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December 15, 2006, Vol. 24, No. 24

Down with the carry trade, up with the Swissie

The once-august Swiss franc is today a common funding tool. It is a favored borrowing unit from Budapest to Warsaw to Greenwich, Conn. Now unfolding is a report on the European branch of the world-famous carry trade. . . .

Marines buy dinar

Investing before you investigate is an occupational hazard. Even the most disciplined investor will now and then call his broker to buy or sell without reading every single page of the annual report... Iraq is not a stock--some deny it's even a country--but to imagine it as an investment may help to clarify the choices facing Americans and their government.. . .

Up the capital structure

The not very shocking news that low-rated tranches of poorly underwritten mortgages on depreciating houses are susceptible to loss has nonetheless managed to shock... Following is a speculation on 2007, if we have our timing right. . . .

Sell the doppleganger

"Bank of the Yield Curve" was the moniker Grant's fastened on Commerce Bancorp as rising deposit rates proceeded to flatten its net interest margin. This was in the summer of 2005... The subject at hand isn't Commerce Bancorp, however. It is, rather, the bank that's doing its best to become Commerce Bancorp. . . .

Quaking before a basis point

News that Japan's third-quarter GDP grew at a downwardly revised 0.8% annual rate, not at the originally estimated, upwardly miscalculated 2% annual rate, rattled the currency markets.

December 1, 2006, Vol. 24, No. 23

Flunking the subprime mortgage class of 2006

Ratings changes come thick and fast in the asset-backed securities market, but seasoned observers stopped and stared at some recent actions by Moody's. On November 10 and 14, the agency placed on review for possible downgrade the lower-rated portions of a pair of 2006-vintage residential mortgage-backed deals. Neither structure had blown out the candle on its first birthday cake. Now unfolding is a new installment in a continuing Grant's series, "Incomprehensible Mortgage Finance Made Slightly Less So." In it, we connect the Moody's bombshells (silent though they were for all but the most inside of mortgage insiders) to the wider investment world. . . .

For gold bulls only

Gold yields nothing and earns nothing. Famously, it is a speculative asset. Which truism makes Witwatersrand Consolidated Gold Resources--a.k.a. Wits Gold--a speculation on a speculation. True apostles of Graham and Dodd may now avert their eyes. We write for believers, and would-be believers, in the investment merits of the ancient monetary metal. Not only is gold rare and ductile and pleasant to receive in a Tiffany's box, but also its value exists independently of the blessing of a government or of Wall Street. . . .

Origination goat

The reigning pariah of the asset-backed securities market (subprime-mortgage origination division) insists that it's turned over a new leaf. And it will return to prosperity almost instantly, the lender's chief financial officer assured listeners on the third-quarter conference call. "[W]e are very optimistic and feel very bullish that we've gotten our arms around this issue," said the CFO of [COMPANY], "and we look forward to dramatic improvement in the first quarter of 2007." . . .

Hark to Fan Gang

Last week, The New York Times reported that Ben S. Bernanke, the Federal Reserve chairman, will join Henry M. Paulson Jr., the Treasury secretary, in a delegation of ranking Bush administration officials on an extraordinary mission to China. "The trip in mid-December, to be led by Mr. Paulson, a former Goldman Sachs chairman with extensive experience in China," the Times said, "escalates the pressure on the Beijing leadership to crack down on piracy, open up its economy to outside investors and allow the value of the Chinese currency to fluctuate more freely, Treasury officials say." The phrase "fluctuate more freely" is an evasion. . . .

Mr. Market is the Maestro

Fred Smith, chairman, president and chief executive officer of FedEx, was in the Financial Times the other day contending that breakthroughs in information technology have flattened the business cycle. But what about the cycles of finance?

November 17, 2006, Vol. 24, No. 22

‘Our friends, the creditors’

Just because the triple-A-rated corporate borrower is nearly extinct doesn't mean there are no triple-A-rated corporate bonds. On the contrary, what nature doesn't provide, Wall Street contrives to invent.

Trophy cap rate

MetLife's sale of Stuyvesant Town and Peter Cooper Village, the big middle-class housing enclave hard by the East River in lower Manhattan, broke the kind of records that value-seeking investors run away from. The price tag, shattered one such mark; the cap rate, felled another. Based on these numbers, the buyers will be, for a time, writing checks to fund their own investment.

