brosnan, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency, "some of the weaker credits might not have had pay-down requirements for five years." "Then" was the 1980s, a time not known for an excess of caution in lending.

'Do as I say'

Alan Greenspan's prudence offensive against the so-called government-sponsored enterprises (GSEs) might have more to do with balance-sheet strength than the market supposes. The Federal Reserve System is the holder of more than $500 billion of Treasury securities. It accumulates these full-faith-and-credit museum pieces in the course of conducting monetary policy (a process also known as "creating credit"). Yet, the supply of marketable Treasurys is shrinking. If all goes according to political script, it will vanish within 12 years.

Can the Fed lift oil?

"The world is facing a possible energy crisis, and OPEC alone doesn't have the power to control it," Ali Rodriguez, president of the Organization of Petroleum Exporting Countries, declared on Monday. Leigh R. Goehring, vice president at Prudential Investments, Newark, N.J., anticipated Rodriguez in a fax to this office last Friday.

August 18, 2000, Vol. 18, No. 16

Grounds for suspicion

"Liquidity" is the myth to which almost everybody on Wall Street pays lip service. What is the price of the last sale? At that price, whatever it is, you can value your entire position. Or--failing an actual sale--you can seek out a quote from a friendly broker, or an educated guess from a pricing service. Ostensibly, at those hypothetical valuations, you can also liquidate a position…The particular portion of the fund-holding public for whom we write on the eve of vacation is the investors in prime-rate trusts

Let's pretend

"Ten Critical Failings of EBITDA as the Principal Determinant of Cash Flow," the title of a recent study from Moody's Investors Service, may not make a viable feature film (though it does bring to mind the charming "10 Things I Hate About You"). Still, it will hold the right audience at the edge of its seat.

By the numbers

The case for Finmeccanica that follows is mainly statistical. In the best of times, a telephone call from a publication called Grant's to the headquarters of an Italian public company might not be returned with alacrity. In August, it seems, the transatlantic response time only lengthens. Possibly, we are given to understand, we will hear from the investor-relations contact in September. On vacation or not, Finmeccanica is Italy's high-tech crown jewel.

Dr. Doom remembers

"As my wife and I vacationed in Europe during late July and early August, I couldn't help dwelling on the interest rate situation." The year was 1982, and the distracted tourist was Henry Kaufman. Wall Street's leading bond bear was about to change his tune.

Free leverage?

Bonds are not the stock-in-trade of John A. Bailey, vice president of Wellington Management, Boston, but it was Bailey who noticed the anomaly in the accompanying picture. Creditors today are settling for less. Less than what? Less than their customary due. For the past 20 years, holders of dollar-denominated bonds have almost invariably received a yield in excess of the growth in nominal GDP. Not in the New Economy, however.

Fearful forecast

The Grant's prediction for productivity growth in the second quarter missed by a factor of approximately three. "Less than 2%," was our forecast; 5.3% was the result. There are narrower spreads in the pink sheets

It can't happen here

"German wholesale prices rose for a third straight month in July," Bloomberg reported Tuesday, "led by oil and some types of food, in the latest evidence of accelerating inflation across the 11-nation euro region. . . .

August 4, 2000, Vol. 18, No. 15

Fearless forecast: productivity growth will...

"Further Gains in Productivity Are Predicted," declared The Wall Street Journal on Tuesday in a three-column headline: "Economists Say Study Has Made Them Believers in the New Economy." Not our economists. The scholars on the Grant's Interest Rate Observer payroll are predicting a feeble rise in the rate of productivity growth for the second quarter and a downward revision in productivity growth for the first.

Stayin' alive

Donald J. Trump has more money than his creditors or he could ever want or need--it says so right in the newspapers. Yet the Trump Atlantic City 111/4s of 2006, a $1.2 billion issue that traded at par two years ago, today are quoted at 67 to yield 21%. Raz Kafri, a wide-awake analyst at Wasserstein Perella, noticed a quirk in the second-quarter income statement of Trump Hotels & Casino Resorts (NYSE: DJT) that might shed light on the situation

Wireless train wreck

Has the world ever before seen the likes of the cell phone, now evolved into the "wireless information appliance," handheld gateway to the Internet? Has it ever before invested in a capital-gulping, economy-altering, life-enriching technology? In any other time but this have investors blithely assumed that because a technology was brilliant, it would also yield a profit? Actually, yes, reflects John Koller of this staff.

