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In Alpharetta, a northern suburb of Atlanta, a certain financial-services executive is playing the system like a Stradivarius. His car loan requires no interest payments. His mortgage requires no principal payments. Truly, he is Mr. Interest Only-Principal Only, or--as his friends might have it--Mr. I.O.-P.O. . . .
The cautionary argument on commodities advanced in the November 7 issue of Grant's came in three parts: (1) China is the marginal bid in the global commodity markets. (2) The Chinese government has ordered a cooling in Chinese economic growth. (3) Therefore, commodity prices will fall. . . . There is new information. . . .
In a series of disclosures now in their 12th month, Freddie Mac, the No. 2 United States mortgage behemoth, has admitted to lapses, errors and misjudgments leading to a multibillion-dollar restatement of its earnings and capital position. . . . . .Insouciance may reign in the stock market, and it may reign in the bond market. But it doesn't reign at Grant's. Now unfolding is a brief for worry. . .
Junk bonds and convertibles are drastically overpriced, and some hedge funds are beginning to sell them short. So said the prior issue of Grant's. Of course, that portion of the population equipped to sell short a corporate debenture is, perhaps, as high as 0.001%. What about the rest of us?
Reuters reported from Los Angeles on December 1: "The company that runs one of the worst-performing mutual funds in the United States has taken a huge gamble by hiring the youngest mutual fund manager ever, a 20-year-old stock picker who has not graduated from college.". . .
Twenty years ago, this journal introduced itself to an intimate band of readers with the following statement of purpose. To those readers, and to all who later joined them, the editor and staff extend their deepest thanks.--J.G. In a more perfect world, this magazine would not have been born. Through most of American history, the purchasing power of the dollar was reasonably stable and long-term rates of interest were low. In those tranquil circumstances, nobody stepped forward to. . . .
The science of interest-rate forecasting was set back on its heels early Wednesday when the Reserve Bank of Australia raised its overnight cash target rate to 5% from 43/4%, its first move in 17 months. "None of 22 economists surveyed by Bloomberg News forecast a rate increase this month," reported Bloomberg News. . . .
The growth locomotive of the world economy is a communist state with a banking system that resembles the Texas S&L industry at the peak of the Dallas real estate delusion. The biggest and most dynamic stock market in the world trades near the high end of its historic valuation range, and the unchallenged global currency is the emission of a country that is running a current account deficit equivalent to 5% of GDP. Now unfolding is a meditation on risk and reward, keyed on Asia and the United States. . . .
"We started in January 1997, and it's been a bear market in Asia since that day. . . ," says James C. Ayer, the Ayer behind the Tiedemann/Ayer Asian Growth Fund. Yet, since inception, the partnership has produced compound annual returns of (#)%-plus. Notice the absence of parentheses around "(#)%." Over the same stretch, the Morgan Stanley Pacific index has fallen by (#)% a year. Following is an exploration of Asian finance. . . .
Hedge funds have boosted their exposure to stocks (relative to their "benchmarks") to the highest level in the past year, International Strategy & Investment reported last month. And the firm added, "This suggests that hedge funds have indeed started to play the long side in an effort to boost relative performance.". . .
In the June 30 quarter, the Federal Home Loan Bank of Pittsburgh essentially broke even. On a capital base of $2.25 billion, it earned a grand total of $2.4 million. To help pay a 2.25% quarterly dividend, it found $10 million in the retained earnings account. There are 12 banks in the Home Loan Bank System. . . .
"Risk" and "reward," perhaps because they both begin with the letter "r," are easily confused on Wall Street. But in emerging markets, the words--in fact--are frequently synonymous. In recent years, the riskiest emerging markets have tended to deliver the highest investment rewards. . . .
In the past 30 days, the word "deflation" has appeared just 2,898 times in the English-language media, or that portion monitored by Factiva, a joint venture of Dow Jones and Reuters. That is down from 7,758 such sightings in June, 4,977 in July and 3,446 in August. And we would be willing to bet (but unable to prove) that the recorded incidence of the Chinese word for "deflation" has also declined. . . .
On Monday, the editor of Grant's gave a talk at the New York Institutional Gold Conference. An expanded version of his remarks follows: My name is Jim. I'm a value investor, and I own a stock with a 53 P/E ratio. In addition, I hold a long position in a certain precious metal, in the company of a record number of self-avowed "speculators." These are the things I have to live with. . . .