On chickens’ wings

On Monday, Tyson Foods reported its third consecutive quarterly loss, leading its CEO to lament, "The best thing I can say about fiscal 2006 is, it's over." [Another company], which is similarly engaged in protein production but with less exposure to beef, navigated the same rough seas as Tyson without taking on water.

Termites in the foundation

The national unemployment rate stands at just 4.4%, yet the 2006 crop of residential mortgage securities is blighted by rising defaults and delinquencies. And the credit quality of the polysyllabic, residential asset-backed security featured in the September 8 issue of Grant's appears to be slipping. All in all, we will agree to disagree with the highly paid consultant, motivational speaker and former Federal Reserve chairman who declared, on October 26, "Most of the negatives in housing are probably behind us." Many of the negatives are ahead of us, in our opinion. . . .

Alternatives for everyman

Though it's still technically feasible to invest in old-fashioned stocks and bonds (not in options on them or derivatives of them, but in the very things themselves), exotica have entered the mainstream. Lehman recently lifted the velvet rope around the private equity market by opening a new fund to pikers with as little as $250,000 to invest. Or, rather, Lehman helped to lift the rope. The American Stock Exchange, with its late-October listing of a private-equity exchange-traded fund, also struck a blow for the democratization of LBO investing. . . .

Intercontinental tightening push

It's not only the Fed that's endeavoring to tighten the screws, but the European Central Bank and the Bank of Japan as well. The users and abusers of low-cost credit will hope the central banks fall flat on their governmental faces.

November 3, 2006, Vol. 24, No. 21

Walk the plank

In every credit boom, there is an obligation or security that crystallizes the spirit of the cycle. In the frolics of the 1980s, the five-year loan against the collateral of the Yugo automobile, a vehicle apt to blow up shortly after the warranty expiration, was that special obligation. [This] closed-end fund that holds junior mortgage tranches, just might prove to be the beacon of remembrance of the '00s.

Silk purse

According to Bloomberg, colleague Dan Gertner just about has [THIS CO.] to himself. Not a single sell-side analyst is known to follow this agricultural, commodity and maritime conglomerate. It isn't hard to figure out why. For one thing, [THIS CO.] is more private than public; the founding family owns 70% of the common. For another, the shares are quoted at a retail-unfriendly price. And, for a third, to the untutored eye, its business lines may resemble a dryer full of mismatched socks. . .

Out of the frying pan

Diversification is the plainest of vanilla investment flavors, so Monday's news that the United Arab Emirates intends to redeploy some of its national wealth into nondollar currencies--just 2% is now so denominated--caused no great commotion. Maybe it should have. The UAE indicated that it might invest as much as 10% of its foreign exchange reserves. . .

Value at risk

The editor of Grant's was the keynote speaker at the Third Avenue Management Value Conference on Wednesday. Following is the text of his remarks: Once you've heard the voice of Martin J. Whitman, you are very likely to keep on hearing it. I mean the terse authorial voice as much as the basso conversational one. Passages from "The Aggressive Conservative Investor," to name only one of Marty's books (and one that he wrote with Martin Shubik), are fixed in my memory. They jostle me as I try to settle down with the morning newspapers. Marty starts arguing with The Wall Street Journal and the Financial Times before I can even open them up to read. Sometimes, I can't seem to get a thought in edgewise.

Tiptoeing away from the dollar

Monday's news that the United Arab Emirates means to hold fewer dollars and more euros (politically and fiscally vulnerable as the single currency is, in our opinion--see page 3) is the latest in a string of such disclosures.

October 20, 2006, Vol. 24, No. 20

Over the cliff with Morgan Stanley

Alone among the Wall Street financial-services providers, that used to style themselves, simply, as “brokerage houses,” or --with a little more tone-- “investment banks,” Morgan Stanley is the owner of a $1 trillion balance sheet…

Accordion outfit expands

This big Mexican multi-modal transportation and logistics company, operates in dual mode itself. It contracts and expands…

Schloss turns 90

Walter Schloss, a value-investing great, was the guest of honor at a dinner sponsored by the New York Society of Security Analysts on October 11. Paul J. Isaac, a nephew of the honoree and chief investment officer of Cadogan Management, gave this tribute: We are honoring a guy who never tried a hostile takeover. He never had the biggest fund, or even a "bigger" fund. Walter never spawned a cult nor sought publicity, or even marketed. . . . Walter worked collegially with great talents at Graham-Newman; and he has been a loyal friend--and, to me, relative--to many, in this field and out. But Walter has always done it his way. . . .

