In communion with Phil Fisher
The hue and cry for dividends is actually a cry for help. It’s an expression of fear and risk aversion. Even more than an end to the double taxation of dividend income, anxious investors today want sanctuary. “We are seeing a profound shift in mood as the investing public veers from a focus on rewards to a preoccupation with risk,” observes Leon Levy in “The Mind of Wall Street,” his excellent new memoir. . . .
In an environment when bond prices are declining, should one sell the TIPs bonds outright or perhaps invest in a Treasury short fund to protect the exceptional profits that have accrued the past year?
Last week's release of the U.S. current-account deficit for the third quarter stopped no presses. The Treasury secretary-designate, John W. Snow, made no public comment (at a seasonally adjusted $127 billion, the shortfall was little changed from a revised second-quarter deficit of $127.6 billion). His Pittsburgh-bound predecessor, Paul O'Neill, did not choose to add to his existing store of comment, the gist of which is that the current account deficit is meaningless.
It is anything but meaningless, but the meaning is obscured by the numbers that purport to describe it. To clarify and demystify is our first order of business, and to this end we are trying something new. . . .
In the late 1980s, Japan set world standards in absurdity to the upside. Today, it's achieving record-setting excesses on the downside.
"Investors who buy 100 million yen ($810,400) of Japanese treasury bills for three months earn enough to buy a cappuccino in a Tokyo café," Bloomberg reports from Tokyo. "Yet auctions in recent months have drawn bids for as much as 800 times the amount sold."
"I am writing this letter in response to the 'Deflation vigilantes' piece in your last issue," writes Stephen A. Alpher, paid-up subscriber from Collegeville, Pa. ". . .While I found Ben Bernanke's remarks quite interesting, if not arrogant, I'll pass in getting my investing advice from him. . . .
On November 25, the international central banking establishment was directed to withdraw its fingers from the pockets of its very own shareholders. These were the private holders [a percentage] of the common equity of the Bank for International Settlements, the central bankers' central bank. . . .
The imaginary scene is the festive Christmas party of the Federal Reserve Board. "Do you realize," one of the distinguished governors says late in the evening, his words slightly running together, "how much more money we could print if we cut down just one minor national forest? We could paper the whole damn world with C-notes." The others laugh till they cry. . . .
The call to Legacy Hotels Real Estate Investment Trust, a Canadian REIT sometimes featured in Grant's, was to ask why the stock price was down. One explanation was disappointing, the other intriguing. . . .
A friend of a friend has sold his business. He would like to put the proceeds to work for the benefit of his descendants, not all of whom have yet come into the world. How would we invest it? . . .
Mr. Market is the Maestro
The Fed may propose but the market disposes. The funds rate may anchor the government yield curve, but the stock market sets the tone for risk taking along the corporate yield curve. . . .
Rating currencies: none of the above
Shares of Newmont Mining dipped last week on the irrelevant news of an earnings miss. Only incidentally is Newmont, the world's leading gold company, in the quarterly earnings-generation business. It is fundamentally in the gold-reserve-accumulation business. In the marketplace of money, its gold competes against the Federal Reserve's dollars, which compete against every other currency under the sun. Now the dollar is losing ground, both to gold and to one of the formerly lamest and weakest of currencies, the euro.
Following is a reexamination of the eternal monetary questions. It's prompted by a pair of recent, apparently unrelated developments. . . .
"Moody's is an investment in the growth of the public debt capital markets," to quote none other than Moody's. Which raises the question of whether a sale of Moody's Corp. is an investment in the shrinkage of the very same debt markets. Our answer is, "Yes." Additional questions and answers to follow. . . .
A double-truck ad in the November 2 Houston Chronicle points the way to a new phase of subsidized consumption in America. From Star Furniture comes an offer you may or may not be able to refuse after you stare at it for five or 10 minutes and take a walk around the block. Here it is: You borrow--and the store pays you interest on your debit balance. Plus--plus--you save 15% to 50% off already low prices in every department.
Does this proposition perhaps activate an impulse to whack the side of your head with your open palm?. . .
Charter Communications and AES Corp., a pair of fallen companies in the cable and energy businesses, respectively, have continued to fall, bullish analyses in previous issues of Grant's notwithstanding. We return with an update.
Asymmetric monetary policy
Chairman Greenspan caused a small furor at Jackson Hole last summer when he denied that it was within either his ken or his power to pop the stock-market bubble before it blew up in his face. Yet, in a talk Tuesday before the Council on Foreign Relations in Washington, he reiterated the duty of the central bank to intervene, if necessary, to prevent the financial economy from collapsing in a panic.
The salient passages from the contrasting texts are as follows:
The most imperfect investment
On the third-quarter General Electric conference call, management virtually asserted that GE is cycle-proof. In so many words, Jeffrey R. Immelt, CEO, declared that it's business as usual in Fairfield, Conn.--bear market, credit contraction and post-bubble syndrome notwithstanding. . . .
"Short Adam Smith, long Karl Marx" was the gist of the Grant's political speculation for this Election Day. Before the polls have closed, it appears that Smith (1723-1790), older even than Walter Mondale or Frank Lautenberg, is a surprisingly spry voter-getter.
GE (not quite) all the time
General Electric Capital isn't the only voracious top-rated corporate borrower on the fixed-income calendar. Fannie Mae last week disclosed plans to raise $290 billion of longer-dated securities next year to fund what it promises will be "rapid portfolio growth."
Deflation, of which there is none
The United States has been, is now and will likely remain a nation of debtors. It's in the national DNA. At the latest reading, i.e., the second quarter's, it took $2.90 of incremental total borrowing to achieve $1 in GDP growth--a post-1958 record. To a debtor, nothing is so inconvenient as a rise in the value of the money he or she has contracted to repay. In their role as consumers, Americans naturally want a dollar that buys more and more. Yet, in their capacity as debtors, the same Americans prefer a dollar that buys less and less. If the troubles of the corporate bond market are a reliable indicator, the debtors' needs are becoming paramount.
