Almost nobody saw the recession coming, but multitudes believe they see it going. In anticipation of the early return of prosperity, investors have marked up stock prices, bond yields and money-market interest rates.
"We have. We can. We will." So Howard E. Janzen, the Julius Caesar of Williams Communications, describes the past, present and future of the fiber-optic network company he leads. It has achieved "operational excellence," set "the bar for practical innovation" and delivered "exactly what we promised," according to the emperor. Furthermore, it is "winning the time-to-market race."
Fleetness of foot is an especially desirable quality at Williams, because the money's running out.
J.P. Morgan Chase is the Hertz of the derivatives business with no visible Avis. Although possessing just 13.2% of the assets of all banks with derivatives on September 30, JPM held 59.3% of the derivatives contracts within the banking system (measured at face, or notional, amount). In the past four quarters, both ratios--notional to assets, net credit exposure to capital--have worked higher.
Is it a crime to be big?
Whatever the medical costs of asbestosis, the financial costs of asbestos litigation are indisputably towering.
The simple idea is that credit creation is a process. It has causes and consequences. Central banks propose, markets dispose.
Formerly, it was clearly true that the Fed led the marketplace. It is no longer so obvious...
J.P. Morgan Chase, Federal Reserve & Co.
The search was on for the leading corporate victims of Enron's bankruptcy even before there was a bankruptcy. Less attention has been devoted to an analytically more interesting question--which U.S. enterprise did Enron in its glory days most closely resemble? . . .
Standard & Poor's lowered to triple-C from triple-C-plus its rating on the Revlon subsidiary's senior unsecured debt. Other Revlon ratings were affirmed with a negative outlook.
Following is an analysis of the senior securities of the Internet Capital Group (ICGE) about which the viewers of CNBC heard so much late in the second Clinton term. . . .
On January 1, the biggest printing job in the annals of paper money culminates in the issuance of 14 billion euro banknotes, "enough to reach to the moon and back three times." Whether this is the right number of hypothetical lunar journeys to nudge the euro back to dollar parity (let alone to the $1.18 rate at which it began its career in 1999) is the subject under discussion. Our conclusion. . . .
Flash: Easy money lifts prices
A determination by the Federal Housing Finance Board that the average house price rose by 9.4% in the 12 months to October will set off a chain reaction of lending and borrowing in 2002. . . .
'Operation Enduring Bubble'
Late Monday, a Revlon subsidiary issued $363 million of four-year senior secured notes. Rated Caa1/B–, the securities bore a 12% coupon and were priced to yield 13.125%. Two things to know about this transaction: The offering size was bumped up from $250 million, and the price spurted by three points right out of the investment banking gate....
"Don't confuse my opinions with the management of the company," advises Michael A.J. Farrell, chairman and CEO of Annaly Mortgage Management (NLY). Those opinions and that management are the topics at hand.
Annaly, as constant readers know, is a mortgage REIT, a virtual thrift on which Grant's has been, and is now, bullish....
Freeport-McMoRan Copper & Gold owns one of the world's best ore bodies in one of the world's worst locations. The mine is Grasberg, and the setting is Irian Jaya (West Papua), Indonesia. Just step on a plane in Los Angeles and 37 hours later, you're there.
Location isn't the only bearish fly in what we judge to be a bullish ointment. There is the balance sheet (highly leveraged), the global economy (receding). . . .
What about Franco-Nevada in view of its proposed (and contested) consolidation with Newmont and Normandy? We have high hopes for a successful deal, assuming that Newmont trumps a rival bid from Anglogold. . . .
Kevin Landis, co-founder of Firsthand Capital Management and hardy tech-stock bull, had some advice for the value-seeking audience at the Grant's conference last week. "[O]ne of the trade-offs of prudence," said Landis, "is that you don't participate in what everyone else is excited about.". . . .
Kicking off last week's long-bond retirement party, Peter R. Fisher, undersecretary of the Treasury for domestic finance, denied that the decision to put the 30-year out to pasture was any part of a government stratagem to orchestrate lower interest rates. Long-term yields thereupon plunged.
No government finance official should be held to the literal truth, certainly not in time of war.....
On October 25, France boosted the size of an offering of inflation-indexed debt to 6.5 billion euros ($5.8 billion) from five billion euros. The inflation rate to which the bonds are linked is not the French one alone, but that of the dozen countries that share the euro....
The Fed's exertions would go for naught if the U.S. banking system, like Japan's, were immobilized. Ominously, lending has downshifted.... We put it to "Mr. Risk" himself, Michael Brosnan, deputy comptroller for risk evaluation at the Office of the Comptroller: How stand the banks?
Listed nearby are a half-dozen investment-grade convertible bonds that a holder may put back to the issuing company within the next 12 months. Each is rated low investment-grade.