Debt-crazy chicken

“Rubber,” would be a slur on [THIS COMPANY'S] trademark chicken but not on its corporate ownership. That has bounced around for years.

Bullish on the yen

Eight short years ago, the Central Bank of Russia was beating back a run on the ruble in the wake of the Russian government’s debt default. Today, the same central bank is moving…

October 6, 2006, Vol. 24, No. 19

So hopeless, it’s hopeful

Top marks for reverse salesmanship at the fall 2006 Grant's Conference go to Amit Wadhwaney, manager of the Third Avenue International Value Fund. In singing the praises of (a certain Canadian paper stock)., Wadhwaney intoned a kind of dirge: for operating losses, corporate attrition, investor disaffection and the pall of bankruptcy. . . Now unfolding is a recapitulation of Wadhwaney's analysis, along with the fruits of some digging by our own Dan Gertner. . . .

Defaults of the future

A half-century ago, Geoffrey Moore, the late, great business-cycle theorist, posited that credit distress did not come out of a clear blue sky but was tipped by the actions of lenders and borrowers. Among other forms of crisis-inducing behavior was breakneck competition to lend, along with a corresponding relaxation in underwriting standards, and a collapse in risk premiums. We would have to say that, by the Moore criteria, a bear market in credit is predestined. But nearly everything else is uncertain. Not only is the timing of such a downturn unknown, but so, too, is the probable severity and distribution of losses--across markets and types and classes of securities.

Unlucky Ben Bernanke

The trouble with the Bernanke tenure is going to be his predecessor's, Paul Kasriel, director of economic research at Northern Trust Co., told the Grant's conference-goers. If Alan Greenspan was the luckiest Fed chairman, Ben S. Bernanke stands to be the unluckiest--at least since the ill-starred reign of G. William Miller (1978-79). . . .

Three bad reasons

Van Hoisington, eponymous founder and head of Hoisington Investment Management, Austin, Texas, knows every reason to buy long-dated Treasury bonds. He's owned them for years, in so doing earning for himself and his firm a place at the very top of the fixed-income performance heap.

Inside the mortgage machine

Through mysterious alchemical processes, Wall Street transforms BBB-minus-rated mortgages into AAA-rated tranches of mortgage securities. So often and so profitably is this miracle performed that most investors have suspended their disbelief about it. One who hasn't is Paul Singer, general partner of Elliott Associates, and he shared his doubts at the conference. . . .

Newmont steps on rakes

At the Grant's Conference, your editor again endorsed Newmont Mining (NEM). The next day, in an early-morning press release, Newmont indirectly and implicitly endorsed every leading gold investment except Newmont Mining. Reading what the company had to say about its costly and accident-prone operations, many investors felt a welling up of bullishness toward the universe of mining and monetary assets not designated NEM. . .

Value in disaster

Value lurks in the oddest places today, Seth Klarman, famed value hunter and president of the Baupost Group, told the Grant's audience. He disclosed, for example, that Baupost actually owns a pair of big-cap stocks (names not named): "It's sort of hard to believe; we are kind of shocked ourselves internally. And we see others that are fairly close to being interesting." But the best value is "disaster insurance," Klarman said. "Financial disaster insurance takes many forms," he explained. . .

Think big

The second of Seth Alexander's 10 suggestions for investment survival in 2006 was to allocate capital "where value is, not where it ought to be." Alexander, newly appointed president of MIT Investment Management Co., admitted that this might seem an odd bit of advice. . . .

The theory of China

The trouble with the People's Republic of China isn't the practice, it's the theory. What in the name of Adam Smith makes this immense, communist-capitalist, poor-rich country work? Maurice "Hank" Greenberg, the featured Grant's luncheon speaker, described the economic and educational transformation of the nation he first visited more than 30 years ago.

Bullish on junk

"Copart," said John Hughes, referring to CPRT on the Nasdaq, the largest processor of total-loss vehicles under the sun, "is the industry-leading incumbent in an oligonomy." "Oligonomy" seemed a pretty fancy word for an auto junker, even a globe-beating one, and Hughes, president of Quantum Capital Management, Northfield, N.J., endeavored to explain it to the Grant's audience. . . .

Horse bolts; barn doors shut tight

Following years of increasingly exotic lending that drove house prices into the treetops, federal regulators have called time. Last Friday, a united regulatory front (from the Fed to the National Credit Union Administration) published the long-awaited, final edition of the "Interagency Guidance on Nontraditional Mortgage Product Risks." . . .