Following is an exploration of deflation, a monetary phenomenon not only inconvenient but also improbable (and to date, invisible). It is an overblown worry, in our opinion. The risks it poses to invested capital are lower by far than those presented by the tiny government bond yields that resurface during periodic deflation scares
It was 1999 with a difference on Monday, when FindWhat.com delivered third-quarter earnings fully two pennies a share better than expectations. Management crowed and the stock price leapt, but there was only silence from Wall Street. Sell-side coverage on FindWhat – "a leading developer and provider of performance-based marketing services for the Internet," in the company's own words – is non-existant today.
In the tech-stock levitation of the late 1990s, Scott Bedford, a seasoned San Francisco technology investor, was net short. . . .
Every Thursday, the Department of Labor discloses the weekly tally of initial claims for state unemployment insurance. And every Thursday . . .the previous week's tally is revised. The revision is always to the upside and always on the order of 5,000 claims. We've traced the pattern back to April. . . .
Gold bull market resumes on York Ave.
That there are two sides to every market was recently reaffirmed by a J.P. Morgan director and a Citigroup shareholder. Larry Bossidy, the Morgan director (and a former chairman of Honeywell), assured the Financial Times that William Harrison, the bank's chairman and CEO, had the directors' full support. "The board's very happy with Harrison, even though the papers might lead you to think something else," said Bossidy, prompting the question of how ecstatic the board might be with Harrison had he not led the bank into a credit buzz saw. As for Citi, the behemoth's No. 1 shareholder, Prince Walid bin Talal of Saudi Arabia, urged that, in the light of better-than-hoped-for third-quarter results, "all those doubters should shut up."
Speaking for all doubters, Grant's notes that the credit difficulties of the post-bubble economy persist.
Rope for the neck of the homeowner
Interest rates can have unintended consequences. Very low rates often ignite booms, but even ultra-low rates may not fix busts. A case in point is the current federal funds rate.
At 13/4%, the rate seems low and it is low, but it isn't as low as it seems, to borrow from Warren Buffett. Judging by the deceleration in the growth of the credit the Fed creates, the Bank of Alan Greenspan is propping the rate up rather than pushing it down. It is withholding credit from the market to support a rate that, in the absence of Fed open-market operations, would probably be lower than 13/4%. So we expect that the rate soon will be lower--1%, to guess...
...Consumers in growing numbers are choosing interest-only mortgages over the conventional, amortizing kind. . . .
A few more bankruptcies on the scale of Enron, and the U.S. economy might yet scramble back to its feet. From the September 30 Houston Chronicle. . .
Stocks yield all of 2%, 10-year Treasurys just under 33/4%. The world--one would suppose--is yield-starved, yet double-digit yields on offer from mortgage REITs go begging. Should the world be passing them by?
"Well, not exactly," is our guardedly bullish answer, which comes in many parts. To begin with, a working definition: A mortgage real estate investment trust is a kind of uninsured thrift institution without walls. It acquires mortgage assets with borrowed funds. As a REIT, it pays out essentially all its earnings as dividends. Unlike an open-end mutual fund, it employs financial leverage. Unlike an equity REIT--e.g., an investor in apartments, shopping malls or office buildings--it owns mortgages on property, rather than the property itself. . . .
Not asking for the earth, the moon or the stars, a limited partner of a tiny biotech investment partnership, Millennium Value in Biotechnology LP, recently expressed the hope that the stocks in the partnership's portfolio would rally back to book value. If so, this optimist observed, investment performance would be mightily improved. As it is, 23 of the fund's 25 investments in the portfolio are valued for less than net cash.
Following is an update of "Mr. Bear's big biotech sale," . . . .
In its haste and confusion, the bond market sometimes leaves valuables unattended. Spotting these loose items, alert investors just slip them into their pockets. Fair is fair...
...At Monday’s close, observes Hilary Till, co-founder and portfolio manager of Premia Capital Management, Chicago, The Bond Buyer 40 Municipal Bond Index outyielded the 30-year Treasury. . . .
‘Shut up,’ quipped the prince
Credit troubles ring the globe. On the credible belief that bankrupt Japanese banks will be stopped from lending to bankrupt Japanese customers, so-called zombie companies, the stocks of Japan's big four banks have buckled. . . .
In the early 1980s, interest rates loomed over the market like a redwood forest. Now they lie underfoot like crabgrass. The deflating bubble has brought with it a flattened yield curve. As they did 20 years ago, extreme levels of interest rates have disoriented even seasoned analysts, and redistributed risk and reward throughout the fixed-income markets.
The Bank of Japan is one of the world's cheapest investments. It is possibly the world's cheapest bank stock, a claim that could have been made for it even before Gov. Masaru Hayami announced his intention to use the bank's own balance sheet as a depository for some of the unwanted equity investments of Japan's foundering commercial banks. . . Compared to the valuation of the BoJ, the Moody's rating of Japan's sovereign debt--famously below that of Botswana--is almost a badge of distinction. . . .
"The investment business has its ups and downs," wrote Levy, Harkins & Co., private money managers, to its grateful clients in January 2000. "Last year was about as uppish as we ever expect to get." So uppish, in fact, was the last year of the bubble stock market that the firm's accounts were up by 159.7%. The S&P 500, not so heavily concentrated as the Levy Harkins portfolios in EchoStar Communications and Qualcomm, gained just 19.5%.