None of the issuers will be confused with the U.S. Treasury, but each yields more than the six-month T-bill, now quoted (on the day the Fed dropped the funds rate to 2%) at 1.83%.
LivePerson is a solvent application-service provider, but the Magellan Fund should resist the impulse to call an investment committee meeting. The stock is quoted at only 30 cents a share. That's up from 10 cents a share on August 22, but down from $11 on April 7, 2000, the first day of trading....
"The U.S. Future Inflation Gauge plunged to a 26-year low in October, underscoring the rapid drop in inflationary pressures triggered by the first synchronous global recession since 1973-75. Therefore, U.S. inflation, which has already dropped noticeably this year, will decline further in coming months."
This country was founded in terror. The 17th-century Puritan settlers confronted the New England winter and King Philip's braves. They lived in fear of the pope and his legions of Frenchmen. In the summer of the signing of the Declaration of Independence, smallpox posed a greater danger to American patriots than the redcoats did. . . .
On the train from Narita Airport to downtown Tokyo, a uniformed girl sells drinks from a cart. Reaching the end of an aisle, she pauses, turns to face the inattentive passengers, smiles broadly, performs a deliberate, steep bow and wheels her drinks into the next car. Commerce works differently in a society in which rank and deference sometimes precede supply and demand.
The bear market in credit has created opportunity as well as loss, distress, apprehension and a general flu-like malaise. Following are some interest-generating investment ideas contributed by knowledgeable high-yield practitioners...
Not one visionary expected that anything so pedestrian as debt would thwart the technological destiny of Global Crossing, the Western Union of the 21st century. Yet the company hangs by a thread.
Asserting that the U.S. has entered a new age of productivity growth, defenders of the bullish faith are fond of citing the 2.5% annual growth rung up in the golden years, 1995-2000. This record they compare to the lamentable 1.3% annual growth posted in 1973-95.
When Osama bin Laden finally steps in front of a bus, the United States will be left with a more intractable foe, the legacy of its own boom. From John Youngdahl, Goldman Sachs economist, comes a provocative analysis of the consequences of the New Economy.
So accommodating is Alan Greenspan that the federal funds rate is lower than the inflation rate. Growth in the broad money supply is running strong, and bond yields are head and shoulders above bill rates. Wartime fiscal policy is beginning to be put in place.
A gold price of less than $290 an ounce in such a world speaks volumes about gold. . . .
Addressing a law school audience in New York two weeks after the September 11 assault, Justice Sandra Day O'Connor made a remarkable forecast. ". . .we are likely to experience more restrictions on our personal freedom than has ever been the case in our country."
What could this mean?
In the 1990s' boom, the best offense was no defense. Savings, inventories and cash reserves were pared to the bone. Confident of happy outcomes, Americans renounced the theory and practice of a margin of safety.
Risk aversion entered a bull market 18 months ago. Before the cycle is over, families will save more, corporations will borrow less and fiduciaries will stop reaching for extra basis points (even the ones at eye level). . . .
Scott Stone, vice president, investments, at Kansas City Life, has taken President Bush's wartime admonition to heart. He is fearlessly embracing everyday life with the purchase of broken-down convertibles. . . .
Sen. Interest Rate blows smoke
From the October 4 Bloomberg news wire: "Sen. Jon Corzine (D., N.J.), the former co-chairman of Goldman, Sachs & Co., says the interest rates American consumers and businesses are paying are higher than they should be because of growing concern in the bond market that the federal budget surplus will be replaced soon by years of deficit." . . .
Probably more central-bank credit was created in the week following the terrorist attack than in any week in the history of paper money. Yet, despite this monetary cataract, the gold price barely rose and energy prices crashed. On Monday, the Treasury's inflation-protected securities were quoted at a price to imply a 10-year average inflation rate of just 1.6% per annum. Implied, too, was a handsome compliment to the Federal Reserve. Not since 1970 has the sustained rate of CPI inflation--on a rolling three-, five- or 10-year basis--been less than 1.9%.
Following is an exploration of the monetary and financial consequences of the epoch that began September 11. . . .
With regard to the Treasury's inflation-protected securities, how cheap is cheap, what is the worst case, and what don't they protect against? Anyone sufficiently contrary to consider the purchase of inflation protection in a noninflationary world will want to know about the downside.
"So some civil liberties are going to have to go by the board?" Treasury Secretary Paul O'Neill was asked by host Jim Lehrer on the NewsHour broadcast of September 19.
"Well," the secretary replied, "I think for those people who are known terrorists, we shouldn't grant them the use of our civil liberties to extend their, their petulance, if you will."
Billions of dollars worth of hats have been hung on the stock-market valuation model associated with the Federal Reserve. It's simple to use. Identify the yield on the 10-year Treasury note and compare it with the forecast 12-month P/E ratio on the S&P 500...