Head case

Like the secret word on "You Bet Your Life," the old Groucho Marx show, a single phrase in the July 18 press release of Coastcast Corp., Rancho Dominguez, Calif., was the source of a small sensation.

Marrying for money

"With the Internet free-money window closing," Frederick E. "Shad" Rowe writes from Dallas, "a young man I know recently mentioned that he thought he would save a little time by marrying for money rather than working for it.

Primary borrowers

Never have the primary dealers in U.S. government securities been so leveraged as they were at the last reporting date.

July 21, 2000, Vol. 18, No. 14

Present at the creation

The bond market hardly flinched before Tuesday's cosmetically alarming CPI report--up 0.6% in June, the highest reading in three months. The source of the investors' courage was a modest uptick in "core" inflation. The CPI less food and energy rose by a mere 0.2%. No serious student of markets will unconditionally reject the "core" inflation concept, even if that individual is 100% invested in inflation-indexed Treasurys and gold-mining shares. However, as every serious student of markets also recognizes, the core inflation concept is equally a tool of the devil, or at least of politicians, central bankers and brokerage-house investment strategists.

Better late

Like a model child, Capital One Financial Corp. earns straight A's: in profitability, growth, operational management, marketing, effort and deportment. The Falls Church, Va.-based credit-card purveyor was named "one of the 100 Best Companies to Work for in America" in a Fortune magazine survey for the years 1999 and 2000. Who, then, would guess that mommy's little angel actually manages to extract a yield in excess of 19% from its consumer loan portfolio, a return that includes significant embellishments from fees charged to late payers?

Banco cheapo

A valuation riddle, courtesy of Thomas M. Crowder, paid-up subscriber at Guilford Co., Richmond, Va.: "What do you think a bank that has the following financial ratios (as of the first quarter) should be priced at? ROE: 15.2%; ROA: 2.1%; net charge-offs/average loans: 0%; nonperforming loans/loans: 0.51%; loan reserves/loans: 2.68% (i.e., 525% coverage to nonperforming loans); Tier 1 capital ratio: 14.4%? You would think, maybe, a P/E of at least 12 times, maybe a dividend yield of 3.5%, a ratio of price to book value of 1.5 to 2.0 would be reasonable." Actually, Banco Latinoamericano de Exportaciones S.A. is available in the market for slightly less.

Heedless of value

In support of the most arresting claim of the third calendar quarter--"The stock market is the economy"-- International Strategy & Investment recently cited the following: "Starting in 1996, swings in the economy have become dominated by swings in the stock market. Along these lines, and in this case to an astounding extent, swings in our weekly survey of home builders have almost a perfect correlation with swings in the stock market. As the Nasdaq has curled back up, our home builders' survey has curled back up." If the stock market is the economy, what is the stock market?

Wrong-way fund flows

"Although equity investors have turned their backs on value," writes Jondavid Klipp, "savvy corporate managers and leveraged buyout firms are having a field day acquiring smaller capitalization firms at dirt-cheap prices. A record 571 publicly traded companies with market caps of less than $1 billion were merged or acquired in 1999, according to Satya Pradhuman, director of Merrill Lynch Small Cap Research. And, the consolidation is continuing at a furious pace, with another 114 small-cap companies announcing merger agreements in the first quarter of this year.

The 'next' Treasury bill

A portfolio manager we know refuses to buy any stock promoted by use of the phrase, "the next"--e.g., "the next Cisco," "the next drkoop.com." To be consistent, our friend must therefore have nothing to do with the three-month or six-month securities of the Federal Farm Credit Banks. Some are calling them "the next T-bills."

July 7, 2000, Vol. 18, No. 13

The whites of its eyes

Bond yields fell Monday when the National Association of Purchasing Management reported a moderation in the rate of price increases for June. Specifically, 34% of the association’s respondents said they paid higher prices last month, compared to 38% in May, 51% in April and 58% in March. Armed with the news, the NAPM seemed to declare victory in the war, or skirmish, against inflation:

Accident report

"If someone mapped our DNA," observes Jay Diamond, publisher of Grant's Interest Rate Observer, "they would find a genetic predisposition to favor any consistently profitable company in an important industry that is trading at a fraction of book value and a single-digit multiple of earnings. That's why we write about companies like Tenneco Automotive (Grant's, Dec. 3, 1999)." Yes, we blame our DNA.

The world on June 30

The last day of the second quarter was almost the perfect time to be rich. Almost, but not quite. A traditional, wealth-preserving monetary point of view was missing from the marketplace of ideas.

