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December 16, 2005, Vol. 23, No. 24

Gold, yen, dollars—in that order

Despite a Japanese profits boom, a five-year high in the Nikkei 225 stock index, a recovery in Tokyo land prices, a resumption of growth in Japanese bank lending and talk of a looming Japanese labor shortage-despite these and other bullish stimuli (including the market-oriented political triumphs of Prime Minister Junichiro Koizumi), the Japanese yen has been in a bear market. . . .

Publish and perish

Are you a parent of a teenager? Good. Congratulations. Can you imagine your child walking across the room, picking up a phone book and looking up a telephone number? Of course you can’t. Now try to imagine a bull market in phone directories. . . .

Yield stew on sale

A reader asks about an optically cheap closed-end bond fund. . . .

The end is nigh

Both by what it said and by what is left unsaid, the Federal Open Market Committee indicated Tuesday that the end of the tightening cycle is closer that many had thought. . .

December 2, 2005, Vol. 23, No. 23

Broad side of a barn

Before it became synonymous with deflation fighting and "helicopter money," the name of the new Federal Reserve chairman-designate was identified with "inflation targeting." Ben S. Bernanke helped to write a book on the subject. And although he vows to follow in the footsteps of Alan Greenspan, an arch opponent of any check on the policy-making discretion of the Federal Open Market Committee….

Leveraged obsolescence

At a Goldman Sachs investment conference in September, Leslie Moonves, co-president and co-chief operating officer of Viacom, parted the curtains on the new world of digital programming. "We just began a 24/7 news operation, and we're calling that the 'cable bypass'…

Rent—California style

The carry trade has almost disappeared for REITs like Annaly that derive their dividend from the shape of the yield curve. It has already gone negative for investors in apartments in Southern California, where multifamily properties sport yields…

Say 'squeeze!'!

Retailers famously feast in the fourth quarter and fast in the other three. But thanks to new technology available to growing numbers of cellphone customers, merchants might eventually be feasting even less and fasting even more…

The 'ceiling' on the funds rate

For weeks, the June 2006 Eurodollar futures contract has been pricing in a lower money-market interest rate than the June 2007 contract; likewise the September 2006 vs the September 2007 contract….

November 18, 2005, Vol. 23, No. 22

Paper money talks and talks

The yen buckled on Monday after the Japanese prime minister warned the Bank of Japan not to raise its zero-percent target interest rate before the economy was ready to stand the possibly unbearable strain. Elaborating on the premier’s remarks. . . .

Lead, Britannia!

Formerly soaring house prices in the United Kingdom are sputtering. A 22% year-over-year gain in June 2004 marked the peak of the boom. These days, the rate of rise has dwindled to little more than 4%. A woman’s home is certainly still her castle, and her decorator’s and her husband’s besides. . . .

The other Fed

FirstFed Financial Corp. of Santa Monica, Calif., founded in 1929 and traded on the Big Board under the easy-to-remember ticker symbol FED, is a traditional thrift with nontraditional assets. Traditionally, it sells virtually none of the mortgages it makes but holds them on-balance sheet. Nontraditionally…

More stuff, less work

Exit, Alan Greenspan; enter, Ben S. Bernanke. Though the names at the top may change, there’s one supposed constant in U.S. monetary affairs. Irrepressible growth in productivity is the new American Fort Knox. It’s the armor against a new inflation, some the leading authorities say…

M-3, we hardly knew ye

Two Thursdays ago, the Federal Reserve announced that, come March 23, it will stop publishing the big monetary aggregate, M-3. The data contribute less to monetary understanding than the cost of compiling them, the press release said in so many words.

November 4, 2005, Vol. 23, No. 21

Bond markets peer backwards

Question: Just a quick question for clarification. If I understood you correctly, you said that you discussed the pros and cons of an increase today; you discussed the pros and cons of leaving rates unchanged; and that the pros and cons of a rate cut may have been envisioned by some. I just want to clarify that you did not, in fact, discuss a rate cut today. Trichet: We did not discuss a rate cut today. . . .

Mankind's bubble gene

Soaring prices and interest-only loans are the hallmarks of the 2005 real estate market (or were until the recent cooling trend set in). They no less happened to characterize the Great Plains segment of the 1886 real-estate market. Here begins a meditation on whom to blame when there's no Alan Greenspan.

Topping out

"Is real estate overpriced?" was the question posed by Jeremiah W. O'Connor, founder of the O'Connor Group and longtime real estate developer and investor, at last week's Grant's Conference. His answer comprehensively included residential, commercial and REITs. . .

Investor, owner, chairman

Edward S. Lampert, whose investment in Sears Holdings and stupendous 2004 compensation caused heads to turn, eyes to roll and faces to turn an unflattering shade of green, told the Grant's post-luncheon audience the story of his career, especially his formative days on the Goldman Sachs risk arbitrage desk. What did he learn there? . . .

Stocks for the long run

Adam Weiss helped to found a hedge fund (Scout Capital, a long-short, market-neutral fund, in 1999). Yet, he admitted, just because hedge funds get 1% and 20% to manage money instead of, say, 50 basis points, that doesn't mean that hedge-fund investors have all the brains. "I don't actually believe that you get smart by changing your fee structure, although you may get rich," he told the Grant's crowd. . . .