The capital city of the boom, New York had a valuation to match, and still does. In this respect, it is like the S&P 500, although we love New York unconditionally.
Business was miserable before the attack, and it's worse today.
Unlike many places, New York has had to overcome adversity and prosperity alike. . . .
End of the beginning (beginning of the end)
"[T]he more this shock pushes the economy downward," writes Peter L. Bernstein in his Economics and Portfolio Strategy, "the greater the likelihood of a V-shaped recovery instead of a U-shaped recovery. . . .
A bomb was detonated outside the offices of J.P. Morgan & Co., adjacent to the New York Stock Exchange, on September 16, 1920. There was a roar, followed by mayhem. Forty people died, hundreds were wounded. A French general was conferring with some of the Morgan partners inside the building when all hell broke loose. Picking himself off the floor, the soldier asked his hosts, “Does this happen often?”
The winners in bear markets are investors-in-waiting, and the nonowners of Mexico-based Cemex are among these latent gainers. The shares they have not yet purchased are available at slightly more than five times earnings and come complete with a 4% dividend yield. If we are asked, Should they consider buying? we reply, “Emphatically.”
When Standard & Poor’s recently tapped XL Capital for induction into the S&P 500, well-oiled machinery started to hum. Managers of S&P 500 index funds looked up from their novels to buy the amounts of XL appropriate to the stock’s new index weighting. They did so without any conviction as to the investment merits of the Bermuda-based insurer. The price of the stock duly rose—by 5.1% in the five trading days after the announcement—as the people who had to buy, did.
The formerly capitalized “new economy” is today seen in lowercase letters in the columns of The New York Times, which respectfully used “N” and “E” as long ago as 1997. A regular weekly column still appears in the Monday business section with the standing headline, “NEW ECONOMY,” as if there ever were one. However, in news stories—for instance, as in the August 20 report about the shutdown of The Industry Standard, would-be journal of the new economy—the formerly capitalized phrase is printed small.
Ari Fleischer, White House press secretary, last month ventured to clarify a clarification. Treasury Secretary O'Neill is, indeed, the steward of U.S. dollar policy, he said. However, Fleischer added, O'Neill may not, in that capacity, hush the President of the United States.
Much has been heard about U.S. dollar policy. Suspending disbelief, some people are prepared to agree that there is one. We dispute it. . . .
It's been a forgettable year for the junk-bond market--mounting defaults, wide-open credit spreads, that telltale $826 million pretax charge to second-quarter earnings by American Express on account of high-yield bond losses...
In a more perfect world, companies would make their acquisitions, and repurchase their shares, in bad times. It would be pleasing to report that Oglebay Norton Co., founded in 1854, has distinguished itself in this fashion during the current cycle. Yet for all its presumably visceral knowledge of the rhythms of the U.S. economy (so many booms and busts since the Dred Scott decision!), Oglebay (OGLE) did what just about everybody else did. It went on an acquisition tear at the top, not the bottom, borrowing as needed. And now that the rug has been pulled out from under its earnings growth, the Cleveland-based pillar of the very old economy says it is out of the acquisitions market. And, of course, it is moving with all deliberate speed to pay down its debt. . . .
Last week's Labor Department revisions sliced nonfarm productivity growth in 2000 to 3% from the previously trumpeted 4.3%. After giving effect to other revisions, output per hour worked for the five years ended 2000 averaged 2.5%. That is a more than respectable number except as measured by the expectations set by the heralds of the New Economy. . . .
A freeze-dried corpse was discovered in 1991 poking out of a melting glacier high in the Italian Alps. No identification was found on the body, but that was only to be expected. Death occurred 5,300 years ago. Teams of forensic doctors performed X-rays and CAT scans on the Copper Age remains. . .They called him "Iceman."
[T]he doctors failed to notice a flint arrowhead lodged in Iceman's left shoulder less than an inch from his left lung. The overlooked evidence came to light on June 28 in yet another set of X-rays. . .
We turn to Iceman and his doctors as a case study in the perils of perception. Investors, like forensic physicians, must draw conclusions from the facts at hand. . . .
What central banks do to unwind
In a major relaxation of policy, the Bank of Japan on Tuesday pledged to boost its outright purchases of long-term government bonds by 50%, to 600 billion yen a month from 400 billion. . . .
Greenspan's peak was Nasdaq's
Sen. Phil Gramm (R., Texas): "If this is the bust, the boom was sure as hell worth it. You agree with that, right?"
Alan Greenspan: "Certainly."
The Wall Street Journal, which last week reported this committee-room exchange, omitted an important detail. The Federal Reserve chairman is no impartial observer of the boom he was asked to appraise. He seeded it, accommodated it, celebrated it and defended it from those who believed they saw it turn into a bubble.
NTL Inc., Britain's largest cable company and second-largest consumer telephone company, hasn't lost its "sense of fun." It says so right in the annual report.