Municipals on the bargain counter

Tax-exemption is almost free at the long end of the yield curve. Thirty-year Treasurys, at 5.90%, yield only slightly more than long-dated municipals, at 5.77% (as measured by The Bond Buyer’s 20-bond general obligation index). For an obvious reason—the 16th Amendment—such a compression is rarely seen. What could the market be discounting?

June 23, 2000, Vol. 18, No. 12

Europe goes boom

From Tuesday's Financial Times: "'The euro-zone received some unexpectedly good news yesterday when official figures showed that annual inflation was unchanged in May and core inflation in fact went down.' --The benign inflation news was doubly surprising to students of the European Central Bank. For despite five consecutive boosts to its key lending rate--with a stiff one-half of one percent coming on June 8--the ECB has been stoking a pan-Continental credit expansion. According to an index of monetary conditions compiled by Salomon Smith Barney, Europe is the flushest it has been in at least nine years."

Long view

"Like a commuter who shuttles between Scarsdale and Wall Street, the credit markets travel from Stringency to Accommodation (and back again). No timetable is published for the cyclical journey of lenders and borrowers, but an alert traveler can orient himself just by looking out the window. For instance, the rise in junk-bond defaults, the troubles in syndicated lending, the widening of credit spreads, the expressed anxiety of the banking regulators and the disclosure last week by Wachovia Corp. of a $200 million addition to its bad-loan reserve all point to the obvious conclusion that the train of credit is fast approaching the city limits of Stringency."

See no evil

"Alan Greenspan is living proof of the maxim that you can take the boy out of Wall Street, but you can't take Wall Street out of the boy. We were reminded of this chestnut after reading a copy of the chairman's June 13 speech on the supposed miracle of American productivity growth during the late 1990s. In his address (which he delivered to a New York economics association in absentia via videoconference, a little technological miracle in its own right), the former consultant-for-hire assiduously ignored any evidence that tended to undermine his theme that information technology is an unalloyed blessing, or that cast doubt on the statistical validity and robustness of the published productivity data (a recent theme in these pages)."

Show me

"Allied Capital Corp. does a lot of what the public credit markets no longer want to do: It lends to small- and midsize speculative-grade credits. It charges a stiff rate of interest and insists on the kind of covenant protection that, in the investment-grade bond market, went out the window a generation ago. In the bargain, it secures for itself an equity interest (usually in the form of warrants) in the companies it lends to. It runs a conservative balance sheet and, for years on end, has earned about 15% on equity. And the price of a share of its stock doesn't go up. Nor do we believe that it should go up--now."

Dog days

"Allied Capital Corp. does a lot of what the public credit markets no longer want to do: It lends to small- and midsize speculative-grade credits. It charges a stiff rate of interest and insists on the kind of covenant protection that, in the investment-grade bond market, went out the window a generation ago. In the bargain, it secures for itself an equity interest (usually in the form of warrants) in the companies it lends to. It runs a conservative balance sheet and, for years on end, has earned about 15% on equity. And the price of a share of its stock doesn't go up. Nor do we believe that it should go up--now."

Crime and--perhaps--punishment

"In the largest one-day securities-fraud indictment ever," The Wall Street Journal agitatedly reported on June 15, "the Justice Department alleged that members of the country's five largest organized-crime families conspired to manipulate publicly traded securities in 19 companies, bilking investors out of $50 million over five years." Elsewhere in the same edition was the news that a trio of former executives at CUC International pleaded guilty to orchestrating the biggest accounting fraud in history. . .

June 9, 2000, Vol. 18, No. 11

The new face of inflation

"The Future Inflation Gauge of the Economic Cycle Research Institute, an index that Alan Greenspan is known to monitor, weakened in May after five consecutive months of strong and worrisome growth. News of the decline, arriving Friday, found Wall Street already half delirious with joy over the cosmetically weak May employment report. Has the Fed's anticipatory monetary policy forestalled a new inflation cycle? No, actually."

Arts & Ideas

"Sharing a billing last Saturday on the identical page of The New York Times were Ornette Coleman, alto saxophonist; Kurt Masur, music director of the New York Philharmonic; and Robert D. Edwards and John Magee, authors of the standard chart readers' text, 'Technical Analysis of Stock Trends.'"

The jury is out

"Besides credit risk and interest-rate risk--staples in the deregulated financial world--Wall Street now confronts a heightened danger of punishment through litigation. Moreover, it faces this risk in what must still be reckoned the nonadversarial portion of the market cycle, before the name 'Wall Street' turns to mud and politicians demand to hold hearings on the multitrillion-dollar scandal arising from the loss of the nation's retirement savings."