Your virtual mine

John Hathaway was a value investor before he became a gold-stock investor (he manages the Tocqueville Gold Fund), and he made no bones about the deficiencies of the all-too-typical gold-mining company. True, it does mine gold, and may explore for new deposits, but that is frequently the full extent of the bullish investment story. Earning a competitive return on the shareholders' capital generally plays no part in it. . . .

Organization building

Frank Brosens, co-founder of Taconic Capital Partners and a former general partner of Goldman Sachs, urged the Grant's conference-comers not to stray too far outside their respective "circles of competence" (he spoke to the topic, "How to build an investment organization"). What are the bounds of one's circle? Sometimes you don't know until you step over the line. Brosens illustrated with a story. . . .

Yield curve connection

Junk-bond defaults will rise in 2006 and peak in 2007, Martin Fridson, proprietor of FridsonVision LLC, predicted. However, said Fridson, whatever the contour of the credit cycle, junk-bond returns will depend on. . . .

Attack of the broadband

Once upon a time, people watched TV and sat through the commercials. They bought records and went to the movies. What the "gatekeepers" of the media and entertainment world chose to serve up was what people watched, or listened to, and at the appointed time and place. At the Grant's Conference, James S. Chanos, a bear's bear and founder and managing partner of Kynikos Associates, delivered an anticipatory business eulogy of these once-mighty media enterprises. . . .

New reserve currency

Robert L. Friend, founder of Recon Capital LLC, spoke up for ("one of the best currencies around"), the unsecured notes of bankrupt (Company) (will eventually "recover par") and a pair of resource stocks. For a new global store of value to augment the undependable dollar (and other, equally unreliable monetary emissions), he nominated. . . .

October 21, 2005, Vol. 23, No. 20

Florida bank boom

In all his 35 years as a bank officer, Russell Greene, president of Grand Bank & Trust, West Palm Beach, told the Palm Beach Post in August, "I've never seen anything quite like this." Greene was referring to the....

Rajan for chairman

At the Greenspan beatification conclave at Jackson Hole, Wyo., in August, the near unanimity of worshipful praise was broken by Raghuram Rajan, had of research at the International Monetary Fund. Rajan contributed his bit to truth and clear thinking by....

Discovery channel

The Federal Reserve and the Eurodollar futures market used to dance the fox-trot, waltz and samba together in the great ballroom of interest rates. Sometimes, The Fed would lead, at other times, the market....

Built by interest rates

"Although it may be light years early," writes paid-up subscriber Albert Saporta, "I think that Japanese real state stocks have already discounted the recovery taking place in the physical market. Wheras I don't dispute that buying an office building or an apartment in Toyko may be a good investment, the same may not be true when it comes to paper property....

Mr. Market to the test

The more you know about triple-C-rated Calpine, the less choked you were likely to find Tuesday's reports that it's consulting with members of the bankruptcy bar. The California-based power generator owes....

So much credit, so little money

A peek to the right reveals a dichotomy for which Economics 101 may not have properly prepared us. The monetary aggregates are growing at a snail's pace, whereas loans and securities are zooming....

October 7, 2005, Vol. 23, No. 19

On planet liquidity

As The Economist counts money, the world's wallet is overstuffed. In fact, the magazine reported early this year, "global liquidity" (defined as the U.S. monetary base plus central bank holdings of foreign exchange, mainly dollars) grew by 20% in both 2003 and 2004. It was the fastest two years of growth since 1975. What memories does the year 1975 conjure up for you, Mr. and Ms. Reader? Nursery school? A rally on Wall Street? President Gerald Ford's No. 1 economist, a suave, 40-something Alan Greenspan, promising to "whip inflation now"? A consumer price index rising by 9% per annum?...

Gas to earnings

"We think there is upside to the stock if commodity prices stay where they are," advises colleague Peter Walmsley. "We do not expect the stock to double again. But, then again, we didn't expect it to double in the first place."...

Currently unshockable

Recent statistics prove that the American consumer is nine-tenths bankrupt. Then, again, so do not-so-recent statistics. Savings as a percentage of disposable personal income has been falling for more than a decade; in July it hit minus 1.1%, the lowest since the unprosperous year of 1934....

Plausible worst case

Investigators combing through Fannie Mae's finances have found new and pervasive accounting violations showing executives embellished the company's earnings over the years by overvaluing its assets, underreporting credit losses and misusing tax credits--on top of what's already been disclosed, according to people close to, or who have been involved in, the inquiries.--Dow Jones Newswires, September 28 An astonished Mr. Market read and digested the above-quoted bulletin. He compared it to a sanguine Fannie Mae press release, also dated September 28. His eyes darted from one piece of copy to the other. Presently, the old gentleman formulated a plan: He raised his hammer and knocked the Fannie Mae share price for a loop. . . .

Invest in interest rates

Hedge funds cater to wealthy investors, mutual funds to the humbler kind. Which must explain why, in the year-to-date, hedge funds have returned only about 4%, while domestic equity mutual funds are up about 6.8%. The differential in performance can perhaps be attributed to the fact that humbler investors need money more than rich ones (this is only a preliminary hypothesis).