However, the fun has gone out of its highly leveraged capital structure. . . .
Ritchie Bros. Auctioneers, the Canadian-domiciled and New York-listed auction house, stages big, sprawling, open-air auctions of backhoes, hydraulic excavators, wheel loaders, crawler tractors, stone slingers, etc. It has lately added fleets of trenchers used to lay optical-fiber cables. As the cables are in surplus, so are the trenchers. "We end up with large consignments from groups who had been busy as beavers for two years," says Ritchie financial-relations manager Bob Armstrong. "And then, all of a sudden, 'they ain't got no money, and they ain't got no diggin' to do.'"
It was the consumer who painted the second-quarter GDP black, if only a little bit, offsetting a plunge in business investment.
What could explain a bull market in a nonearning asset in a noninflationary era? Ample credit is the first answer, low interest rates the second. An overly narrow definition of "inflation" is the third. . . .
Interest rates drive equity and real-estate valuation models--except, perhaps, at the 0% to 11/2% level, as in Japan, or the 32% to 160% level, as in Argentina. Extreme interest rates do not always guarantee proportionately extreme valuations.
We checked in on Argentina because. . .
Ryerson Tull, the leading North American metals distributor, bullishly reviewed in the April 13 issue of Grant's for its absolute cheapness and reform-minded management, suffered a miserable second quarter. . .
Contagion of obliviousness
In a major policy address to the Detroit Economic Club on June 27, Paul H. O'Neill, 72nd Treasury Secretary in a line that began with Alexander Hamilton, concluded a discussion of his philosophy of development economics with a single arresting sentence. He said: "The best way to alleviate poverty is to increase people's incomes."
It was vintage O'Neill--crisp, uncomplicated and, as far as it went, true.
"I'm proudest of the efforts we made to attack earnings management and financial fraud," Richard Walker, head of the SEC enforcement division, was quoted as saying in a July 11 New York Times article that reported on his plans to return to private life.
Hourglass Fund L.P., just as its name implies, strives for slow and steady returns. But it quickly stepped out of character following its launch in February. The partnership achieved some sudden and startling returns through no fault of its own when, in May, Cable & Wireless announced a bid for Digital Island....
Grant's does not readily defer to any person, publication or even nation in the matter of market timing. Still, Japanese investors have compiled a record of maladroitness in equity investments that rivals even our own chronically unprofitable stance toward the greatest bull stock market of all time.
Calpine Corp. will receive that disputed $267 million receivable after all (Grant's, July 6). We were wrong. Calpine was right. Should we therefore turn bullish on the nation's top independent electricity generator? We should not.
The stimulative power of easy money is being thwarted by the legendary American consumer. Credit-card charge-offs are rising; layoffs are mounting, and stock prices are falling. Yet--as noted last issue--housing starts and auto sales are running at near-record levels. New this issue is the pictorial evidence.
'Liquidate the manufacturers'
The funds rate is falling, and the securities-buying tempo of the Federal Reserve System is accelerating. Ergo, monetary policy is easy. Or is it? . . .
Louis V. Gerstner Jr., knight of the British Empire, presides over a high-tech company that has not preannounced poor earnings. Competitors in every one of its business lines have warned of looming trouble. Big Blue sails majestically on. . . .
Late in March, Peter Cartwright, president, chairman and CEO of Calpine Corp., described the possible future arc of the Calpine stock price. Anticipating a tenfold expansion in the company's electrical generating capacity over the next five years, Cartwright helped an audience of investors and analysts to visualize a price of $100 or $200 a share, up from the then-quoted 52-week high of $55.92.
Not all was chaos on the Nasdaq Stock Market last Friday, the last trading day of the quarter. Though many stocks gyrated on account of a technological accident, a handful seemingly leapt by design. It was as if someone willed them higher. . . .
Polaroid Corp., world leader in an aging technology, is valued in the stock market at seven cents on the sales dollar and 42% of book value. Paying Monday's closing price of $2.56 a share, you could buy it all for less than $120 million.
"It," however, is the equity in name only. A better measure of the Polaroid equity is the debt. . . .
Make last issue's forecast '25 basis points'
Correction: Make last issue's forecast '25 basis points'
The Federal Open Market Committee cut the funds rate not by the predicted 50 basis points (Grant's, June 22), but by half that much. The central bankers' implicit optimism, taken together with recent bullish economic news, pushed up the forward structure of money-market interest rates. Funds will print at around 5% by Labor Day 2002, or so says Mr. Market. . . .
The $19.2 billion quarterly loss disclosed last week by Nortel Networks only ties a mark set in 1992 by General Motors. In setting, exposition and analytical importance, however, the Nortel disclosure stands alone. . . .
Complementary page-one stories in Monday's Wall Street Journal and New York Times established beyond the shadow of a doubt that a surplus of fiber-optic cable exists in the United States. Everybody can see it. Why could almost nobody see it coming? . . .