Banking on risk

"In every culture, 'risk aversion' is a defined term. The risk to which investors are most averse is the one that most recently set them back on their heels. Thus, in Japan, the avoidance of risk means a purchase of government bonds, even at a yield of approximately nothing. In Japan, bonds in general are deemed 'safe,' whereas equities, real estate, venture capital, foreign exchange etc. are thought to be unsafe."

Still red-hot

"With hardly a demurrer, Wall Street cheered the May employment report as the herald of a softer economy and a stronger bond market. Our own Team Harvard--James Medoff and Andrew Harless--begs to differ."

Party time

"Tupperware Corp., maker of the one and only deviled-egg server you will ever need (it's guaranteed for life) and a host of other plastic kitchen products, housewares and toys, has attracted the attention of a strategic investor. Vorwerk & Co., a closely held German direct-selling outfit, filed an amended 13-G form on April 26, disclosing a new and enlarged interest in TUP: 10.2%. It had declared its first better-than-5% holding only two months before."

Bond crops fail

Vis-à-vis U.S. Treasury securities, Grant's has been bearish, but we are prepared to consider the contrary possibility. The best and simplest bull argument is that the marketable supply is shrinking. In fact, it is shrinking outside the United States, too, and in the unlikeliest of places.

May 26, 2000, Vol. 18, No. 10

The coming bull market in salvage

"Somewhere in his vast oeuvre, Chairman Greenspan defined inflation as a rise in prices broad enough and strong enough to bring about a change in people's behavior. That definition has been met and surpassed by the great bull market. In response to soaring stock prices, Americans have saved less and spent more."

J.C. Penney sale days

"Last week's windup of Boo.com, the chic and profligate European e-tailer, was almost as glitzy as its recent launch. It is impossible not to compare the outpouring of international media attention on Boo with the near absence of coverage of the emotional annual meeting of J.C. Penney, which was held in Lenexa, Kan., on May 19, the day that Women's Wear Daily ran the headline-size postmortem: 'Boo's Aftermath: The Hype Didn't Hold Up.' Penney, too, has had its troubles, but it has rarely had hype."

Engine that will

"'For this, I am truly sorry,' said John W. Snow, chairman and CEO of CSX Corp., at a federal hearing on March 7. He was apologizing to customers and regulators for a problem he brought on himself, his overpromoted and underdigested acquisition of a sizable portion of Conrail. Trouble was foreshadowed as long ago as October 1996, when Snow, disclosing plans for the $4.3 billion investment, recklessly challenged the stock-market gods. 'The merged company will be the premier freight transportation company in North America,' he made bold to say, 'and, as such, we should command a premium price/earnings multiple--thus creating greater value for our shareholders.'"

Secrets of the GDP

"Technology is widely regarded as the greatest single source of the U.S. economic achievement of the past decade. But there is another mighty wellspring, a purely technical and statistical one. This is the method by which technological innovation is represented in the national income accounts. In the analysis that follows, our favorite sons of Harvard, James Medoff and Andrew Harless, examine the distortions introduced into a host of government macroeconomic data by the use of so-called hedonic price adjustments."q

Terms of debate

"'No one disagrees that the surge in the production and availability of computers and software has been integral to the recent upswing in productivity,' said William McDonough, president of the Federal Reserve Bank of New York, to the New Jersey Business Conference on May 18. 'Where the differences in view enter is over the deeper sources of productivity growth and whether the productivity improvements are sustainable.'"

Light a candle

"They cursed the darkness at the British Energy annual meeting on May 10, an event described by an unidentified analyst as 'easily the most depressing I have ever attended; it was like a funeral. When the dividend cut was announced, it was like an execution.' Management sawed the dividend in half--to 8 pence a share--and didn't shrink from saying why: 'We expect a major deterioration in our financial performance in the current financial year, and cannot exclude the possibility of incurring a loss.' The main reason: softness in British wholesale energy prices."

Telephone call from Auckland

Fred Kingery is in New Zealand preparing for a seismic monetary event: the coming exodus from U.S. dollars. A paid-up subscriber from Volant, Pa., Kingery called from halfway around the world to report on the Kiwi dollar, now making 15-year lows. He is bearish on it.q

May 12, 2000, Vol. 18, No. 09

So many conferences, so little time

"Bearishness at the Berkshire Hathaway annual meeting in Omaha on April 29 was, if anything, a little thicker and more forcefully expressed than the bearishness that colored some (but by no means all) of the presentations at the Grant's spring conference in New York on May 3. Warren Buffett and Charles Munger were more scornful of current valuations and speculative practices than what came through in the press, according to our man at the Berkshire show."