September 23, 2005, Vol. 23, No. 18

Black ink in the Amazon

The U.S. government issues credit cards to its employees for "micropurchases." Before Katrina blew in, according to The New York Times, a micropurchase was one of $2,500 or less (though homeland-security cardholders could ring up much more). But with the passage of a $51.8 billion federal hurricane relief bill on September 8, micro has been redefined. It now means "macro." Post-Katrina, a card-wielding government worker can charge as much as $250,000 per purchase, while "overall credit limits can be much greater." Which implies what for the federal budget deficit? Unclear, says the Times. Nobody seems to know how many cards are outstanding.

Trop d’euros

"We do not really know what the German electorate voted in favour of," writes Wolfgang Munchau in Tuesday's Financial Times concerning the stupefyingly anticlimactic electoral result in Europe's No. 1 economy. "But we do know what it voted against. It voted against change. No matter what the result of the coalition negotiations, no change is precisely what Germany will get."

Charles Schwab: 46% off

Charles Schwab is a growth stock in the sense that the number of shares outstanding has proliferated wonderfully: There are 1.3 billion. However, it is only a former growth stock in the sense that the business itself has grown grudgingly.

Bunge jumped

"We begin this bullish overview by admitting that Bunge is no orphaned stock," said Grant's in its July 1 edition. "The shares have had a run and lots of good news is out in the open. Maybe one day soon, Mr. Market will fall down and break his neck, and the shares will be translated from the Big Board's 'growth at a reasonable price' department to its value wing." Mr. Market has had no such accident, but the Bunge share price....

Inflation hedges with ticker symbols

The rising federal funds rate (up to 3.75% on Tuesday) may stymie the S&P 500, but there's a big world outside the 50 states. As the Fed was lifting, or preparing to lift, no fewer than six non-U.S. stock markets made new all-time highs. The honor roll includes Argentina, Australia, Brazil, India, South Africa and South Korea. Bulls will applaud the limits of American influence.

September 9, 2005, Vol. 23, No. 17

Post-storm inflation surge

The Consumer Price Index is about to become even more imperfect. It may shortly begin to register an accelerating inflation rate owing to Hurricane Katrina....

Tree hugging

If a company has a great quarter, but no analyst is on hand to cheer, "Great quarter, guys!" did that company actually have a great quarter? Yes, of course. Wall Street's moment of discovery just happens to lie in the future....

Yield machines sputter

With the once-lucrative business of borrowing short and lending long under siege from the Federal Open Market Committee, the share prices of banks, thrifts, and mortgage real estate investment trusts have suffered....

That was then

From "Practical Farm Economics," a 1924 publication of the U.S. Department of Agriculture: [B]etter farming does not always result in better living. Many a farmer and his family toil early and late....

This is now

From the August 28 Los Angeles Times: What was once considered undesirable--taking on large debt--is now seen as smart....

Self-administered tax cuts

In July, for the first time since the weeks following September 11, 2001, Americans consumed more than they earned - $59 billion at an annual rate, the Commerce Department reports. No more is the personal savings rate an insignificant positive number. Now it's a not-insignificant negative number....

Bearish on crude

Frederick E. (Shad) Rowe writes in from Dallas: The recent parabolic rise in the price of oil has left me, for lack of a better word, bothered: First, because I didn't capitalize adequately on the bullish arguments I had heard from Boone Pickens and others over the last four years....

Resistance at 3%

Ten of 10 Wall Street strategists surveyed by Barron's last weekend forecast a higher 10-year Treasury yield, the consensus forming around 4.51% by year-end vs. the prevailing 4.08%....

August 12, 2005, Vol. 23, No. 16

Bank of the Yield Curve

You are Vernon W. Hill II, age 59, founder and CEO of Commerce Bancorp, New Jersey, and you won't give an inch. You won't retreat in front of the flattening yield curve or the rising federal funds rate....

A bridge very far

Now unfolding, by popular demand, is a reappraisal of Chicago Bridge & Iron, Co., broad-shouldered builder of structures and systems (though not very much in Chicago, and no longer bridges, and no longer, principally, out of iron; in 2005, the company's name is more historical than descriptive). In preview, we have changed our minds....

Bearish on Bankrate

In the interest-rate observation field, Bankrate, Inc. is a rare and remarkable success. Its annual revenues top $40 million. It is profitable, liquid and debt-free. Its June 30 balance sheet shows $35 million in cash. Grant's Interest Rate Observer fraternally salutes it...

Reaching for houses

"We have," observes Merrill Lynch economist David Rosenberg, "an unprecedented gap between the trend in start home prices, which have soared almost 14% in the past year, and the trend in median income for this cohort at barely over 4%...

‘Fed Sees Bond Market as Hurdle qTo Efforts to Contain Inflation’

So much for the "bond vigilantes," steely-eyed assassins of price inflation (they would keep real interest rates so high that politicians could never debase the dollar again). The headline above, which appeared in the August 3 Wall Street Journal, is not their first epitaph...

July 29, 2005, Vol. 23, No. 15

After the house party

A bubble is to a boom as a martini is to a beer. So much more potent is the former, why does anyone settle for the latter? You know the reason: the morning after...