Michael Lewitt, principal of Harch Capital Management, Boca Raton, Fla., and longtime investor in (and student of) junk bonds, had a kind word for an embattled group. . . .
Shares of Innkeepers USA Trust, a hotel REIT, were priced for "some disappointment," said the April 27 issue of Grant's. Disappointment ensued, and the KPA share price firmed.
We return to the scene of this little triumph because the disappointment was so sharp and its onset so sudden. . . .
The latest derivatives report from the Office of the Comptroller of the Currency, for the three months ended March, shows sizable quarter-to-quarter gains in previously implausibly large numbers. . . .
By tradition, the annual report of the Bank for International Settlements is comprehensive, informative and analytically conservative. This year, it's comprehensive and informative. Belatedly, the central bankers' central bank, of which Alan Greenspan is a director, has taken up with the New Era. Confronting the aftermath of the techno-boom, it sees nothing very much amiss. In one astonishing passage, it holds out hope of a prompt return to bull-market investment patterns. If this document distills monetary discussion at the highest levels, what are the dull central bankers thinking about? . . .
In May, for the eighth consecutive month, industrial production declined, by 0.8% (economists had expected 0.4%), and factories operated at 77.4% of full capacity, down from 78.2% in April, the lowest level of utilization since August 1983. High-tech production fell by 1.2 percentage points, to 70.3%, the lowest rate in a quarter-century.
Anirvan Banerji, director of research at the Economic Cycle Research Institute, produced the accompanying graph to put the current losing streak into perspective.
Provided it can penetrate the apathy of its remaining shareholders, the Franklin Templeton Hard Currency Fund will disappear into its sister fund, Templeton Global Bond Fund.
Industrial production has fallen in the United States for seven months in a row. There has never been a string of more than three monthly declines during the postwar era, except in times of recession... The U.S. unemployment rate jumped to 4.5% in April, a rise of 0.6 percentage point from the 3.9% prevailing in both September and October last year. Never in postwar annals has the jobless rate climbed by more than 0.4 percentage point, except in recession. . .
On Monday, the editor of Grant's addressed the worldwide meeting of Advent International in Bermuda. Following is the text of his remarks, approximately:
From the 2000 high to the 2001 low, the Wilshire 5,000 gave up $4.7 trillion, or 31.7% of its capitalized value. Even compared to the cost of an education at the schools my children attend, this is a sprawling and impressive figure. What knowledge have we purchased at such a dear price?
The transformation of mutual savings banks into investor-owned companies enriched the banks' depositors; they became stockholders. Last week, a ruling by the Iowa Supreme Court gave new hope that policyholders of mutual life insurance companies might enjoy the same lucrative experience. . .
American International Group, which needs no introduction, is becoming less like an insurance company and more like a financial institution. The change is apparent in the growing contribution of derivatives activity to operating profit.
The recession extension trade
To judge by the pricing of interest-rate futures, December will bring an economic recovery, whereupon the Federal Reserve will tighten. By September 2002, to read a forecast into Tuesday's settlement prices, Eurodollar money rates will be back over 5% as against less than 4% today. . .
We write on May 22, and Xerox, the Document Company, has not yet filed a 10-K report. It was due on March 31. Furthermore--despite assurances quoted in the last issue of Grant's--it has filed no 10-Q. That was due on May 15. Silence from this American corporate icon is deafening, and Wall Street pretends not to hear it.
After the surprise easing of May 10, Wim Duisenberg, president of the European Central Bank, inadvertently explained why the mission of the ECB is a near impossibility. So doing, he unintentionally subverted the confidence of every thoughtful investor in the art of central banking, and helped to lay the foundation of the next gold bull market.
The reasons for this event--so ardently anticipated, so long delayed--will not be the ones usually enumerated. . . .
The Tocqueville Gold Fund, with $20-odd million under management, is a speck on the map of U.S. mutual funds but a tower of relative performance. Since inception in June 1998, it has not lost money but actually appreciated by 41%, of which more than 20 percentage points have been booked this year. . . .
Pauline Kael, the eminent and hard-to-please film critic, recently told of being fired by McCall's magazine for panning "The Sound of Music." We panned the great bull market, the financial equivalent of "The Sound of Music," but were not fired, owing to the liberality of our employer. Then, too, we found many individual investments to praise, even some that we should have panned.
Following is a long overdue follow-up to investment ideas from issues past. We have focused on long ideas, including a few that didn't go up. Modesty and limitations of space preclude a comprehensive listing of every winner.
The shoe,actually,doesn't pinch
Small business, in general, is happy with its treatment by banks and the capital markets. It perceives no credit contraction. Possibly, it will begin to feel one, but the fact that it has not yet done so after so much travail in the junk-bond market is worthy of note. So are the likely reasons why.