'I love you'

"The sentiment in the headline was a staple of the greeting-card industry long before the computer virus of the same name. So, too, are the following sentiments, in their approximate order of importance at the retail checkout counter: Merry Christmas, Happy Valentine's Day, Happy Mother's Day, Happy Easter and Happy Father's Day. An American of only average popularity receives more than 20 cards a year in the mail, the Internet notwithstanding, according to the Greeting Card Association."

Unproductivity

"Output per hour of labor grew by just 2.4% in the first quarter, the Labor Department reported two Thursdays ago, down from 5% in the third quarter of 1999 and from a revised and improbable 6.9% in the fourth quarter..."

The best defense

In flight from high technology, defensive-minded investors have begun to crowd into food and consumer products issues, especially the overvalued ones.

Inflation accelerates

Over the past two months, the CPI has risen at an annual rate of almost 8%. Far from panicking, the bond market has reacted calmly and philosophically....

Two out of three

The rise in government bond yields, although wide-ranging, is not quite global. Since March 30, 10-year rates have climbed by 25 basis points in Europe and by 50 basis points in the United States. However, they have fallen slightly in Japan...

April 28, 2000, Vol. 18, No. 08

The Earth revolves around the moon

So great is the mass of U.S. equity-market capitalization that it is exerting a gravitational force on economic and financial affairs the world over. This goes beyond the so-called wealth effect...

Slo-mo LBO

International Business Machines Corp., which has been engaged in a de facto going-private operation for the past five years, disclosed first-quarter results that passed the CNBC test. True, revenues were down by 4.8% and cash on hand declined by more than $2.2 billion ...

L.A. arbitrage

According to the March 27 Los Angeles Business Journal, the latest fad among bubble-blessed Angelenos is to buy up their neighbors’ houses and raze them...

Electrical shock

The cyclicality of all things—speculation, technology, politics, energy prices and, as a matter of fact, life—may be read in the fortunes of British Energy, the U.K.’s top producer of nuclear-generated electricity and an opportunistic buyer of American nuclear plants.

One word: ‘plastics’

The trouble with high technology is that there’s usually a higher technology under development somewhere. No sooner does the applause for the latest miraculous invention die down than an even better technology pushes it off the stage and into the mosh pits.

Save the date

At 8:30 a.m. next Thursday morning (that’s the day after the Grant’s conference), the Bureau of Labor Statistics of the U.S. Department of Labor is expected to report on the growth in nonfarm productivity for the three months ended March 31. The market has come to expect great things from these announcements. . .

Gender-based disinflation

The Greenspan household gives rise to an interesting question: Who has done more to advance the cause of disinflation over the past decade, Alan, the central banker, or Andrea Mitchell, the career woman? The fact is that the wholesale entry of women into the labor force has been a vital and unsung source of our happy inflation experience. But now that women finally hold about 50% of managerial and professional jobs in America, the outlook for price stability has begun to darken.

The Greenspan hedge

If the stock market took a header, what would the Federal Reserve do? Probably, we think, the Fed would ease. More than likely, to judge by the graph below, the Eurodollar futures market would anticipate the easing. . . .

April 14, 2000, Vol. 18, No. 07

Bubbles: concave and convex

“Now that the stock market has restored an element of suspense to Wall Street by not going up every single business day, the credit markets have made adjustments. On Monday, for example, following a break in the Nasdaq indices, interest rates sensitive to credit risk widened in relation to Treasury yields.”

The old new thing

“Since publication of the March 17 issue of Grant’s, the quoted value of a seat on the Chicago Mercantile Exchange has climbed by 60.9%. In synchronous fashion, the value of the public equity of eMerge Interactive (a New Economy, online cattle-auction promotion unfavorably compared in our story to the ancient CME) has fallen by 69.1%. We must remember to tell the Grant’s marketing department about this.”

Rubber-type GDP

“James Medoff and Andrew Harless, the economic minds behind the exposé of U.S. productivity data in the previous issue of Grant’s, now turn their gimlet eyes to the GDP statistics. The productivity numbers, as you will remember, were flattered to death by a ‘hedonic’ price index.”