On the cal

Analysts on the second-quarter Countrywide conference call skipped the customary analytical salutation ("Great quarter, guys!") to tax management with questions about the shrinking margins in the mortgage origination and the appearance of degradation in balance-sheet quality...

Unthinkable euro thoughts

From across the Atlantic come new and unsanctioned notions about European finance. First is that interest rates are too low, especially in the Czech Republic. Second is that seemingly comical calls to reinstate the lira in fact point to a serious risk of the euro zone breaking up into its 12 quarrelsome components and cutting short the grand experiment of the single currency.

Hold that double

At the spring Grant's conference, Dan DeClue, eclectic biotechnology investor, delivered an impromptu bullish presentation on Kopin Corp. (KOPN). The stock was then literally friendless – it had DeClue- but few Kopin bulls envisioned an early doubling in the share price...

Interest rate observer

The most portentous interest-rate event of the fortnight was the lightly attended auction of 50-year gilts by the British government on July 14. At a bid-to-cover ratio of just 1.23:1, demand was the weakest "of any completed auction in the U.K. in seven years," the Financial Times reported.

July 15, 2005, Vol. 23, No. 14

When inflation is three-ish and yields are four-ish

Under the sun of investing, nothing is new. The so-called conundrum of the present day was yesteryear's conundrum, too-even if the old-timers properly chose to call it a paradox and not a conundrum (which, according to the dictionary, it wasn't and isn't). Bond yields stumped the experts during the administrations of Dwight D. Eisenhower, Lyndon B. Johnson, and Richard M. Nixon...

Tata in the slipstream

"Ladies and gentlemen of the jury," colleague Peter Walmsley addresses the readers of Grant's, "please direct your attention to the chart of the share price of (#) Bank. This institution, trades at (#) times book value, (#) times trailing earnings and (#) times estimated March 2006 earnings...

When to sell

[A] co-chief investment officer and portfolio manager of not only practices the art of value investing, but also preaches it. The shareholders (who happen to include your editor) are his congregation, and he speaks to us quarterly. "Diversification is a surrogate, and usually a damn poor surrogate, for knowledge, control and price consciousness," says the master in his latest communiqué...

Boone: a progress report

At 77, life for Boone Pickens is getting better and better. Remember that, in 1996, Pickens was removed as CEO of Mesa Petroleum went through a painful divorce from Bea Stuart, and became clinically depressed. BP Capital Management, seeded in 1997 with $37 million, had declined in value to $4 million by the end of 1999...

Flat curve society

This publication is beginning to doubt that yield curve is going to continue to flatten. For that matter, we are beginning to question the predictive significance of the flattening that has already taken place. When Alan Greenspan muses that the narrowing in the difference between money rates and bond yields does not fill him with dread, as he did last month in Beijing, we are starting to see his point...

Inflation? Deflation? Why, yes.

"Powerful secular forces are working to lower inflation, and thereby long term interest rates," according to Van R. Hoisington of the eponymous Hoisington Investment Management Co., Austin, in his second-quarter letter, which explains why the bond portfolios he manages returned....

July 1, 2005, Vol. 23, No. 13

Buy the Brazilian franc, sell the Swiss real

In Brazil, the measured rate of inflation stands at 7.7%, the benchmark central-bank interest rate at 19.75%. Meeting on June 14 and 15, the Monetary Policy Committee of the Central Bank of Brazil promised to stand pat. Are inflation-adjusted money rates no punitively high? No matter....

Not the euro, either

Speculation that the European Central Bank might reverse course and lower its 2% policy rate has stirred the currency markets and roiled an economist. The economist, Paul Kasriel, senior vice president at Northern Trust Co., has produced an elegant little proof to show that whatever ails the euro-zone economy, it isn't a lack of monetary stimulus....

Bullish on Bunge

In response to a question on the first-quarter conference call, the chairman and CEO of Bunge Ltd. discounted to the vanishing point the significance of Asian political tensions on corporate operations. Whether or not China is mad at Taiwan, or Japan at China, said Alberto Weisser, the worldwide soybean crop looked promising. He observed that, in soybean meal and soybean oil, Bunge sells...

That ’70s Show

The Bank for International Settlements, "the central bankers' Swiss bank," to borrow a line from Christopher Fildes of the London Spectator, is out with its 2005 annual report. Like preceding editions, this one – the 75th – is authoritative. And like just a few others, it is also scintillating...

Up on the farm

"Land prices just keep rising," laments Murray R. Wise, agricultural real-state adviser with the Westchester Group, Champaign, Ill. "And the pace in many areas is actually accelerating. I keep waiting for some semblance of sanity to return to the market, but have yet to see it...

A glut of what?

As central banks go, the Federal Reserve is merely one of the larger super-regionals. In asset size ($812 billion), it is smaller than the People's Bank of China (the equivalent of $950 billion), the European Central Bank ($1.2 trillion) and the Bank of Japan ($1.4 trillion)....

June 17, 2005, Vol. 23, No. 12

Bring back the lira

On June 8, the government of Italy issued €2 billion of floating-rate, 15-year debt at an initial yield of only 2.75%, an interest rate worthy of the proverbially triple-A-rated Roman Empire under Caesar Augustus. Except, today's Italy is in recession, the only economy in the G-7 so blighted. And the European Union last week began procedures to discipline the Italian government for exceeding EU and euro-zone limits on budgetary deficits....