Suddenly, the federal funds rate is lower than the euro-denominated fulcrum interest rate, and the two-year Treasury yields less than the two-year German bund. The Federal Reserve is easing policy in the face of a rising inflation rate. The European Central Bank is holding policy steady in the teeth of a weakening economy. Which is the lesser evil?
The New Economy aged suddenly Tuesday morning with news that, in the first quarter, productivity growth declined and unit labor costs accelerated.
Not by coincidence. . . .
Owing to a lengthening investigation by its auditor into a range of corporate accounting practices, Xerox Corp., the Document Company, is late with its 10-K report. What makes the 10-K worth waiting for (though usually not beyond the filing deadline set 90 days after year-end) are the audited financial statements. . . .
"What have I learned?" mused Jack Byrne, CEO of White Mountains Insurance and featured speaker at last week's Grant's conference. Among other things, he replied, he has learned not to manage a business with eyes fixed on the stock price. . . .
"First," said James S. Chanos, noted short seller and leadoff speaker at the May 2 Grant's conference, "let me talk about our views on the market. We don't have any." He did, however, provide a number of specific short-sale recommendations. . . .
Peter Hall and Fred Woollard not only came to the Grant's conference all the way from Double Bay, Australia. They also brought their own investment idea. The two are partners in Hunter Hall International Ltd., and they are very long the shares about to be named. . . .
Yield curve of the future
The dollar-denominated money-market interest rate curve begins at 4.54%, the overnight rate. It dips to 4.06% at the sixth month, i.e., late next fall. Then it begins to rise again into 2002. The prediction embedded in the numbers is that the Federal Reserve has almost stopped easing.. . . .
At the recent bear-market lows, junk-bond yield spreads were almost as wide as the maximum spreads recorded in 1989-91, even though junk-bond issuers were defaulting at only about half the rate seen at the peak of the earlier cycle.
Why is pricing so much worse than the visible default-based fundamentals?
Almost the least bad aspect of Compaq's first quarter was the made-for-headline 74% decline in first-quarter net income, to 12 cents a share (a penny below the holy consensus). Easily nudging out the earnings news in corporate significance was weakness in sales, a rise in lease receivables, the continued outlay of real cash to manage share dilution, loss of market share and the collapse in margins of the company's much-bruited "industry standard server" line.
Compaq is a worthy object of financial study for two reasons, at least. . .
If the termites of litigation can fell W.R. Grace, why can't they topple even bigger corporate structures? On April 2, the day Grace filed for Chapter 11 protection, ABB Ltd., the giant Swiss-based electrical-equipment manufacturer, disclosed an unknown asbestos liability in the U.S. Its shares dropped 16%.
Nothing enhances profitability like the lack of competition. This chestnut is offered in preface to a bullish review of Innkeepers USA Trust (KPA), a hotel REIT that makes its niche in the extended-stay market. . .
Why the Fed may ease and ease
Not even bureaucracies so revered as the Federal Reserve and the United States Department of Agriculture can exert complete control over the commodities they regulate.They can fix the price of credit or soybeans, or they can set the quantity of those things, but not both at once. For the past 20 years, the Fed has chosen to regulate the price , i.e., the federal funds rate. The quantity, i.e., the monetary base, is what it doesn’t control.
The Federal Reserve, trying to preserve calm, has referred to what ails the U.S. economy as an "inventory correction." In one sense, at least, this euphemism fills the bill. Sales of used and refurbished high-tech equipment are through the roof.
Inventories of semi-processed metal are holding their value, yet Chicago-based Ryerson Tull, North America's leading metals distributor and processor, has been marked down like an unsold file server...
We embark on this bullish analysis with a conviction that there's no way to positively identify a bear-market bottom except by watching it in the rearview mirror. Thus, it's incumbent to carry on the search for bargains even when the bottom is (or seems to be) falling out.
On May 14, 1837, before the Presbyterian Congregation of New Orleans, the Rev. Joel Parker preached a sermon about the then-raging financial and commercial panic. The true source of the crisis lay not in the overextension of bank credit, the subsequent contraction, the overbuilding of canals and railroads, the heated speculation in stocks or the bloated prices of cotton and real estate. . . .
Barring a miscarriage of justice, the 2001 Complacency Prize will go to an American banker. Astoundingly, the men and women at the top of our leveraged financial institutions are mainly unconcerned.
Bear markets were put on earth for a reason (beyond the ones enumerated so many years ago by Rev. Parker). Pessimists may respond to the gnashing of teeth on Wall Street by condemning the Fed for its tightfistedness or Congress for its incorrigible stupidity. Optimists will survey the same terrible scenes and cheer the work of restoring investment value.
Cyclical history was made in the fourth quarter when business equipment spending fell by an annualized 3.5%. It was the first such decline since a 10.3% drop in the first quarter of 1991.