September 22, 2006, Vol. 24, No. 18

The trouble with serenity

Wall Street is taking more risk and using more leverage not only because the market allows it; the market almost commands it. . . .

Giant opportunity

Just as Shad Rowe prophesied, Adam Smith found oil (Grant's, July 28). "Adam Smith" was Rowe's shorthand for the law of supply and demand. High prices would induce exploration, and exploration would end in discovery, he predicted. And it came to pass. News of that big, deep-water discovery in the Gulf of Mexico some weeks back proved, if not the catalyst, at least the accompaniment to the late-summer break in energy prices. XLE, the energy-sector exchange-traded fund, has plunged in sympathy. We write in praise of a stock that stands to do well even in a down energy market. . . .

Age of Aquarius

ACA Aquarius 2006-1 is the subject under discussion. Are you still with us? Good! A short catechism will serve to introduce the fine points. To start with, what is it? ACA Aquarius 2006-1 is a $2 billion, mezzanine-structured, hybrid collateralized debt obligation, or CDO. What is a CDO? A CDO is. . .

Big foot stomps index

"What is your best bid [on] $2.3 billion notional of the triple-B minus tranche of the ABX.HE index?" a mortgage bear asked a derivatives broker last week. . . .

Argentine doubleheader

IRSA and Cresud, the related Argentine property companies featured in the prior issue of Grant's, staged a telephonic twin bill on Monday to review results for the fiscal year ended June 30. IRSA, up first, was the bearer of the news that the Argentine credit machinery is cranking up again. . . .

Borrowing from China to pay Japan

Buried in Monday's announcement from the Bureau of Economic Analysis that the current account deficit in the second quarter jumped to $218 billion, or 6.6% of GDP, was news that the balance on income had dipped further into the red. Because the United States is a net debtor to the world to the tune of $2.7 trillion, economists have racked their brains to try to understand how America's relatively small pool of assets abroad could outearn the rest of the world's relatively large pool of assets in the 50 states. . . .

September 8, 2006, Vol. 24, No. 17

Inside ACE Securities’ HEL Trust, Series 2005-HE5

The nation is running out of magazine covers on which to announce the coming collapse of house prices. From which fact it could be inferred that Mr. Market is running out of sellers of the statistically cheap housing stocks. Is there even one surviving bull on Toll Brothers or Countrywide Financial or New Century Financial Corp. who doesn't know that the house-price bubble has burst? Maybe not. But the news has strangely failed to register in the mortgage-backed securities market. . . .

Iraq's unflappable dinar

There's a curious tower of strength in Iraq. It is the Iraqi currency, the new Iraqi dinar, of which 1,477 gets you $1. That is the official exchange rate. The funny thing about the official dinar/dollar exchange rate is that it hasn't collapsed. Not what you might expect in a country with Iraq's inflation rate--or in a country with Iraq's criminals. . . .

Argentine Busman's Holiday

In search of fun, cool weather and--yes--investment value, colleague Ian McCulley sojourned in Buenos Aires last month. "Construction projects are sprouting," he reports upon his return to the New York office, "potholes are getting fixed, new streetlights are being installed and new condos are shooting up all over town. It's not a boom on the level of Shanghai, but the long-suffering porteños will take it.". . .

Back to you, Gyan Sinha

Our August 11 article on house prices elicited some of the nicest words from the head of asset-backed research at Bear Stearns. Three of them, to be exact: "extremely eloquently written," wrote Gyan Sinha in an August 15 research note. But three were all that he could find it in his heart to commit to paper. . . .

The Fed pauses—and the bond bulls, too

"When the esteemed members of the FOMC meet on September 20 to formally usher in 'the pause,' they will have piles of bearish housing news clippings, as well as subdued employment data, to validate their actions.

August 11, 2006, Vol. 24, No. 16

House prices: prepare for the impossible

Grant's is now embarked on a series of grand speculations. We ask: What is the likelihood of a coast-to-coast bear market in residential real estate? What effect might such an event have on the U.S. economy? On interest rates? What do history, economic analysis and--yes--theology have to contribute to the penetration of these mysteries? In preview, we conclude that . . .