The U.S. General Accounting Office has been asked to investigate the possible manipulation of exchange rates by China and other Asian countries for the purpose of enlarging their exports to the United States. . . Happy to be able to contribute to the narrowing of the federal budget deficit, even by a little bit, Grant's has taken it upon itself to perform the GAO's work pro bono. . . .
Now comes a securities analyst comparing mortgage REITs to Internet start-ups. James Delisle, of Independent Perspectives LLC, says that the mortgage REITs actually make the dot.coms look substantial, because it is so much easier to whip up a mortgage REIT today than it was to sell an Internet promotion then. However, he advises, don't start a mortgage REIT. . . .
On Oct. 6, 1979, the Federal Reserve vowed to lay inflation low. Chairman Paul A. Volcker delivered the news at an emergency Saturday press conference. In recent months, the Fed has vowed to raise inflation up. Gov. Ben S. Bernanke so declared last week in a talk at the University of California at San Diego.
A particularly informative feature of the Fannie Mae Web site is “Answers from the CEO.” Tuesday’s installment was tinged with controversy: “CEO Frank Raines Addresses Accounting Issues in Freddie Mac Report: Can you assure us that Fannie Mae does not have the accounting issues raised in the ‘Report to the Board of Directors of Freddie Mac’?” The answer turned out to be—astonishingly—“Yes.”
In November 2001, the track of the median CPI hung suggestively over that of the headline, unmassaged CPI. “Historically speaking,” we then quoted a knowledgeable economist, “when you have a divergence of this magnitude, when the CPI is going in one direction and the median is going in the other, it’s usually the headline that changes its course to conform with the median.” Instead, the median CPI. . . .
The latest reported monthly United States trade deficit is the third-highest on record; the German chancellor has complained about the newfound strength of the euro; and, at year-end 2002, the U.S. was a net debtor to the rest of the world in the impressive sum of $2.6 trillion. Furthermore, the real, or inflation-adjusted, federal funds rate has swung to negative from positive; the federal budget deficit has flipped from a small surplus to a very large deficit; and the estimated monthly cost of the U.S. occupation of Iraq is now put at $3.9 billion (not $4 billion, but exactly $100 million less than $4 billion), up from $2 billion in April. . . .
New survey results show that the bond bears, though they may have right on their side, can’t claim contrary opinion. Professional investors are more bearish on bonds than at any time since 1994, at least (as measured by their portfolio duration relative to their benchmark, according to International Strategy & Investment Group). . . .
The temperature of Franco-American relations warmed almost to the freezing mark on Tuesday when Treasury Secretary John Snow (who presides over a budget deficit equivalent to 4.6% of GDP) commended French President Jacques Chirac (who presides over a budget deficit equivalent to 3.6% of GDP) on the wisdom of his call for a temporary suspension of rules that cap allowable budget deficits in the European Union at 3%. The Chirac initiative did not please every European finance minister—“The storming of the Bastille was a better idea,” the Dutch finance minister, Gerrit Zalm, declared—but it charmed the American. . . .
“Bethesda, Md.—June 26—A survey conducted by Harris Interactive on behalf of ProFund Advisors LLC finds that, although most U.S. investors (57%) believe interest rates will rise in the next two years, nearly two-thirds (65%) are unaware that rising rates generally have a negative impact on the value of bond investments.” For the bond bear who does understand the inverse correlation between yield and price, Grant’s presents a pair of ideas. . .
When Wall Street sneezes, California catches cold, the 3,000 miles of intervening land mass notwithstanding. The stock-market bubble inflated the state’s income, and the state inflated its spending. The bear market deflated the income but not the spending. Enterprise staggered under the double blows of overregulation and overinvestment. And there’s one more bearish twist to the plot. . . .
The headline over Monday’s Wall Street Journal bond story begs the question of when the course of interest rates is ever certain. In Japan, government bond yields have virtually doubled in the past three weeks, to 86.5 basis points from 44.8 basis points at the June 12 low.
As of June 11, the close of the latest banking week, foreign central banks had accumulated $746.6 billion of Treasurys and $188.9 billion of federal agency obligations, e.g., Fannie Maes, Freddie Macs and the Federal Home Loan Banks. The grand total of U.S. government and quasi-U.S. government securities owned by official monetary institutions not named “Federal Reserve” was, therefore, $935.5 billion. For perspective, the Fed itself held just $652 billion of Treasurys and only trace amounts of agency paper. One of these days—by mid-October, at current booming rates of growth—the reported dollar-denominated assets of foreign central banks and other international financial institutions will top $1 trillion. There ought to be a party.