Bearish on New Century

In the prior issue of Grant's, reader R. King Burch brought forth the fact that transaction volumes in U.S. residential real estate plunged by 50% between 1978 and 1982. Admittedly, mortgage rates in those dull years were at double digits, but the possibility of a long drought in turnover has set us thinking. Specifically, it has led us to mount a search for a mortgage originator that, having heavily invested during the boom, would find itself overextended in the bust. The first R. King Burch Prize goes to. . . .

Rents rise (bondholders duck)

On June 7, ING Clarion Partners bid $1.6 billion, or $43.50 a share, for Gables Residential Trust, a 23-year-old apartment real estate investment trust headquartered in Boca Raton, Fla. The tender price represents a 14% premium to the prior day's closing share price. Well and good for apartment investors, the transaction presents a potential source of worry for inflation-phobes. . . .

Support group

Collateralized mortgage obligations (CMOs) outyield Treasurys. Foreign central banks are as yield-hungry as the next institutional investor, possibly even a little more so. Ergo, foreign central banks are buying CMOs. End of story? Actually, only the beginning....

‘Simple math’

"Last June," reports The New York Sun, "Hank Sopher sold a 57,000-square-foot developable site at 23-29 Bond Street for $9 million. This past March, the property was sold for $26 million." The numbers are not hard to understand (nor are they hard to verify--visit the New York City registrar online at http://www.nyc.gov/html/ dof/html/jump/acris.shtml). It's only that they are astounding. Yet, on a moment's consideration, they can be explained--easily explained, in fact. . . .

Private inequity

Frederick E. (Shad) Rowe is chair of the Texas Pension Review Board. He writes from Dallas: I don't think my experience is too different from that of the thousands of people sitting in pension meetings a couple of hours a year who nod their heads and pretend to understand, and care, what is being said. A couple of years ago, emerging from my daze, it dawned on me that the problem of underfunded public defined-benefit plans is mushrooming, and that a favorite solution, private equity, is going to create more problems than it solves. . . .

The oxymoron at the Fed

"Whatever the underlying causes," Alan Greenspan told the International Monetary Conference in Beijing the other day, "low risk-free, long-term rates worldwide seem to be one factor driving investors to reach for higher returns, thereby lowering the compensation for bearing credit risk and many other financial risks over recent years." But the chairman's phrase--"low risk-free, long-term rates"--is an oxymoron. . . .

June 3, 2005, Vol. 23, No. 11

Where we came in

No sooner had Grant's opened for business than bond yields began to move inexplicably higher. In May 1984, long-dated Treasurys hit (#)%, though the CPI was rising by not much more than (#)% (not the "core" rate but the "headline" rate, measured year-over-year). This inexplicable situation called forth many explanations. Market action often trumps reason (some believe that reason is implicit in price movement), and rising yields seemed to justify themselves merely by going up. The bond bears said that the budget deficit was too big, that money-supply growth was too fast and that the inflation rate was deceptively low...

Up with Newmont

The 29th bubble

"We don't perceive that there is a national bubble," Alan Greenspan, speaking about house prices, advised the Economic Club of New York the other day, "but it's hard not to see...that there are a lot of local bubbles." For what might be the first time in his life, Maestro thereby staked out a genuinely contrary investment position. These days, bearishness on house prices has become an Approved Institutional Opinion, much like bullishness on almost everything else....

Inside Baseball on Europe

Since we prophesied that European sovereign debt yields would begin to de-converge (Grant's, March 11 and 25), Portugal has owned up to a shockingly big fiscal deficit, the Organization for Economic Cooperation and Development has revised upward its 2005 deficit forecasts for Greece and Italy (as well as for Portugal), and French voters have rejected the European Constitution. But spreads between the strongest and weakest European national borrowers have widened only a little.

May 20, 2005, Vol. 23, No. 10

Yes, we have no more credit

Credit formation in the United States has slowed to a crawl. Money-supply growth is barely positive. Ditto, growth in the Federal Reserve's securities portfolio, and in the U.S. government securities portfolios of foreign central banks. Fannie Mae and Freddie Mac, chastened mortgage giants, have reined in their operations--Fannie's are actually shrinking. Prices of junk bonds and leveraged corporate loans are tumbling. The Grant's investment worldview is predicated on....

Barton on converts

If any branch of the credit markets ought to be cheap, it's convertibles. You can't pick up a newspaper without reading about the supposed death throes of the convertible-arbitrage community. In April alone, the CSFB/Tremont Hedge Fund Index's convertible arbitrage subindex lost 3.1%; it's down by 5.8% for the year. Now begins a value hunt in convert-land....

Perfidy, betrayal, etc.

Every bondholder is helpless before the winds and tides of monetary policy. Holders of corporates are, besides, the powerless objects of corporate financial policy. To their stockholders, managements owe a fiduciary duty. To their bondholders, they owe nothing more than compliance with the letter of the indenture. Not for nothing do CEOs invest in stock. Now unfolding is a story of victimization....