The Merrill Lynch economics department was preaching to the choir when it published its March 21 commentary entitled, "Inflation's Last Hurrah." Former inflation vigilantes are today's aggressive buyers of two-year Treasurys priced to yield less than 100 basis points above the year-over-year inflation rate...
Connoisseurs of zaitech, or financial engineering, long ago turned their attention to IBM. Even more than the Japanese companies that pioneered the art form in the 1980s, Big Blue has shown that superficially brilliant growth in earnings per share is not necessarily dependent on superior business results. When top-line growth disappoints, ingenuity must fill the breach.
"There are no 'bargains' among our current holdings," writes Warren Buffett in the new Berkshire Hathaway annual. "We're content with what we own but far from excited by it."
What's a bottom without a bargain? we ask in service of the most frequently asked question on daytime television: Is the bear stock market over?
Frederick E. "Shad" Rowe writes from Dallas:
"T. Boone Pickens and his limited partners had a very good year in 2000. On January 1, Pickens's partnership, BP Capital Energy Fund, had $4.4 million in equity. On December 31, it had $244 million. There were no interim capital contributions (and no withdrawals).
"Principal blame for the credulousness of world financial markets toward overbred U.S. economic data, it seems to us, goes to Chairman Greenspan, who often invokes the supposed statistical proof of technological progress and productivity growth but never (as far as we know) cautions against overreliance on numbers that may not be what they seem."
"Some Fear a Lasting Disillusionment with Stocks Will Hamper U.S.," said the headline over a story about loss and recrimination in the March 9 International Herald Tribune. Such talk is a staple of bear markets, of course, but the timing this cycle is out of the ordinary.
As a bank, Gateway Inc. makes an excellent computer company. The third-largest supplier of PCs to consumers boosted its allowance for loan losses last year by $121.9 million, equivalent to 25% of the new loans it extended. ... Yet, despite this demonstration of the hazards of lending to American wage earners, stocks of the consumer-finance companies have been holding their own (certainly in comparison to the Nasdaq)....
Once a week, the staff of International Strategy & Investment polls as many as 160 companies in 15 industries. Are their revenues weak, strong or on-plan? The results--none too pretty to read nowadays--are compiled in the weekly ISI Company Survey Report.
In January, for the first time in two years, the smoothed rate of growth in the Japanese CPI turned positive: It rose by 0.6%. In other incredible news from the crisis-racked Japanese economy, consumer confidence in the fourth quarter of 2000 achieved a four-year high.
Although your editor is invested in Japanese equities, and is therefore anything but impartial, he passes along these data with a clear conscience.
Surprising his regulatory colleagues, the feed industry and the congressmen before whom he was appearing on a routine budgetary matter, acting FDA Commissioner Bernard Schwetz let it drop that he is weighing an outright ban on the feeding of meat and bone meal to pigs and chickens (a ban on the feeding of cow parts to cattle is already in place).
If the calculations of William V. Sullivan Jr. are correct (and when have they ever not been?), growth in M-2 and M-3 for the month of February continued to climb. According to the Morgan Stanley economist, year-over-year growth for M-2 will show a jump to 7.6% from 7.0% in January and M-3 to 10.1% from 9.5%.
$3.1 trillion in market value has been erased since the Nasdaq’s peak in March 2000, equivalent to 30% of GDP. By contrast, $986 billion was wiped out in the 1987 stock market panic, equivalent to 20% of GDP. Wall Street, of course, regrets the losses--it feels sorry for the customers—but it has been slow to adjust the scale of its operations to the unfolding bear market...
At eight ounces in weight and six to 10 inches in length, the average menhaden is the kind of fish that a sporting angler would throw back into the ocean. The nation’s largest producer of fish oil and marine protein products is similarly pint-sized. With a market cap of $36 million, Omega Protein Corp. would be unlikely to interest the typical institutional investor even if it jumped into his frying pan. But we can imagine a bigger Omega and a reconfigured world protein market. Hence the following essay.
For those not seated, please find a chair. John Reed is bearish on the banking system. The man who led Citi into the real-estate depression of the early 1990s and then, miraculously, survived to lead it out again, has warned that institutions like the one he headed lack the means to manage “discontinuous” risk.
The faculty didn’t object to Jonathan Lebed’s speculation habit, a friend of the high school wunderkind was quoted as saying in Michael Lewis’s stunning profile of Lebed in last Sunday’s New York Times Magazine. “They were trading,” said Jonathan of his mentors and teachers.
If risk is what builds behind the dam of perceived certainty, gold was bound to go up eventually. Maybe the time has come. The Market That Could Never Rally is caught in a short squeeze.
Many are the miracles of the computer age. Though the dot.coms, ASPs and ISPs etc. may perish, the Commerce Department lives on, and its economists continue to produce the data to demonstrate the benefits of faster and more powerful computers.