We are all—each of us—witnesses to history. Like the best-selling former first lady, we are living it. May 31 marked a high-yield watershed. On that day, junk bonds were more overvalued than at any time since September 1986, according to Martin Fridson, the former Merrill Lynch analyst who has graduated to entrepreneurship and his own excellent weekly publication, Leverage World. Experienced investors will stare, as the 17 years in question encompass some of the greatest yield riots of all time. . .
“Until last week,” The New York Times speculated Tuesday, “most Americans familiar with Freddie Mac or Fannie Mae probably had a vague image of benevolent government agencies helping young couples get their first mortgages.” The Times should speak for itself. Most investors we know have an image of Freddie or Fannie as a towering pile of mortgage assets hedged with thickets of derivatives.
There is no living to be earned by handling your editor’s gold-stock orders, though (to declare an interest) Fred D. Kalkstein, a broker at Janney Montgomery Scott, does just that. What he also does—and this is relevant to interest rates—is manage guardianships for 125 dependent people, “wards” as they are legally known. . . .
Alan Greenspan may speak in tongues, but the Federal Reserve System is an open book. It publishes a weekly balance sheet, discloses a targeted funds rate and publicizes the collected prose of its senior officers and ranking staff. The single message of these several media is that the dollar will appreciate in domestic purchasing power over the dead bodies of the Federal Open Market Committee. To see the matter another way. . .
Depending on your cultural perspective, Bangkok is a long way from New York or New York is half a world away from Bangkok. In either case, someone winds up making an inconveniently timed phone call. It was late on a Sunday evening when colleague Peter Walmsley dialed [a] chief financial officer of [a property development company], in the capital city of Thailand. The time was 10:30 p.m. on May 13 for Walmsley and 9:30 a.m. on May 14 for the CFO. This chronology will serve to introduce a threshold issue in the following bullish reprise of a very distant and very cheap Thai real estate development and home building enterprise. . .
[A] radiation-oncologist-turned-payments-entrepreneur, does not dispute that the U.S. dollar is the current brand leader in the global monetary marketplace. However, on behalf of his creation, " a kind of digitized bullion," he can enter one impressive claim: Payments denominated in it are doubling every six to eight months. Is this the "Base Money of an Emerging Global Currency?". . .
Americans take well-deserved pride in their indestructible banking system. State and federally chartered commercial and savings banks and government-sponsored enterprises stand side by side as monuments to financial diversity. And if, as in 1990-91, some of these monuments happen to topple, the taxpayers are only too happy to reach into their pockets to build bigger, better and taller ones. To an American trying to keep up with events in the German banking system and the German economy, there is a powerful sense of déjà vu. . . .
Tuesday's auction of 10-year Japanese government bonds, the 0.5s of 2013, was hammered down at [#] to yield [#]% (note the zero to the left of the decimal point). Bid-to-cover was ... a disappointment. The prior 10-year JGBs had elicited bids equivalent to [#] times the volume of securities offered. . . .
The page-one headline in Monday's Sports Final edition of the New York Daily News reduced the city's financial crisis to 11 scary words and a set of ellipsis points. They were: "Fares, Taxes, Tolls Up, Putting New Yorkers in . . . The Big Squeeze." So deep is the city's fiscal hole, so contentious are the plans for filling it up and so guarded is the local economic prognosis that the New York City 5.6s of Aug. 1, 2007, are today quoted at. . .
Even hardened sinners blushed for Wall Street following news that five financial institutions had paid others to publish research reports on stocks of companies that the five had underwritten during the great bull market. According to Gretchen Morgenson, writing in the Sunday New York Times, Morgan Stanley was the most openhanded of the five, passing around $(#) million in "research guarantees" to some two dozen "competing" firms. . . .
AES Corp., the worldwide power-generation company, has four "shared values," not one of which speaks directly to moneymaking. "Fairness, Integrity, Social Responsibility, Fun" were the corporate watchwords before last year's near-death experience, and so they remain today. However, to judge by the rising prices of the company's securities and its new annual report, management has shifted its focus to homelier virtues, e.g., Solvency, Liquidity, Profitability and Not Sending the Debtholders to the Threshold of Cardiac Arrest Only Months After the Business Cycle Has Peaked.
"Price change begets price change," Paul Singer, of Elliott Associates, told the Grant's conference last week. "Momentum and performance-chasing means that price changes, not information, cause more price changes." T. Boone Pickens, possibly the most successful 74-year-old gas speculator on the face of the earth, gave the boldest price prediction of the day. . . .