Following is the story of bears who stopped being bearish. In particular, it is the story of complementary investment feats--the aforementioned year of getting rich followed by successive years of not getting poor. Most people find it easier to get rich than to stay rich. . .
In the bad old days, there was a "misery index" to measure the pain and suffering of working people. Now--and not a day too soon--there's a "capitalist misery index" to measure the manifold problems of the rich. Who says there's no progress? . . .
"Over time," intoned the Federal Open Market Committee on Tuesday in explaining its decision to hold the funds rate at 13/4%, "the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate. However. . .
How America misprices credit
Students of the art of lending blinked on Friday when AT&T Corp. borrowed $4 billion from its banks at just 37.5 basis points over the wholesale cost of funds. Those who blinked the fastest knew a complementary fact: The cost of insuring an AT&T obligation against default was quoted at no less than 475 basis points over. Differences are what make markets, but why was the loan so cheap when the risk of default (as reflected in the cost of default insurance) was so great?
Following is an exploration of the American way of lending, with the focus on coincidences, accounting conventions and a looming major rules change....
On August 30, at the annual monetary jamboree of the Kansas City Federal Reserve Bank in Jackson Hole, Wyo., Alan Greenspan washed his hands of responsibility for the bubble he said he could not have pricked even if he had noticed it floating above his desk on a string. "The struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policy makers," declared the Maestro. "We were confronted with forces that none of us had personally experienced. Aside from the then recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy."
The chairman's Jackson Hole speech has been, will be and should be deplored as the worst kind of self-exculpating revisionism. However, it was a letter to the editor in Sunday's New York Times that hit the critical nail on the head....
In a July 22 Barron's interview, value investor Jeremy Grantham stated his position vis-à-vis gold bullion. As the metal pays no dividends and earns no profits, said Grantham, he had no view. He was purely agnostic.
Grantham's agnosticism might be even purer if he read Monday's "Capital Market Update" by Paul Macrae Montgomery, the eclectic and always-interesting analyst at Legg Mason Wood Walker, Newport News, Va....
President Bush mobilizing; the stock market falling; the oil price rising; big banks failing. The year? There are two correct answers: The U.S. in 1990, and Japan in 2002.
The picture describes a scene from Japan, the plunging share price of a big, ugly bank. . .
Memo to the queen of England
On July 24, Harvey L. Pitt modestly proposed that the Securities and Exchange Commission be accorded cabinet status and that he, the chairman, be named a cabinet officer. Two weeks later, the British Treasury announced that Alan Greenspan would be made a knight of the British Empire. The Pitt proposal brought hoots of derision, as it should have. Greenspan's promised knighthood elicited, for the most part, a respectful silence, which it should not have. Almost 21/2 years into the bust that followed the boom, the chairman of the Federal Reserve Board is still a global icon...
...We return to the chairman because his continued lofty reputation is a worrying financial omen.....
"Over the short term, a 3.5% real yield might also turn out to be a very good hedge against the market's expectation of returns on riskier assets such as stocks." So wrote Christopher F. Kinney, senior vice president of Brown Brothers Harriman, in January. Lesser sentences have been bronzed, gilded or pressed between rose petals.
The real yield to which Kinney so presciently referred was the inflation-protected yield provided by TIPS, the Treasury's inflation-protected securities. In the seven months through July...
Qwest Communications, "the U.S. telecoms group being investigated by the Securities and Exchange Commission," to quote the unflattering capsule description used last week by the Financial Times, went from investment-grade credit to New Economy flotsam in less than three months.
You've heard of Qwest and its flamboyant former CEO, Joseph Nacchio, who, if he knew nothing else, knew when to sell his own shares (he sold them nonstop). In a critical review of Qwest in the March 1 issue, Grant's judged the company's prospects dim and its securities overvalued. We said that the value of the Qwest 7.25s of 2011 should be closer to 70 than to the then-quoted 901/2, a price to yield 8.81%. We were right in the direction, at least: The bonds are quoted today at 42-44, to yield 23%....
Like a teenager driving the family sedan backwards to try to unwind the odometer before his parents get home, Wall Street has been trying to undo the damage done by boom-time business practices....
We're all New Dealers now
It was 90 degrees at lunchtime Tuesday when the AFL-CIO's "No More Business As Usual" campaign cranked up at the corner of Broad and Wall under the glower of the New York Stock Exchange. The Dow was reversing its morning losses as the president of the AFL-CIO, John Sweeney, in shirtsleeves and braces, took the microphone on the steps of Federal Hall.
"When corporate criminals invade our workplaces and our markets to steal our jobs and our savings," spoke the head of American organized labor. . .
...There appears to be only one speechwriter working the crisis-of-capitalism assignment. . . .
In a review of AES Corp. in the March 15 issue, Grant's expressed frustration that the equity, preferred and bonds of the worldwide power producer had appreciated in price before we could put our bullish analysis to bed. At the prices and yields prevailing when work began, we lamented, "AES was a brilliant opportunity. At the prices quoted Tuesday, it is merely an interesting businessman's risk."
In the past several weeks, the company's publicly quoted capital structure has gone from interesting to spellbinding. . . .
Until it forgot itself and rallied, the stock market was veering closer toward fair value. Now it is veering off again into deeper unfair value.
The subject under discussion is the overvaluation of the U.S. equity market, and we have started off on the wrong foot. Andrew Smithers, London-based consultant, our leader and guide on this expedition, insists that the market has no will. It has no purpose (as in, "The market's purpose is to impoverish as many as possible") or job (as in, "The job of a bear market is to restore fair value"). To him, it's all mechanical. Still, in our experience, the mechanical contraption at the corner of Broad and Wall delights in the confusion of the experts. . . .