Banking on sunshine

"The growing popularity of nontraditional products may have moved the mortgage credit cycle into uncharted territory," warns the brand-new edition of FDIC Outlook, the quarterly publication of the Federal Deposit Insurance Corp. "Industry analysts are uncertain how loans such as IOs and pay-option ARMs might perform in periods of rising rates or in stagnant housing markets." No such uncertainty clouds the minds of the management of [this state's] biggest indigenous banking organization. . . .

Up with Libbey

[COMPANY], the glassware maker that mistimed its trip to the junk-bond market and paid the price in the stock market, could furnish the subject of a Ph.D. dissertation. "A Theory of Market Information: When Junk Bond Investors Actually Know Less than Equity Investors," would be the title. An upbeat profile of [THE COMPANY] in the April 21 issue of Grant's we hereby incorporate by reference. We return to the company. . .

English majors' revenge

Collateralized debt obligations are only baffling most of the time. Gibberish, the technical literature may be, but a determined reader can make out the occasional familiar English word or phrase. One such word is "assumption." It turns out to be of critical importance to understanding how these complex structures are designed, priced and sold. Now begins another voyage of discovery. The destination: The land of the CDOs. The mission: Understanding.


The previous issue of Grant's ("Tomorrow's pileup today") noted that Standard & Poor's had assigned lower default probabilities to investment-grade tranches and higher default probabilities to speculative-grade tranches. This was incorrect; the default probabilities have increased for investment-grade tranches and decreased for speculative-grade tranches.

The world sells greenbacks--quietly

Last winter, as the dollar took sick, currency traders hung on the words of the Asian central bankers. Now they focus instead on the future path of fed funds (or did until the announced path of that rate became the least interesting direction of all, sideways). However, though the talk has abated, reserve accumulation and reserve diversification persist. Both point to the dollar's continued loss of vault space in the world's central banks. . . .

July 28, 2006, Vol. 24, No. 15

They told you so

For its disappointing second-quarter results, Capital One Financial Corp. blamed "a stunning rise in insolvencies." The debts in question, interestingly enough, were British, not American. The news shocked Wall Street, which only goes to show how little attention most busy Americans pay to the research output of the Bank of England.

June marks the spot

"Bring your buyers out today and earn a 11% co-op on a beautiful new home in the Westwind Community of Las Vegas. That's right, I said 11%!!" So beckoned Beazer Homes in a June 27 e-mail to Las Vegas real estate brokers ("co-op" means commission in this context). Well might the recipients stop and stare. As a rule--in hot markets, an invariable rule--developers pay not one cent in brokerage commissions on new homes.

Business weak, stock strong

If California residential real estate is peaking, can the shares of the Golden State's mortgage lenders be far behind? "Yes, they can be, and--up to this moment, at least--have been," is the answer.

Tomorrow's pileup today

Deep are the mysteries of structured finance, but some things are mortally certain. For instance, a bear market in complex debt instruments will eventually succeed the current resplendent bull market. And dollars to doughnuts, when that time comes, [a], co-managing member of [***], New York, will be on hand to enter mathematically coherent bids for distressed assets. . . .

Adam Smith finds crude

I have a theory on the making and losing of fortunes, and it has yet to be proven wrong. It goes like this: What happens in Dallas is a precursor to what happens in the rest of the world. In that light, the great [COMPANY] play is worth a moment's reflection.

Transpacific sucking sound

The Bank of Japan is extinguishing yen--by 25.1% a year, measured at a year-over-year rate, by fully 46.9% a year, measured over the past three months and annualized. It has erased some ¥38 trillion, the equivalent of $330 billion at current exchange rates, since the crest of the policy-induced monetary flood last year.

July 14, 2006, Vol. 24, No. 14

July 19: an advance peek

Next Wednesday, Ben S. Bernanke is scheduled to deliver his semiannual testimony on Federal Reserve monetary policy before the Senate Committee on Banking, Housing and Urban Affairs. Following is a purloined advance text of the chairman's testimony, which, if it is not strictly accurate, perhaps ought to be.

Missing bancruptcies

"[There are] capital flows around the market from what feels like limitless sources--from CDOs, CLOs, hedge funds, private equity and recycled foreign trade surpluses."--Victor Consoli, head of corporate credit strategy at Bear Stearns, quoted in the May 11 Financial Times. Going broke takes some determination in 2006.