At last week's Grant's conference, Michael Farrell, CEO of Annaly Mortgage Management, displayed a picture that was just as clarifying to the mind as it was confusing to the eye. If you stared, you could see four lines jostling for attention. Portrayed were the funds rate and a trio of economic variables that, so Farrell said, make the Fed do what it does, when it does. The conclusion of Farrell's interest rate analysis (and, for that matter, of ours) was that the funds rate is likely to. . . .
In Japan, continental Europe and the United States, central bankers are saying that too little inflation is even worse than too much. On Tuesday, the Federal Open Market Committee said that, over the next several quarters, "the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level." . . .
At prevailing yields and spreads, investment-grade corporate bonds are an investment for victims. Aa-rated industrial bonds fetch a mere (#)%, Moody's reports, the lowest since 19xx. A-rated and Baa-rated industrials fetch (#)% and (#)%, respectively, the lowest since 19xx. Observing that not only are absolute yields low (in recent historical terms) but also they are closely spread to government yields (by post-19xx standards), Moody's speculates that. . . .
On April 9, the Federal Energy Regulatory Commission (FERC) approved three new LNG projects. So doing, the commission smiled on every holder of Chicago Bridge & Iron, a leading designer and builder of the tanks, terminals, peak-shaving plants and cryogenic orbs in which natural gas is transformed into liquified natural gas. . . .
On April 15, A. Alfred Broaddus Jr., president of the Federal Reserve Bank of Richmond, described a fate worse than inflation. He repeated the Fed's determination not to let the price level sag but to print enough dollars to make it rise. As chairman Alan Greenspan and governor Ben S. Bernanke had pledged before him, Broaddus vowed that a zero percent federal funds rate would create no insuperable barrier to an effective anti-deflation campaign. . . .
Maybe the Chinese government lied about SARS out of habit. It has lied about the "Hidden Epidemic of Sexually Transmitted Diseases in China" (to quote the title of an article in the March 12 Journal of the American Medical Association). And it has lied, as expedient, about Chinese economic growth (Grant's, January 17)....
Last week, Annaly Mortgage Management raised (#) million of equity capital, with which it is acquiring (#) billion of new mortgage assets. It was the first such equity infusion in more than a year for a company about which Grant's writes both frequently and nonobjectively. . . .
By "volatility," the talking heads really mean "going down," something that stock prices and bond yields have done a lot of. The current issue of Grant's is dedicated to answering the question, "How far is enough?" and to helping investor-plaintiffs and their public-spirited attorneys identify the most promising sources of redress. . . .
The clairvoyance era of U.S. monetary policy ended on March 18 with a long-overdue admission by the Federal Open Market Committee that it really doesn't know what the future holds. Pending clarification of "geopolitical uncertainties," the FOMC said, it would venture no economic forecast but would diligently keep up with current events. Omitted from the FOMC's end-of-meeting press release for only the second time in three years was . . . .
Benjamin Graham, the man at whose feet Warren Buffett sat, once laid out seven criteria for conservative stock selection. A deserving company should have (1) "adequate" size, (2) a good balance sheet, (3) 10 consecutive years of net profits, (4) 20 years of uninterrupted dividend payments, (5) a modicum, at least, of earnings growth, (6) a P/E ratio no higher than 15 and (7) a ratio of price to book value no higher than 1.5:1. These criteria he commended to the "defensive" investor, i.e., "one interested chiefly in safety plus freedom from bother." They pertained to industrial companies, not to utilities or banks. Now unfolding is the application of Graham's seven criteria to the present-day stock market and to the bear markets, panics and corrections of yesteryear,
A four-line ad for an administrative assistant in the March 2 New York Times said the following: "Expanding company seeks smart, self-motivated person. Must have excellent computer skills, be good with details and have patient, friendly phone manner. Growth opportunity. Fax resume. . . ." The ad . . .has interrupted [the prospective employer's] sleeping patterns, because the corporate fax machine is situated in his bedroom. . . The first fax came in early Saturday evening, as the Sunday paper hit the streets. . . "And it basically did not stop through Wednesday, and it slowed down somewhat on Thursday and Friday." He says the faxes are still coming in. . . .
Last week, the finance minister of the world's second-largest economy made a monetary policy suggestion. He urged the Bank of Japan to boost its monthly purchase of long-dated Japanese government bonds by two-thirds. . . The subject under discussion is post-bubble monetary policy. . . .