Risk in mortgages

Beleaguered Fannie Mae last week submitted a quarterly filing, not the customary 10-Q but Form 12b-25, a document for the troubled and tardy. In it, the federally chartered mortgage behemoth poured out its heart about the increasingly speculative tone of residential mortgage finance. Following is a survey in two parts: the nature of this risk, and (below) where it may reside...

Find that risk

The point is carried--again: There's risk in the U.S> residential mortgage market. Is it properly priced? Who owns it? Answers--or, at least, suppositions and inferences---to follow. Our most important findings we offer in preview: No 1., while corporate credit spreads have widened this spring, mortgage spreads have actually tightened--in fact, have been tightening (or holding steady) for years. No. 2, the riskiest pieces of the riskiest mortgages are held not in the United States, but in Asia and Europe...

Snowfall in May

Ian McCulley writes: On Tuesday, the Treasury released its oft-delayed and much anticipated (for a government document) report on international exchange rate policies. Pressing China to junk the renminbi peg, the report stopped just short of accusing the People's Republic of outright currency manipulation....

May 6, 2005, Vol. 23, No. 09

Items not mentioned

On Tuesday, the Federal Open Market Committee bumped up the funds rate, retained the word "measured" to characterize the likely pace of monetary tightening and, to the delight of conspiracy theorists, weighed in with a post-publication P.S. "Longer-term inflation expectations remain well contained," press release No. 2 therapeutically added. What else did the Fed leave out? we asked ourselves....

Turmoil play

LaBranche & Co., The New York Stock Exchange specialist firm, sets a fine example with its own common stock. The price goes straight down. It's down by (#)% since the April 20 announcement of the proposed merger between the Big Board and Archipelago Holdings. And it's down by (#)% since the all-time LAB peak in February 2001. There's no misunderstanding Mr. Market's message. LaBranche is- he keeps shouting- a goner....

Home Depot: how cheap?

For excellent 2004 financial results, the chairman, president, and CEO of Home Depot, Bob Nardelli, credited the company itself. No thinks to Alan Greenspan, to loosey-goosey lending or to the super0leveraged American homeowner. What pushed up sales by (#)% and earnings per share by (#)%, he declared, was the ability-Home Depot's ability-"to operationalize and execute our strategy....

Our man in Omaha

American International Group Inc., Warren Buffett told shareholders, investment pilgrims and the Grant's reporter at the scene of last weekend's Berkshire Hathaway annual meeting, is "a great company." So Berkshire is buying it? Buying it as it did Salomon Brother's in the wake of an earlier financial-services scandal? Buying it to put to work the billions of dollars burning a progressively larger hold in the pocket of the Sage of Omaha? Buying it because, for all the fuzzy math and evident wrongdoing, AIG-so Buffett declared-is still a great property? Actually no-or, at least, Buffett made no such admission....

Chicken long

John Bekkers, president and CEO of Gold Kist, America's third largest integrated chicken producer, made this concession on the company's February conference call: "[L]ife is pretty good in the chicken business." It was as close as management would come to scratching the participating analysts' itch for bullish guidance....

Sovereign yield pigs

Foreign central banks may or may not be buying fewer dollars. Almost certainly, they are buying fewer Treasurys: Over the past three months, growth Treasury securities held in custody by the fed for the account of foreign central banks rose at an annual rate of 3.3%. But, over the same three months, Fannies and Freddies and Ginnies held in custody for the non-American owners registered annual growth of 59.8%....

April 22, 2005, Vol. 23, No. 08

Bull market in suspicion

China doesn't trust Japan, which doesn't trust China, which doesn't trust the United States. Polls indicate that French voters don't trust the proposed European constitution. . . Creditors don't trust General Motors. . . and equity investors seem not to trust Freddie Mac, Fannie Mae, or AIG. On Tuesday, Fitch Ratings . . .

Minutemen

Volunteers rushed to the rostrum at last week's Grant's conference to fill the allotted time of the absentee speaker whose wife was about to have twins (she did: girls-all concerned are doing fine). Two of these saints presented long ideas, one a virtual M&A idea, and a fourth a strategic call on risk…

Home sweet speculation

Karl Hill, owner and chairman of the Monroe County Bank, Forsyth, Ga., put a question to the conference-goes: "How do you value a house?" And he answered it himself: "It does not produce income, so there's no way you can try to value a house on the income it produces or will produce in the future. So you can only value a house by what someone will pay for it. Well, what will people pay for it?...

‘South of idolatry’

The Grant's conference, high-minded as usual, featured a pair of talks on the use and abuse of theory in economics and finance. An historian conducted the first discussion, a physicist the second. Economists were conspicuous by their absence . . .

Don’t cross Vernon

Bears on Commerce Bancorp, Cherry Hill, N.J., may be right or they may be wrong (we have our view), and they may be jobless. As you will have read by now, a Morgan Stanley broker who asked an unwelcome question of Vernon Hill on the April 13 Commerce conference call was sacked for the crime of threatening a prospective investment banking relationship. . .

Value picks: a pair

David Winters, president, CEO and chief investment officer of Franlkin Mutual Advisers LCC (among many other professional offices and duties), likes cigarettes and diamonds, as he explained to the Grant's audience . . .