Redwood trusts

“Reasons not to buy a share of Redwood Trust, a smallish ($124 million of market cap) mortgage REIT are enumerated on your Bloomberg. Just type in ‘RWT Go’ and observe a net loss for calendar 1999, a net loss for 1998, a shrinking balance sheet and a long and unpromising list of minus signs under the heading ‘growth potential’ in the basic Bloomberg description format. As the expression goes, what else do you need to know? Nothing, we would have thought, were it not for an e-mailed suggestion from a new subscriber.”

Bearish on Corning

“Corning Inc., once a maker of casserole dishes and silicon breast implants, and today the world’s leading producer of optical fiber and cable, received a multibillion-dollar imprimatur in The Wall Street Journal last Friday. The company’s stock, according to the paper’s ‘Fund Track’ column, is one of the three top holdings of Kevin Landis, who only happens to own the best five-year record in the entire American mutual-fund management industry.”

The Fed taketh away

“I love this,” recently said Jose Canseco, designated hitter for the Tampa Bay Devil Rays, referring to the stock market. “It’s like gambling.” So, too, with hazarding a guess concerning the effect of Federal Reserve policy on “the credit markets.” There are many different credit markets and many different yield curves. Which one is the best litmus for monetary policy?

March 31, 2000, Vol. 18, No. 06

The great productivity delusion

A crisis of faith for the acolytes of the New Economy may be just around the corner. On May 4, at 8:30 a.m. on the dot, the Labor Department will report on the growth in nonfarm productivity for the three months ended March 31. The number stands to be hugely disappointing--just as disappointing, in fact, as last year's third and fourth quarter data were uplifting.

Merck manual

With the S&P 500 Index trading at 32 times trailing net income, a price-earnings ratio of 25 may actually look cheap, especially when the eminent Merck & Co. is the bearer of the valuation. In fact, the bullish case toward the global pharmaceutical-cum-cost-containment company rests, in part, on valuation: buy now at this rare juncture when Merck is available at a discount to the S&P, the argument goes. Grant's herewith presents some counterarguments.

Airborne again

Many are the blessings of the Internet, not least the gift of transparent pricing. In the Information Age, both buyers and sellers will, in theory, get the best and truest price, whatever the transaction.

New risk-free rate

On the evidence of the unscripted strength in stock prices, bond prices and the GDP, interest rates are still low. They are low in relation to the expected return on the marginal dollar of borrowed funds. The net economic and financial effect of 125 basis points of Federal Reserve tightening since last June can hardly be detected by the naked eye.

Kids of all ages

"A whole generation of young Americans in their 20s has fallen in love with stock investing," The Wall Street Journal reported Monday. No doubt. But a just-received promotional mailing shows that older Americans need not feel left out of the fun.

Bearish on bandwidth

As the Old Economy had its pig iron and coking coal, so the New Economy has its semiconductors and bandwidth. The commodities are different, but the dynamics are the same. When the incremental supply of--for example--bandwidth outstrips the marginal demand, the price of a unit, or "bit," falls. What is new about the commodity markets of the New Economy is that tens of billions of dollars in stock-market capitalization, and billions more in speculative-grade debt, are leveraged to them.

The Americanization of Germany

“Time was,” writes I.G. Zeisler, from Frankfurt, “a Frankfurt bond salesman with a large German bank was assured of a lifelong career free from worry. Money just flowed in, from ultra-cautious German savers, with their Japanese-like savings habits, and their world-class phobia of inflation in any shape or form. “No more,” Zeisler goes on.

March 17, 2000, Vol. 18, No. 05

You are there

Hey mom,” begins a recent e-mail from a prep school student to his Wall Street mother. “Just writing to tell you what’s going on. . . . I took a math test today that I think I did really well on. Oh, I also exited some more of that CDTS position. I’m up close to 80% in just over a week! Also, I came out of GENXY with a 98% gain, GENE with 70% and I’m still sitting 128% from Cell Genesis (CEGE). All in just four weeks!!! They all think they can cure cancer through genomics. Whether they can or not doesn’t matter. I got in just in time, when the sector got hot.” Even more than last month, the month before that, or the month before that, the stock market is irresistible.

Space balls

If all goes badly—as it habitually has done—Iridium’s 66 orbiting capital assets will shortly begin to be “de-orbited” in a process that is technically described on www.space.com as “[yanking] the Volkswagen-size satellites from orbit and [sending] them on a fiery suicide dive through Earth’s atmosphere.” Barring a miracle, Iridium will wind up its operations at 11:59 p.m. today, its $6 billion of sunk capital almost a total loss.