Not previously known for an interest in New York State government, Tom Hicks, first-named partner in the private equity group of Hicks, Muse, Tate & Furst, recently asked his friends to come to lunch with H. Carl McCall, a Democratic politician and gubernatorial candidate who (as the invitations explained) is renowned for social moderation and fiscal conservatism.
General Electric, the House that Welch Built, is the biggest company in the world by market cap and the only surviving member of the original 12 Dow industrials.
Eric Fry, editor of GrantsInvestor.com, led a team of analysts to get behind, among and in front of the numbers.
American Banknote Holographics has achieved a position of stock-market leadership only once. On Jan. 20, 1999, its share price topped the U.S. percentage-loser list after plunging by 70%. That was also the day the company admitted its books were cooked...
The owners of Lucent Technology’s unsecured long-term debt were busier than ever on Monday as they absorbed the enormity of a Moody’s downgrade, to Baa3 from Baa1. All at once, they were unsecured and insecure.
Alan Greenspan, who worked on Wall Street long enough to know better, invoked the authority of sell-side research in his Humphrey-Hawkins testimony on Tuesday: “Corporate managers more generally, rightly or wrongly, appear to remain remarkably sanguine about the potential for innovations to continue to enhance productivity and profits,” he told the Senate Banking Committee.
Sychronized global unhappiness
On the evidence of chronic weakness in money growth alone, the Bank of Japan stands accused of willful stupidity. Possibly, it is guilty as charged. However, it is a measure of the intractability of the Japanese debt predicament that the bank has failed to ignite a reflation even when performing the central bankers’ equivalent of handstands.
Ritchie Bros. Auctioneers is the world's largest auction dealer in industrial and construction equipment. When the owners of these capital assets begin to feel cautious, uncertain or incapacitated, they are more inclined to sell the marginal underutilized backhoe, truck or tractor. Ritchie's business is to convert these transactions into commission dollars.
So cheap did junk bonds become in 2000 that they were bound to excel in 2001. This, at least, was the essence of the bull argument that frightened optimists croaked out during the depths of the bear market. When on January 3 the Federal Reserve slashed the funds rate to 6% from 61/2%, the bulls stopped croaking...
For so long has Freddie Mac delivered extraordinary returns that people have stopped wondering how it does it. In the civilian economy, financial institutions are famously susceptible to the vagaries of credit and interest rates. Either an excellent management or a reckless one may string together a few years of outsized returns. However, as far as we know, none has sustained a 20% ROE through thick and thin. Such a record does not occur in nature. Then again, Freddie is not a natural enterprise.
When Cisco Systems discloses its quarterly results next week, balance-sheet details will likely be sparse. However, that is not to say that Cisco has no balance sheet. The world's leading supplier of infrastructure for the Internet is deeply involved in financial services...
Not every downturn is over before you know it, and not every investor breaks even at the terminal point. From the January 24 Real Estate Alert...
"Uneasy over the mad cow crisis in Europe," the Associated Press reported last week, "American cattle producers are pressing the government and feed makers to improve compliance with a federal ban on feeding animal meal to cows and sheep." Uneasy over the same crisis, investors are pressing for ideas on how to implement it ("play" seems the wrong word). It's not an easy question to discuss, let alone to answer.
Examining the totality of government policy late last year, Grant's found it oppressive. The federal surplus and the governmental tax take were at, or close to, records, and the federal funds rate towered over the rest of the Treasury yield curve. Others noticed, too, and the push is on to lighten the burden.
The coming mad cow bull market
More than an ocean and a currency separate the United States and the continent of Europe this year. Mad cow disease is cutting a swath through the Old World but has only begun to worry the New.
However, the U.S. imports tons of possibly contaminated bovine products from Europe, and because (as the FDA reported last week) regulations intended to keep mad cow disease away from America are being flaunted by hundreds of animal-feed producers, the risks of a public-health threat to the U.S. seem anything but remote.
The Bank for International Settlements, the central bankers' central bank and the conscience of the global banking system, stands accused of trying to pick its investors' pockets. Many people will be surprised to learn that the BIS even has private pockets available for picking. They may be even more taken aback to discover that the bank is trying to buy them out at a price equivalent to one-half of the institution's net asset value...
From the January 12 Wall Street Journal:
Spanish consumer prices in December rose 4.0% from a year earlier...
"Consider," reflects Martin Fridson, ace high-yield strategist at Merrill Lynch, "that 1991 was the highest return year on record for high yield and it was also the highest default year." We are considering....
"Armed with the finest research in the world," write the partners of Hoisington Investment Management Co. to their fixed-income clients, "the Federal Reserve would not have moved so dramatically simply to shore up the Nasdaq or ameliorate other temporary financial strains . . . . Rather, the FOMC must have observed that the potential for reinforcing contraction in business activity was a significant danger."