Radio silence

When a $7 billion market-cap company has trouble borrowing in the junk-bond market , that's news – which news pertains either to the market or the company. . .

Transmission change

The U.S. Treasury market is no longer the American Treasury market. Last year marked a great divide: For the first time, foreigners owned more U.S. government securities than domestic buyers did,

Earth to bond market

"There's a debate about whether or not the market is pricing in the unfunded liabilities of Social Security and Medicare" Tom Gallagher, senior managing director (and top Washington hand) of ISI Group, told the crowd. . .

Central banking: a new primer

"Look elsewhere on this page and you'll see slowing growth or even negative signs in front of the monetary aggregates. So the Fed's tightening must be having an effect on money supply growth and credit creation, right? Maybe, maybe not. . .

April 8, 2005, Vol. 23, No. 07

Interest rates: Watch out above

For the American saver (there must be one or two), good news: Emigrant Direct, the online outlet of the Emigrant Savings Bank, New York, is paying 3-1/4% per annum on savings balances, 75 basis points higher than the "Incredible Interest Checking" rate offered by North Fork Bank, also of the Empire State... Whether the competitors are in for a mile or a marathon will depend not only on trends in the usual numbers--inflation, job creation, GDP growth, etc.--but also on. . . .

Generous Electric

A friend of the Grant's family has pointed out an unusual security. He is bullish, and so are we. . . .

Snoopy deploys capital

MetLife, once upon a time known as the Metropolitan Life Insurance Co., sold its self-branded, 58-story New York City office tower last week (the one that starred in "Godzilla") for $1.7 billion. On $83 million in projected annual net operating income, that's a 4.9% yield, or cap rate, a remarkably low number even for this sky-scraping real estate market. It is, in fact, just remarkable enough to inspire a meditation on the risks presented by low interest rates and rampant overvaluation. Question: How does one invest in an era of low rates? Answer. . .

Thanks to Luca Pacioli

John Hughes, CPA and money manager (he presides over Quantum Capital Management, Northfield, N.J.), has a thesis. It's a simple thesis, but simple in the way of something that causes the person who hears it to bring the heal of his hand smartly to his forehead and say, "Now why didn't I think of that?...

Central banking: a new primer

How will the Federal Reserve know when to stop tightening? Answer: When the interest-rate futures market tells it to. And how will the market, which does not speak in words, get its message across? Answer. . . .

March 25, 2005, Vol. 23, No. 06

THE CURRENT ACCOUNT FOR STOCK JOCKEYS

30,000 FEET OVER JO'BURG

WORSE THAN THE DOLLAR

TEARS ON PLANET HOPE

March 11, 2005, Vol. 23, No. 05

The superinvestors of Graham-and-Dullsville

"What Charlie and I would like is a little action now," laments Warren Buffet in the new Berkshire Hathaway annual. "We don't enjoy sitting on $43 billion of cash equivalents that are earning paltry returns." Buffet should cheer up...

Now comes ‘deconvergence’

On March 2, Greece sold 30-year bonds, the longest since Odysseus. Just as remarkable, it sold them at a price to yield 4.45%, just 26 basis points more then the yield on 30-year German government debt. Germany is a triple-A-rated sovereign borrower, two full rating notches better than the sponsor of the 2004 Summer Olympics...

On time, on budget

Peter Bernstein's new "Wedding of the Waters: The Erie Canal and the Making of a great Nation" (Norton, $24.95) is the story of a perfect outcome. For those who associate epic capital-investment projects with multibillion-dollar errors, Bernstein's history will most pleasantly stretch the mind. The Erie Canal, a 363-mile-long ditch dug between 1817 and 1825 to connect Lake Erie with the Atlantic Ocean via the Hudson River, was a miracle of human enterprise...

Sell Thailand, buy Korea

"In your issue of March 28, 2003," Arjun Divecha advises the editor, "I said Thailand was attractive and one way to play it for U.S. investors was to buy the Thai Fund (TTF), which was trading at $4.03....Our model is now negative on Thailand and we have very little money invested there. I would recommend you advise your readers to take profits on TTF." Noted: On March 8, the Thai Fund closed at $10.81 a share...

Speaking of Korea

Grant's remains bullish on Korea Electric Power Corp., a.k.a. Kepco, the cover company in the August 13 issue. At the time, the ordinary shares yielded 5.6% and traded at 32% of book value and 5.1 times earnings. Today, they yield 4.3% and trade at 42% of book and 7.2 times earnings....

Old business: a roundup

Steel stocks broke Tuesday after Ispat Inland disclosed a cutback in steel production keyed to "excess inventory in the system" and the CEO of U.S. Steel called on China to make less metal...

February 25, 2005, Vol. 23, No. 04

C’est une bond bubble

"With this new OAT," declares Bertrand de Mazieres, chief of the French government's debt-management agency, "we are opening the new frontier of the euro fixed-income market. There is a structural demand for very long dated maturities and this market segment is now ready to fully develop." For the benefit of English-speaking readers, an OAT is a French government security. . . .