Corporate America, though it has supposedly sworn off make-believe, continues to imagine that it is better at investing than, say, Warren Buffett. Twenty-five of the 30 companies in the Dow Jones Industrial Average sponsor defined benefit pension plans, and the 25 therefore disclose their assumed long-term rates of return on invested pension assets. What they expected for 2001 was an average return of 9.4%. What they achieved was an average of minus 7%. . . .
Before there was a Grant's Interest Rate Observer, there was a Grant's Village Store, and without the proprietor of the store, there wouldn't be an editor of the publication. The store was in Middletown Springs, Vt., and it was the post-corporate sanctuary of Philip Osborne Grant, who died on July 19 in Niceville, Fla., at 87. . . .
Gold bull market resumes on York Ave.
While the gold price has pulled back and gold stocks have suffered the indignity of being treated like other common stocks (in some cases worse), the barbarous relic shone for 13 minutes Tuesday evening on the Upper East Side of Manhattan. At 6 p.m. at the Sotheby's auction house on 72nd Street and York Avenue, bidding for the only known U.S. double gold eagle coin began at $2.5 million. . . .
Mr. Bear's big biotech sale
News last week of the discovery of the oldest hominid skull, a finding that pushes back the presumed origin of the human species by up to three million years, only reaffirms that we are who we are. If, after all this time, humanity still can't get the knack of buying low and selling high, it may never learn.
In no field of investment is the behavior of the species less evolved than in life sciences. During the 1999 genomics craze, no price seemed too high for a share of a biotech company, even for the wrong one. Now, apparently, no price is too low, even for what may prove to be the right one. Perhaps two-dozen once-cherished biotech businesses are valued in the stock market at less than their net cash....
Paul Allen, billionaire Microsoft alumnus and controlling shareholder of Charter Communications, the nation's No. 4 cable company, wouldn't be human if, alone with his thoughts, he didn't muse on how much simpler, even richer, his life would be if what he controlled was an investment-grade municipal bond portfolio instead of a speculative-grade cable property.
But the die is cast, and Charter is embarked on a mission to wire the world....
The dollar's fall to parity against the euro provides a moment of monetary clarity. If the United States currency is only as good as the European one (a unit printed on a continent once dubbed by Byron Wien, Morgan Stanley investment analyst, an "outdoor museum"), what good is it?
Currency-wise, we are, and have been, almost impossible to please. We are critical of the dollar for one reason, of the euro for another, and of the yen for still another. We are critical of the entire shooting match--"the institution of managed currencies"--for the undue trust it vests in the political bureaucracies called central banks. Now comes the annual report of the Bank for International Settlements with a new analysis of the precarious position of the dollar....
James S. Chanos, the short seller who figured out Enron, penetrated Tyco and foresaw the millennial telco collapse, has only one professional problem: There have been net withdrawals from Ursus Partners, his short-selling fund (and its offshore counterpart), for seven consecutive quarters....
Prisoner of policies past
Prospects for a rise in the fed funds rate this year have dwindled to the vanishing point, but the Bank of Canada on Tuesday implemented its third quarter-point rate rise since April.
When one's most unconventional thoughts are repeated all day long as revealed truth on the stock-market cable shows, a decision is in order--to think more highly of the TV set or reappraise the ideas.
All the world today knows essentially what the bears alone used to know. It knows that the stock market is risky, that technology is especially risky, that telecommunication is overbuilt and that there was really no New Economy after all. It knows that some corporate executives are corrupt. The readers of Grant's knew this last detail four years ago....
Ink runs red from Sacramento to Washington, D.C., to Paris and points in between. On two continents, governments are back in the borrowing business, the United States government in unprecedented haste.
If anything will ever shame the Federal Open Market Committee into dropping the false and hackneyed words "foreseeable future" from its press releases, it should be the staggering and unforeseen change of fortune in U.S. fiscal affairs....
International Finance Discussion Paper No. 729, a new publication by the staff of the Federal Reserve Board, possibly has more authors than readers. Thirteen names are credited on the title page.
We are mortally certain we know the name of one reader of this essay, entitled "Preventing Deflation: Lessons from Japan's Experience in the 1990s." He is--must be--Alan Greenspan, who will find support in its 62 pages for an even lower funds rate than the current 1.75%. Our conclusion (not to be confused with the authors') is that the analysis was ordered up to support the policy in place--and to validate a more protracted bout of monetary ease than either the Eurodollar futures market or the currency market now has in view....
"You can't cook the books on gross-domestic-product numbers," asserted a reporter in Monday's Wall Street Journal, on the authority of an economist from Salomon Smith Barney. "No analyst can make up the numbers on or influence GDP," declared the source himself.
The U.S. government does not--repeat, not--"make up" the GDP data. It records them. But it does not necessarily record them accurately the first, second or even third time around. This third try it calls the "final" estimate, but there's nothing final about it....
The bear stock market, you know about. Behold the bull industrial raw materials market....
Norika Fujiwara, newly appointed spokesmodel for Japanese government bonds, is about to pitch the world's lowest-yielding securities to some of the world's most risk-averse investors. "OK," the script will have her say, "I'll try government bonds!" Yet, even while saying so little, Fujiwara may be claiming too much. The two-year JGB yields slightly more than seven basis points.
Your editor, who visited Japan last week in the capacity of investor (as opposed to that of objective and disinterested reporter), is twice disoriented....
In December 1998, while employed as a research analyst by Merrill Lynch, Jonathan Cohen wrote that Amazon.com was "probably the single most expensive publicly traded company in the history of U.S. equity markets." It fell to others, including Henry Blodget, his successor at Merrill, to show how truly expensive an expensive stock could become....
"If one is bearish enough to be in cash," asks reader David Schiff, in reference to the hymn to cash in the prior issue of Grant's, "does one want the credit risk of unsecured corporate obligations? Would one be better off in short-term senior debt?"