Bull-to-bull

The New Economy is about to be augmented by an institution that was created in the days when high technology meant a wall socket. If all goes according to plan, the 102-year-old Chicago Mercantile Exchange will soon become a public company.

Yields plus

“High Yield, a million-dollar yearling trained by D. Wayne Lukas,” reported a New York Post racing correspondent last week, “looked like a hopeful champ after winning the Hopeful Stakes last summer but then lost five in a row.” Much the same could be said for yield—any kind of yield—in the high-tech-preoccupied financial markets: it has produced few wins and much discouragement. Grant’s, which is bullish on income and not discouraged, hereby presents a pair of investments offering yield with an upside.

BankBoston settles

Last month, the corporate parent of Grant’s reached a settlement with BankBoston of a suit filed last May alleging illegal photocopying of Grant’s Interest Rate Observer.

Back to normal

On the home front, monetary policy has returned to a state of pre-millennial accommodation. The holiday bulge in adjusted bank reserves has melted away, and growth in the monetary base has been erased.

March 3, 2000, Vol. 18, No. 04

The possible cause of a hypothetical panic

The renewed threat of invasion of the semiconductor-, motherboard- and computer notebook-producing nation of Taiwan by the cadres of mainland China has elicited only muted investment reaction.

Yield factories

n 1999, the year of one of the worst bond markets on record, Annaly Mortgage Management generated a total return greater than that produced by the S&P 500 (22.7%, mostly through dividend income; in contrast, the S&P achieved 21%, mostly not through dividend income). In recognition of this feat of asset-liability management, Annaly (NLY on the Big Board) is currently valued at little more than book value. It yields 171/2%.

Youth movement

On Tuesday, the share price of Safeguard Scientifics vaulted by 307/8, to close at 175 3/8, on the indescribably fabulous news of a 3-for-1 stock split. In the same press release, Safeguard (SFE), which is led by a 73-year-old dynamo who does not happen to have a PC on his desk, disclosed plans to issue 10 million new split-adjusted shares. With the proceeds of the sale, it said it expects to acquire interests in Internet infrastructure businesses.

Valuation non sequitur

News last Friday of the creation of a gigantic, cost-crushing, automotive- materials-buying Web site gave no boost to the stock prices of the already-deflated auto parts companies. Victims of progress (longer-lasting parts), manufacturers’ consolidation (fewer customers) and globalization (more competition), the likes of Tenneco Automotive are valued as if something terrible were about to happen, which, of course, it always might.

Monetary period pieces

On Monday, the euro plunged by 3.5% against the dollar to a new low, as currency traders seized on the apparent apathy of the European central banking establishment. “There is a real risk of a crisis of confidence in the currency,” a trader told the Financial Times.

The secret life of central banks

Until last month, the Federal Reserve disclosed only a portion of the U.S. government securities it held in custody for the accounts of foreign central banks. This was the plain-vanilla Treasury-coupon portion, and through the early 1990s, it was the only one that mattered. As the decade wore on, however,

February 18, 2000, Vol. 18, No. 03

Bumper crop in microprocessors

Trading in the Nasdaq 100 Index is being moved from its pit on the floor of the Chicago Mercantile Exchange to handle the crush of new business. Only 75 or 80 people can shoulder their way into the existing space; the Merc’s new pit will accommodate 150 to 160. The switch is scheduled for Tuesday. The NDX, up 104.5% year-over-year, is the hottest index in Chicago or any other American city.

Home alone

The far-flung CNBC audience, although prepared to pay almost any price for a company that creates or develops high technology (or plans to), seems to want no part of the so-called old economy businesses that actually use it. This anomaly raises a question: If the technology that causes the Nasdaq 100 index to spit flames does not truly enhance the profitability of the companies that employ it in everyday commercial and financial applications, what, exactly, is it good for?

At any price

Infosys Technologies Ltd., a very hot Indian software and information-technology stock, is one of the wonders of the boom. However, the stock is as nothing—the merest United States Savings Bond—compared to the corresponding, flyaway American Depository Receipt.

Just to be conservative

Built into the valuation assumptions of a new work of analysis by Wit Capital is the forecast that each and every closely held investment in the Internet Capital Group (ICGE) stable will appreciate by approximately 200% a year in each of the next three years

‘In this space’

Since the last week in January, some $5 billion has been wiped off the stock market capitalization of Akamai Technologies, the formerly idolized Web hosting business (Grant’s, February 4). It’s a sum approximately equal to the existing market cap of Carolina Power & Light, which, by coincidence, is also an Internet stock.