The not-euro trade

Seasoned readers will intuit the investment prescription of the foregoing article. It is, "Buy gold." It will bore many and shock no one. In defense, we plead that fundamental shifts in monetary alignments are once-in-a-generation events. . . .

No excuses

The best quarter of the best year in the 104-year history of AK Steel Holding and its predecessors yielded a net loss. "Great companies find a way to win," said the president and CEO, James L. Wainscott. "...[N]o excuses." Then no excuses for us, either. . . .

Three nearly impossible things

The 0.8% monthly increase in the January core Producer Price Index (less food and energy) limbers up the mind to consider impossible things. After all, is not a reacceleration in the measured rate of domestic price inflation widely held to be impossible?

February 11, 2005, Vol. 23, No. 03

At the Bank of Graham and Dodd

The prior issue of Grant's featured a bearish critique of Commerce Bancorp of New Jersey, the hell-bent-for-election outfit headed by Vernon W. Hill II. Now unfolding is a bullish review . . . an institution in no particular hurry, which is owned and chaired by Karl B. Hill. Possibly no two banking (institutions) have ever had less to talk...

Neighborhood price war

An interest-rate experiment is about to be conducted at the intersection of Broadway and Wall Steer in lower Manhattan. Banco Comercial Portugues, which had occupied the old banking hall at 2 Wall Street, the building in which Grant's has its offices, has departed, and our new best friend is moving in....

Sell the dollar (again)

Grant's likes to say that a strong currency is the old maid of global monetary affairs, i.e., nobody wants it. We now revise that judgment. The Russian ruble and Malaysian ringgit are each a candidate for officially sanctioned appreciation against the dollar...

Just wait

"We continue to see few investments worth making," writes Seth Klarman, president of the Baupost group, in his year-end letter. "Price is, and has always been, the key determinant in risk and in return...

From the pits

A friend who deals in metals on the Comex reports that the physical demand for gold is strong and Swiss refiners are scratching around for bullion. There have been mass defections from the once "embedded idea of being short the dollar and long some metals....

Leverage victims

The bond vigilantes-supposed guardians of the integrity of the dollar and of dollar-denominated credit-long ago repaired to the 19th hole of American finance for rest and refreshment. They've been knocking 'em back since 2003...

January 28, 2005, Vol. 23, No. 02

Commerce Bancorp: branched out

Positively sloped yield curves have turned mediocrities into moguls and community banks into regionals. With a mighty push from the founder, . . . the yield curve has helped to make (COMPANY) what it is today--pound for pound, one of the most profitable and innovative banks of this era. . .

Flattening agent

Recent narrowing of the spread between 30-year and 10-year Treasury yields may be only the start. If Elaine L. Chao gets her way, there won't be enough long-duration assets to go around...

Don’t wake the bondholders

Name that credit: Baa2 (outlook negative)/BBB (outlook stable). Hard pressed by new competition, bruised by strikes, burdened by employee-benefit costs. High debt burden currently supported by ample cash flows, but competitors call the pricing shorts, set the bar on quality...

Carry-san

A reader reports on the Japanese government's newly unveiled plans to make you, the sophisticated speculator, very rich: "New York was the scene of a historic road show last week. Financial ministers of a sovereign state virtually invited America's hedge funds to...

Moths to flames

In an especially errant pronouncement one year ago (see the Feb. 13, 2004 issue) Grant's asserted that a bear market in credit was under way. Just how errant is "especially errant" can be seen by the 2004 issuance boom in ultra-speculative junk bonds...

Hello and goodbye

Tata Motors (Grant's, July 2 and Oct. 8, 2004; TTM on the Big Board), the up-and-coming (Ex-U.S.) auto maker, on January 10 disclosed plans to acquire, a stable mate, in an all share deal. As seen from 2 Wall Street...

What do you mean by ‘inflation’?

The January 25 edition of Moody's Global Credit Trends is a source of a set of paradoxical facts. Thus, in 2004, the median price of a not-new, or "existing," house climbed by 7.8%, the most in 22 years...

January 14, 2005, Vol. 23, No. 01

Taming of the shrew

What makes Fannie Mae tick? Last April, the Congressional Budget Office cracked the mystery with its estimate of the value of the public subsidies conferred on the government-sponsored mortgage behemoth. For 2003, they amounted to...

There ought to be deflation

Fly now for half price--no restrictions! Take 30% off that top-of-the-line cashmere jacket, which, by the way, looks smashing on you. And may we show you, sir or madam, our special no money-down, zero-percent financing options on any vehicle in stock? Undercoating and rubber floor mats are yours...

China invades Taiwan

We profit-maximizing Occidentals believe we know what to worry about and what not to worry about. In the case of Taiwan, we would (if properly briefed on Taiwanese finance) worry about bond funds. In Taiwan, bond funds are...

Tearjerker

"More evidence that the bond market has distanced itself from that thing called credit analysis arrived on Monday," reports colleague Peter Walmsley. "Blockbuster's plans to acquire a rival video rental chain hit a roadblock when...

Wendy’s bearish, too

“Economy: Interest rates begin to rise in the second half of 2005.” The forecaster isn’t Grant’s, or one of the many bearish economists polled by The Wall Street Journal at the new year, but a psychic called Wendy, of Dobbs Ferry, N.Y....

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