Consider, first, a leveraged bank loan, BB-rated, priced at the London interbank offered rate plus 250 basis points--a standard receptacle for institutional cash. As Libor is 200 basis points, the gross yield would be 450 basis points. Subtract 100 basis points for possible credit loss and what remains is 350 basis points. Is it worth the bother?...
On June 8, the editor of Grant's addressed a Deutsche Bank group at the London Bullion Market Association Gold Conference in San Francisco. Following is the text of his remarks, amended to include a few things he wished he had thought to say at the time.
History is the record of impossible things. With good genes and a little luck, you'll live to be astonished.
In no field of endeavor is impossibility more common than in the investing field....
L. Dennis Kozlowski, messenger of socialism
The freshly indicted chief executive officer of Tyco International is a cardboard cutout for every market cycle. In the boom of the 1990s, he was the epitome of the hard-driving, earnings-conjuring, ostensibly value-creating CEO. With his resignation and disgrace, he even more persuasively slips into the bear-market role of "boss."
Bosses, of course, are reviled, and Kozlowski makes a corporate villain from central casting.
The president, chairman and CEO of North Fork Bancorp., John Kanas, recently offered a little free, late-cycle investment advice. Don't deposit your money in the bank at the prevailing 1% savings rate, he counseled. Invest in the bank's stock instead. At $38.48 a share, the fast-growing Long Island institution trades at the equivalent of 15.4 times forecast 2003 net income and four times book value. It yields almost, but not quite, 21/2%.
Annaly Mortgage Management (NLY), a mortgage real estate investment trust, is priced to yield 12.68%. Seeing this number, a conservative, cash-holding investor will think first of the serpent in the Garden of Eden. Temptation takes many forms, very high interest rates among them.
We return to Annaly because the world would like to know if this stunningly high dividend yield will last.
In the first bear market of the New Economy, salvage operations are complicated by the fact that, in many cases, there isn't much to salvage.
Touch America Holdings, down 96% from its peak, is one example of this problem. "A national broadband telecommunications company, providing services including customized voice, data and video transport," TAA boasts some of the statistical attributes of an investment bargain. For example, it is debt-free. It has $200 million of cash, $1 billion of telecommunications plant, property and equipment and $1.1 billion of shareholders' equity. The trouble is the business.
In the May 10 issue, in breaking the story that Berkshire Hathaway stood to earn a certain sum of money if the S&P 500 closed below 1,150 on June 3, Grant's exaggerated the prospective winnings. They were $60 million (which Berkshire indeed won), not $600 million.
And in the May 24 issue, our garbling of some historical data made hash of a conclusion involving Cummins Engine. In fact, the Cummins share price began its recovery in late 1991, whereas the company did not show positive earnings until the first quarter of 1992.
"Ottawa, June 4 (Bloomberg)--The Bank of Canada raised its benchmark lending rate a quarter point for the second time this year, widening a disparity with the U.S., the nation's largest trade partner.
Capitalism began a major uptrend in the Carter term, when people were least expecting it. And it has begun a major downtrend in the administration of George W. Bush, again taking the country by surprise.
For most of the past quarter-century in the United States, certain propositions were held to be self-evident. . .We write in an impartial, scientific spirit. A Grover Cleveland Democrat who favors free markets and traditional business attire, your editor votes the straight capitalist ticket, when available. However, it's an investor's bounden duty to take the world as it is, not as it should be or could be. In the world in which we live, the politicians are gaining on the capitalists....
As we go to press, an issue of "Principal Protected Notes" linked to the Dow Jones Industrial Average is coming to market. UBS is the issuer, and UBS Warburg and UBS PaineWebber are the underwriters.
The notes are noninterest-bearing. At a minimum, they pay off at par on a date to be named. Above a certain minimum (about Dow 11,800 if we assume a starting point of Dow 10,000), the holder would begin to receive about 85% of the Dow's appreciation. The notes are expected to be listed on the American Stock Exchange.... even without a look at the final term sheet, we can intuit an investment strategy....
Cummins Inc., a global leader in truck engines, filtration products, power generation equipment etc., forcefully dissents from the notion that the 2001-02 recession was only in your mind. In fact, the new Cummins annual report asserts that 2001 served up "the worst market conditions in the company's 82-year history." That would seem to include 1931, 1932 and 1933....
Jondavid Klipp, reporting on the Berkshire annual meeting in the May 10 issue of Grant's, described Warren Buffett's bullish musings on the pharmaceutical industry....
Hearts skipped a beat Tuesday morning when Freddie Mac disclosed a drop in the size of its retained-mortgage portfolio for April. The decline was unprecedented....
The Treasury deficit is blowing out, the dollar exchange rate is weakening and the Treasury undersecretary for domestic finance is possibly wishing he hadn't canceled the 30-year bond auction after all....
"Remarkably," declared Alan Greenspan in an April 22 speech, "the imbalances that triggered the downturn and that could have prolonged this difficult period did not fester."
Which imbalances? The chairman did not identify them, nor did he explain why an imbalance, by persisting, would generate pus or become putrid, which is how other things fester. Speaking in tongues, Greenspan conveyed a message of hope only lightly supported by fact. Is the chronic U.S. current account deficit not an "imbalance"? Has it not persisted? Is the U.S. economy truly in balance?...
$17 million into $1 trillion
First came the Netscape IPO--Aug. 9, 1995--and then Henry Blodget and then the college students with the $10 million net worths and then the blow-off. Now comes Peninsula Technology Fund. "We're investing in companies that have long runways, that have lots of cash," says Peter Schleider, general partner of the San Francisco-based venture. "We don't invest in them if they don't have lots of cash."