The Bush administration may or may not succeed in abolishing the double taxation of dividends. Right now, Mr. Market is making available tax-exempt bonds backed by pots of Treasury securities. . . . We are now entering an obscure province of a strange country. The province is "escrowed to maturity," or ETM, and the country is Muniland....
According to [a] report on T. Boone Pickens in the January 31 Grant's, the BP Capital Energy Fund was up (#)% in the first 16 days of January. We now have an update. . . Only recently has the gas bull market begun to interest the stock market. To judge by the rig count, it has not yet seriously begun. . . Following is an exploration of alternative ideas. . . .
Something went haywire with American capitalism in the 1990s, and we think we know what it was. There weren’t enough Henry E. Singletons to go around. In truth, there was only one Singleton, and he died in 1999. He could read a book a day and play chess blindfolded. He made pioneering contributions to the development of inertial navigation systems. He habitually bought low and sold high. The study of such a protean thinker and doer is always worthwhile. Especially is it valuable today, a time when the phrase “great capitalist” has almost become an oxymoron. . . .
According to Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo, fair value on the S&P 500 is (#). So it's (#)% down just to reach the point at which bear markets famously don't end. Membership in U.S. investment clubs turned up even before the Beardstown Ladies got famous. . . .
We correct two gaffs from recent issues: In the prior issue, Imperial Chemical Industries was butchered to read "International" Chemical Industries. And in the article on China in the January 17 issue, tabular data were presented [which has since been updated with a source we believe] is more authoritative. . . .
The London stock market didn't go as high as the S&P 500 in the post-1995 bubble (# vs. #), but it's fallen as low in the bust (# vs. #). Although not statistically undervalued, neither is it any longer overvalued. According to Andrew Smithers, London-based financial economist, it's probably at fair value. What does "fair value" look like? Americans wouldn't know. . . .
On February 4, Annaly Mortgage Management reported fourth-quarter earnings of (#) cents a share, (#) cents lighter than the Wall Street consensus. Disappointed, investors marked down the stock price by (#), to (#). For ourselves, we were surprised that there was even an earnings consensus to disappoint. Now unfolding is an update of our favorite yield machine. . . .
Freezing Canada has a hot inflation rate, up in December and possibly heading higher in the first calendar quarter, depending on where the oil price goes. Do you believe these facts and that prediction? Holders of Canada's inflation-indexed securities seem doubtful. ...Subtract the indexed yield from the nominal one: This is what aficionados call the break-even inflation rate. At an inflation rate above this break-even rate, you are better off in indexed securities. The Canadian break-even inflation rate is meaningfully lower than the existing Canadian inflation rate (never mind the possibly higher looming one). Price inflation is the subject under discussion, and a contentious subject it is. . . .
Frederick E. "Shad" Rowe writes from Dallas: "Two years ago, we reported on the very good year that Boone Pickens's BP Capital Energy Fund had in 2000. Pickens began the year [well] and finished the year [even better]. ....During 2001, he added office space and hired more people. Pickens is a natural plunger and a congenital bull on natural gas. "When I went to see him later in the year. . . .
The longest bear market in capitalism may be the drought in property and casualty underwriting profitability. By necessity, the insurers have had to make their money on Wall Street, buying low and selling high and clipping coupons. Thus begins our guardedly bullish foray into the P&C business. . . .
On Sunday, the editor of Grant's delivered the 2003 Henry Whitney Bellows Lecture at the Unitarian Church of All Souls in New York. It was entitled, "George F. Baker: The Heart and Soul of a Banker." Many will wonder about the title I have chosen for this morning. They will say that I might as well have picked the "honor and brevity of a politician" as the "heart and soul of a banker." Bankers are known to be heartless and soulless. Either they refuse to lend or, what is more likely nowadays, they lend until you say "uncle." . . .
All eyes, please, on the monetary data [listed in our centerfold]. Note the surge in Federal Reserve credit creation, the boom in commodity prices and the lift in the Future Inflation Gauge, a leading indicator of the U.S. inflation cycle. If life were simpler, there would be nothing else to talk about. . . .
In the late 1970s and early 1980s, an entire class of investment asset was blighted. "Certificates of confiscation!" cried the Wall Street hanging judges, turning their backs on bonds for all time. Compared to the mob's contempt for these unwanted financial claims (which, by then, had come to represent a once-in-a-lifetime investment opportunity), the Salem witch trials were a reasoned verdict of justice. But wait. The indictment must be qualified. Bonds are an inherently inferior investment asset, but they can be a cyclically superior investment asset. They can excel at a time, at a price, under a particular set of economic conditions and in comparison to a specific set of alternatives.. . . .