Sayonara, deflation

Inflation was the single most unprofitable thought available to any investor in Japanese government bonds in the 1990s. Debt destruction, banking contraction and economic stagnation combined to push the rate of change in consumer prices into negative territory, and interest rates into the history books. But speculative trends are graven in sand, not stone. Japanese inflation may already be stirring.

Money of the mind

Post-millennium, according to script, the excess liquidity created to insure against a disaster of the computer clocks was supposed to de-materialize. Not yet.

February 4, 2000, Vol. 18, No. 02

Protection racket

“Alan Greenspan’s Fed, through its actions, has made a clear statement,” write Steve S. Kim et al., members of the Merrill Lynch derivatives group: “under situations of systemic financial distress, the Fed is willing to step up to provide liquidity.” The record is long-established. . . .

Pariahs’ club

The stock market is, by our lights, absurd, but it is becoming slightly more symmetrically absurd. There is a growing list of cheap valuations to complement a considerably larger number of extravagant ones. Possibly, there can be no safety in value until the speculative bubble bursts, but it might be useful to chronicle the arrestingly low valuations attached to some of the companies that, for one reason or another, have been in their own individual bear markets.

Rooting for Akamai

The better the stock market, we hereby propose, the worse the investment research. The post-1990 bull market has been the best market in history, therefore the investment research produced during the post-1990 market has been the worst research in history.

No parking

Now that Steve Jobs has a new Gulfstream V jet, where will he put it? “That’s a good question,” replied Jim Lafferty, head of the San Jose (Calif.) Jet Center, to New York Post cyber-gossip columnist Chris Nolan. “We’ve been told he’s going to base it here”—i.e., the aerodrome of choice for Silicon Valley—“but, frankly, it’s going to be parked outside on a piece of asphalt.”

Color TV redux

The miracle of American productivity is writ large on this, the gaudiest and lengthiest U.S. business expansion on record, and in few places is the record more indelible than in Silicon Valley itself.

Exporting empty boxes

The U.S. current account deficit, a dry topic, was made less abstract by a January 13 report in The Journal of Commerce: LOS ANGELES—The insatiable demand of U.S. consumers for imported goods is creating logistical headaches for ports, shipping lines, trucking companies, railroads and others in the intermodal chain. . . .

Pariahs’ auxiliary

One of the little-noted miracles of the greatest-ever economic expansion is that even Hawaii is starting to participate in it. In the fabulous 1990s, the economy of the 50th state more closely resembled the Japanese economy, from which it derives an important increment of tourist income, than it resembled America’s.

In the bleak midwinter

The undoing of the festive, stock-market-pleasing, Y2K-related credit expansion continued last week at the Federal Reserve System and the Bank of Japan alike. About $6.1 billion rolled off the Fed’s balance sheet. Although the central bank added a few billion dollars worth of securities to its permanent portfolio in the banking week ended January 26, it allowed almost $12 billion of year-end repurchase agreements to vaporize.

January 21, 2000, Vol. 18, No. 01

Men in brown

By rights, the first comment of the new century ought not to concern an event of the last century, but the late- autumn IPO of United Parcel Service —the biggest one of all time—may well be the phenomenon that most clearly defines the late phase of the boom.This is a bold conjecture, we know, as the parade of absurdities isn’t getting any shorter.

Speculative playthings

A friend of a friend, a bond arbitrageur, reports that the opportunities have never been thicker on the ground. Because risk capital has very largely abandoned the fixed-income markets, potentially lucrative anomalies abound. Underscore, please, “potentially.”

Answer the phone

See Washington count

It’s nobody’s secret that the price of the average American house ishttp://grantspub.com/pdfssky/articles/1028.pdf rising, but the consumer price index contains almost no sign of this pleasant bull market.

Interest rate heresy

The notion that prosperity is bearish for bond prices is rejected out of hand by progressive thinkers in the year 2000. It’s inflation that drives long-term interest rates, they say. If economic growth has any effect on interest rates, the argument goes, it ought to be bullish, as it isn’t the rich countries that tend to default on their debts. The higher the national ratio of earnings to fixed charges, the better.

Fed credit vanishes

The Federal Reserve is fast draining the liquidity lake it calculatedly fed in the runup to Y2K, an event for which no canned goods or rifle ammunition turned out to be necessary after all.

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