Peninsula is in the high-tech salvage field. The essential promise of the Internet in the late 1990s was true, say Schleider and his fellow general partner, Scott Bedford. The trouble was the market's misperception of the immediate business opportunity....
At the recent GE annual meeting, chairman and CEO Jeff Immelt lodged a complaint about the share price. "To be specific," said the man who succeeded Jack Welch, "the stock is where it was three years ago, and since I became chairman, it's dropped more than 15%. I hate where our stock price is today."...
At the Berkshire Hathaway annual meeting last weekend, Warren Buffett disclosed that Berkshire has bought S&P 500 put options on more than one occasion in recent years. In a clinically specific detail, the Sage of Omaha said Berkshire holds an options-related investment on which it stands to gain $600 million if....
The rising gold market has presented the gold stock bulls with a windfall and a dilemma. How high is up? When does a cheap thing become overvalued?
Answers to these questions are necessarily inexact. The value of gold-mining shares depends on the gold price, a thing of magic and mystery....
In a May 3 editorial, "Dumping on the Dollar," The Wall Street Journal acknowledged the risk that the sizable net U.S. debt might eventually lead foreign dollar creditors to diversify into non-dollar assets. "But we're still a long way from that day," the commentary assured its readers, "and the dollar remains the world's reserve currency."
Where "that day" may fall on the calendar is a subject. . .
Corning Inc. observed its sesquicentennial year with massive impairment charges, 12,000 layoffs, a $5.5 billion net loss and a $38 billion decline in stock market capitalization. That was 2001."Clearly," wrote then-CEO John W. Loose and chairman James R. Houghton in the just-published annual report, "these results are very disappointing to all of us."
It's a toss-up which group of investors Corning has managed most to disappoint....
The breakneck proliferation of hedge funds will come to no good, except for the lucky documentary filmmaker who, telling the story, will win first prize at a forthcoming Sundance Film Festival. These excesses just in: More and more banks are lending against the collateral of limited partnership interests; more and more hedge funds are selling stocks short by what appears to be the momentum method; and the French are shopping for hedge-fund shares in the supermarket....
The best high-yield bond salesman doesn't work on Wall Street. We will drop a broad hint: An aging resident of Washington, D.C., he's the man behind the 13/4% federal funds rate. As between a low single-digit return in a money fund and a low double-digit return in a junk-bond fund, more and more Americans are choosing the latter....
Following is the text of your editor's remarks at the Grant's Spring Conference on Tuesday:
Potomac fever strikes without fear or favor. It afflicts Republicans as well as Democrats, conservatives as well as liberals. Alan Greenspan, who has fit all the above descriptions during his distinguished career, has a textbook case....
One in the eye for empiricism
In a restatement that stands out even in the Enron era, Federal Reserve Board economists last week revised down by $600 billion the net external indebtedness of the United States. Instead of $2.1 trillion, they marked it at $1.5 billion.
Why this titanic do-over? . . .
Last Friday morning, an investor walked into Morgan Stanley's headquarters at Broadway and 50th Street looking for a scheduled seminar on how to read a 10-K. The firm was offering this tutorial to clients who might never have mastered the art during the long boom. There wasn't time. Reading documents distracted the conscientious portfolio manager from the lucrative business of obtaining IPO allocations. . . .
The U.S. monetary base is growing by 10% a year, the Japanese monetary base three times faster. And the presumptively conservative president of the Bundesbank, Ernst Welteke, has proposed that the German central bank sell a portion of its gold reserve and invest the proceeds in European equities.
The world has three major currencies and three corresponding major central banks. Each of these institutions is pursuing policies that would cause a classically trained central banker to faint....
Or, whatever happened to hockey?
From an April 2 Bloomberg dispatch from Toronto:
"Canadian Boy Scouts will be able to earn a badge in investing under a program started by Scouts Canada and securities regulators, Ontario Securities Commission Chairman David Brown said....
In what has become an annual rite of nondisclosure, Xerox, The Document Company, didn't file its 10-K report but sought a 90-day extension. It is restating four years of earnings. It is paying a $10 million civil penalty to settle fraud charges brought by the SEC. It is in delicate negotiations with its creditors. Yet, at the $10 share price, it commands a multiple of pro forma unrevised, and likely overestimated, 2003 earnings of 17.7 times. Equity market cap totals $7.4 billion (it was $5 billion higher before the scandal). Enterprise value--i.e., equity at market value and debt at par, less cash--adds up to $22 billion.
Either we are getting older or Xerox is becoming more intransigent....
The U.S. capital markets were not at their most ultra-efficient last month when about $1.7 billion of Fannie Mae's older, high-coupon mortgage-backed securities were called away from their startled owners. Quoted at $1.10 or so before lightning struck, they were requisitioned by Fannie at 100 cents on the dollar....
Holders of 30-year inflation-protected Treasurys (i.e., TIPS) require an average annual rate of rise in the CPI of only 2.2% over a three-decade holding period to keep up with the holders of non-indexed bonds. We say "only" because, since World War II, the 10-year rolling rate of inflation has rarely dipped below the 2% line....
Money makes the mare go, but what makes money go? Central banks, you say. And, indeed, in ordinary circumstances, monetary policy can spur and restrain the pace of credit creation. Then, there is the Japanese case--and our own....
In the manner of Prof. Corey
New concerns that Alan Greenspan is losing his battle with productivity-growth-on-the-brain surfaced in the wake of the speech he delivered to the Independent Community Bankers of America on March 13. Society isn't getting any younger, the chairman reminded his audience, which was gathered in Honolulu: "Because of the near certainty of a major rise in the retiree-to-worker ratio in the next few decades, we now face the pressing need to set policies for the enhanced productivity growth that will be necessary if we are to successfully meet the pending demographic challenge." The chairman's words made an unaccompanied flight to Hawaii via satellite. In a real-time demonstration of the uses of technology to boost output per man-hour, the chairman himself was able to stay home. . . .
Swisscom, the former Swiss telephone monopoly, generates free cash flow, earns a net profit, earns net interest income, pays a dividend (a 3.77% rate on Tuesday's share price) and acquires its own shares in the market for enlightened, stockholder-friendly reasons. It is conservatively capitalized, capably managed and reasonably valued.
These achievements would elicit polite applause in most industries. . .
In the issue dated July 17, 1998, Grant's asked how GE could deliver perfectly predictable stair-step earnings growth, year in and year out. How could a company so big, so leveraged and so exposed to the vicissitudes of the world economy never miss?
After due consideration, GE has framed a reply. . . .
Clouds parted over the heads of American consumers in March, as the Conference Board registered its sharpest jump in consumer confidence since the end of the last recession in March 1991. Those surveyed were bullish on present and future conditions alike. . . .
In which the chairman gets whipsawed
On February 27, in his regular semiannual monetary policy report to Congress, Alan Greenspan expressed more caution than hope concerning the prospects for an economic recovery. On March 7, in revisions to those comments, he expressed more hope than caution. "The recent evidence increasingly suggests that an economic expansion is already well under way," was the essence of the revision. Interest rates and the stock market leapt.
As the facts change, we are duty-bound to change our minds. And when the facts don't change but we change our minds anyway, we usually suffer the consequences. On such occasions, we are said to be "whipsawed." . . .
The unconditional, all-season outperformance of equities is regarded by many as a truth requiring no proof. In the 55 years from 1946 to 2001, the S&P 500 delivered annual compounded returns of 11.4%, six percentage points greater than Treasurys. From this it supposedly follows that equities will always excel, Q.E.D.
It does not so follow. . . .
Jay Diamond, for many years the publisher of Grant's, has taken a job with Annaly Mortgage Management. His title is executive vice president, and he will help the high-grade mortgage REIT to extend its money-management brand in other departments of the credit markets. . . .
"So while I have stepped back a little more from the company to allow me to devote additional time to my wife and foundation," wrote the chairman of AES Corp., Roger W. Sant, in the high-cotton days of 2000, "I remain as excited and committed as ever to the people of AES and the people we serve."
However, as sometimes happens on the road to a happier and more fulfilling life, the business went into a ditch. Sant, a founder of AES (christened Applied Energy Services in 1981), is said to be spending more time at the office these days. . . .
"With 2001 annual reports soon to arrive," wrote Warren Buffett recently, "it will be interesting to see whether companies have reduced their assumptions about future pension returns. Considering how poor returns have been recently and the reprises that probably lie ahead, I think that anyone choosing not to lower assumptions--CEOs, auditors and actuaries all--is risking litigation for misleading investors."
In its new 2001 10-K report, IBM follows the sage's advice. . .
The Washington Strangler?
The picture of the Federal Reserve chairman implied by the slope of the money-market yield curve is not the chairman we know, but a Prussian impostor. . . .
Before seasonal adjustment, the contiguous 48 states are basking in the warmest winter since records were begun in 1895, according to scientists at the National Oceanic and Atmospheric Administration. After seasonal adjustment, the U.S. economy is blossoming.
"Qwest is not Enron--Qwest is not Tyco," declared an analyst from Loomis Sayles & Co. the other day. So saying, the man from Loomis assigned a "zero" probability to a bankruptcy filing by Qwest Communications International Inc.--"Q" on the Big Board--of Denver.
Your editor is old enough to attach a zero-percent probability to no earthly event.
Under the leadership of Louis V. Gerstner Jr., IBM for years played the game of "Where's Waldo?" by hiding unflattering information in plain sight in the notes to its financial statements. What's new about the post-Enron environment is that Wall Street will actually be looking for Waldo rather than pretending he doesn't exist.
The cataclysmic negligence of the eminent directors of Enron Corp. was very much in the news when The New York Times, on February 11, published a page-one profile of Robert E. Rubin. The paper reported that the former Treasury Secretary "drafted an op-ed article opposing the Bush administration's tax cuts last year while attending a Ford Motor board meeting." Unmentioned was the corporate business before the board during the time when director Rubin was multitasking. Might it have been Ford's fast-deteriorating finances?
Background: Last year, CBOs purchased about one-third of new junk-bond issuance.
Foreground: More and more CBOs are impaired.
Implication: Fewer and fewer CBOs have the means to buy new junk bonds. Absent a new source of purchasing power, the junk-bond market will be less welcoming to needy borrowers.
Explanation. . . .
What do you mean by 'inflation'?
The soon-to-be-published study of the problem of measuring price inflation--"At What Price? Conceptual-izing and Measuring Cost-of-Living and Price Indexes"--constitutes food for thought for all who deal in dollars.
The miscreants we deserve
In the New Economy, even the scandals are unimaginably stupendous. Nothing bigger than Enron came to light in the inquisitions following the 1929 stock market crash. No breach of trust uncovered by the Senate Banking Committee in 1933-34 was more condemning than that laid at the feet of the mute and forgetful executives from Houston. "I think the market was a God-given market," famously said Albert H. Wiggin, long-ago chairman of the Chase National Bank, when asked about a certain price-rigging scheme in the Coolidge era. Jeffrey K. Skilling, the ex-president of Enron, has so far failed to measure up to Wiggin's standard of public speaking. However, so important and thoroughgoing is the change in the country's political and regulatory mood that Skilling will certainly have an opportunity to refine his delivery. . . .
"The convertible bond market will be the next disaster," asserts a friend who, like the rest of us, has an opinion (and who, like many of us, prefers not to have his name attached to it). Because our correspondent is knowledgeable, and because his opinion coincides with our own (Grant's, June 8, 2001), we quote him further. . . .
Capitalist reeducation proceeds apace, with U.S. senators weighing legislation to force the recognition of options expense on corporate income statements, where it belongs (as opposed to a mere footnote in the 10-K report, where it doesn't). Such a law would make a richly valued stock market appear even pricier. If in force in the year 2000, for example, it would have reduced S&P operating income by around 17%. . . .
Writing about Maxxam Inc. in the issue dated May 25, 2001, we compared a $16.21 share price with an estimated $85.52-per-share breakup value. "Implausibly cheap" was the headline over the table setting forth the approximate value of the corporate components. One of those components, Kaiser Aluminum Corp., filed for bankruptcy protection Tuesday. . . .
On January 16, Standard & Poor's did not put J.P. Morgan Chase & Co. "on watch for possible downgrade," as erroneously reported in the previous issue. . . .
"Real" fourth-quarter GDP rose at an annual rate of 0.2%, according to Commerce Department estimates. If the rate of rise was trifling, the sign was at least encouraging: Third-quarter real GDP growth was negative, by 1.3%. . . .
Before it was revealed to be a calamity, Enron was held up as a triumph. Such is the way with excesses. They look their best in bull markets.
The world's greatest financial imbalance, the U.S. payments deficit, perfectly conforms to type. It is big beyond imagining. It has been growing for years. Yet, to many seasoned analysts, it is tantamount to a national ornament. . .
Yesterday's money tomorrow
As usual, Japanese savers are hoarding. What's new is the asset they are beginning to clasp to their breasts. Japanese gold purchases jumped by 54% in the fourth quarter. Simultaneously, according to Bloomberg, deposits at a cross sample of Japanese regional banks fell by 1.5%. "With the government planning to curb protection on bank deposits, starting in April," advises the Financial Times, "many savers would rather hold their wealth in a bar of gold than as money in a bank account." . . .
Credit may be a lagging indicator, but the credit posture of J.P. Morgan Chase--"Bank of the Year," "Derivatives House of the Year" and "Loan House of the Year," all in the considered judgment of International Financing Review--is cutting edge. In the global derivatives field, JPM is the No. 1 bank without a significant No. 2. To maintain its dominance, it must protect its creditworthiness. . .
"Let's network" was the theme of last year's Nextel Communications annual report. "Let's restructure" is a thought for the new edition. The company with the "4-in-1 Phone" has lots of debt and not much time to grapple with it.
Nextel is a purebred boom-time telco, highly leveraged and powered by perception. Tens of billions of dollars were raised for the wireless industry on the premise that top-line growth would translate into earnings growth. Forgotten in the haste of the moment was the meaning of the word "earnings.". . .
After the Stephen Ambrose contretemps, the unimprovable words of colleague Jay Diamond will have to go between quotation marks: "The search for yield in a low-yield world, the search for cyclical companies at the bottom of a cycle and the search for an undervalued currency in a world dominated by an overvalued one (ours), brings us to a 9% dividend yield, the hotel business and the Canadian dollar." The business in question is a REIT, Toronto-listed Legacy Hotels (LGY.UN).
An early glimpse of the looming crisis in corporate accounting appeared in an advertising supplement to Business Week magazine dated July 13, 1998.
It is possible that only James S. Chanos, forensic short seller, penetrated to the heart of this advertorial. . .
"I'll bet if I told you 32 months ago, when we announced the goal [to double earnings per share in five years], that in the fourth quarter of 2001 Fannie Mae would report earnings per share of $1.40, up 59% from the first quarter of 1999, you would have guessed that our stock would be up by at least that amount." So said Tim Howard, CFO of Fannie Mae, on the fourth-quarter conference call Monday.
He went on in that vein: "I certainly would have. But it's not. At the close of business on Friday, the stock was up just 15%, about a quarter of the earnings growth.
By the sound of it, Howard was singing our song. . .
The Wall Street Journal has capitalized the phrase "New Economy" in its news columns since at least Aug. 31, 1999, but it printed it small Tuesday. On page one, column six, it referred to "the excesses of the new economy."
One of these excesses, so we proposed in the September 14 issue of Grant's, was the Journal's use of capital letters for an economy that didn't really exist (a dynamic economy is forever new and forever aging). And we proposed that a return to lowercase "n" and "e" would "mark another milestone on the road to investment sanity."
Regrettably, The Wall Street Journal Indicator did not flash an unambiguous "buy" signal Tuesday. On page A4, the jump of the Enron story referred for a second time to "New Economy." This time it was in capitals.
The bear market and an unplanned recession have discredited the nostrums of the boom. However, faith in a homegrown American productivity miracle is largely intact, recent downward revisions in the data notwithstanding. On January 7, The Wall Street Journal reported new findings by a pair of authorities in the field, Dale Jorgenson of Harvard University and Kevin Stiroh of the Federal Reserve Bank of New York: "[T]he likely scenario for productivity growth over the next decade remains a robust 2.24% annually," concludes their analysis. "That's just a tad lower than the average 2.36% that helped the economy surge from 1995 to 2000."
. . .Following is a new chapter in the Grant's revisionist history of the millennial productivity bulge. . . .
"Worst case" may, for once, actually describe a commercial experience. The market expects that revenue per available room (RevPAR) for the U.S. lodging industry fell by 6.5% in 2001. In 1991, the latest prior recession year without a terrorist attack, RevPAR declined by only 2.6%.
By refusing to surrender to thrift, the American consumer may be helping to perpetuate the kind of economy in which the funds rate hovers below 2% for a long time.