Incredible mortgage journey

"For my clarification," colleague Dan Gertner queried a ratings-agency analyst with whom he was discussing the fine points of collateralized debt obligations (CDOs), "a bank would originate a loan and would sell a loan to Countrywide, say. Countrywide would pull thousands of loans together and cut them up and sell them to investors as residential mortgage-backed securities tranches. CDOs would buy the RMBS, pool and cut them up as CDO tranches, with everyone taking fees out along the way?" "Yes," the analyst replied.

High tech, low evaluation

"You can buy this market, which is 70% tech," said Arjun Divecha, "for 12 times earnings and a 4% dividend yield. And these are reasonably run tech companies; they are not junky tech companies." Taiwan is the market Divecha was talking about (and the earnings he was referring to were the forward kind).

Abel and Bernanke, Macroeconomics, 4th ed., p.

"The story of the Fed," John Medlin, retired chairman of Wachovia Bank, remarked the other day, "is too little, too late; too much, too long." That is the short-form story of the Fed. A lengthier analysis--with special relevance for the 2006 bond market--is contained in the second-quarter report of

June 30, 2006, Vol. 24, No. 13

A kind word for Treasurys

Because Grant's went to press before the June edition of monetary Judgment Day, the readers of these pages know more about current Fed policy than Grant's does. Whichever way the policymakers jump, however, we have a new idea to present: government bond yields are going to fall.

Tune it in

Before the Internet, the iPod and subscription satellite broadcasting, there was radio. You turned it on and listened. Advertisers paid but listeners didn't. It was free. Radio still exists, and advertisers still pay. Listeners still don't. But growth in radio advertising revenue stopped cold six years ago. The marginal advertising dollar has gone in search of the new technology. The balkanization of media has naturally taken its toll on the stock-market capitalization of the investor-owned radio broadcasting companies. Herewith a bullish review of one of the hardest hit. . .

The new old Japan

The high-speed Chinese economy is bound to decelerate. Sooner or later, the restrictive policies put in place by the People's Bank of China will take hold, Sinologists and economists broadly agree. Something will do the trick, they insist: If not the boost to the basic lending rate on April 27, then the tweak to reserve requirements on June 16 or the program of intermittent sales of central bank securities (China's version of matched-sale operations). For ourselves, we don't believe it. We don't doubt that the Chinese economy will eventually throttle down. But monetary tinkering will avail the authorities nothing until the renminbi-dollar exchange rate is untethered. The essay now unfolding is, however, more than a brief for a higher renminbi and a lower dollar. It is also a speculation on the consequences of the Chinese style of finance to the world's economy and markets.

Ultra-low rates: Love ’em today, hate ’em tomorrow

The Bank for International Settlements, headquartered in Basel, is the central bankers' own Swiss bank. Understandably, it never chastises its member institutions. Neither does it belittle their curious line of work. But it does, in its always scholarly annual reports, spell out a certain number of inconvenient truths.

June 16, 2006, Vol. 24, No. 12

Market timing

Gold bullion is down by $200 an ounce this month, but it's no closer to book value than it was at the top. Unfortunately, gold has no book value, and no earnings, either.

Sell Zurich

Landlocked Switzerland is a port in a storm, and the Swiss franc is the monetary attraction of the port. It was ever thus…

Storm in a port

In this liquidation, gold was a safe haven only for the people who were short it. It has traded-first to the up side, now to the down side-not much differently than lead…

Risk at mortgage insurers

"Until the early 2000s, private mortgage insurers had flourished," The New York Times almost reported. "Even when buyers defaulted on their mortgage payments, insurers were rarely struck because steadily rising house prices meant that homes could usually be sold at a profit…

New Chinese bank stock

Industrial $ Commercial Bank of China, the biggest bank in the People's Republic, with assets of $768 billion as of a year ago, says it intends to raise as much as $12 billion in a September IPO…

Flight to risk

What could be "safer"--a better preserver of capital over the long run--than an intelligently selected, out-of-favor biotech stock? Or, better, a portfolio of intelligently selected, out-of-favor biotech stocks? Of course, orphaned equities that resemble call options more than value stocks don't satisfy any textbook definition of investment safety…

Up the wrong tree

The proximate cause of swooning global equity markets, if you believe the press, is investors' concern that runaway inflation may force further action from the Fed. . .

June 2, 2006, Vol. 24, No. 11

Bank of Defalcation

The Bank of China's $9.7 billion initial public offering, the biggest in six years (therefore, the biggest of the 21st century), was massively oversubscribed, 80 times over the retail allotment, 18 times more than the institutional one. The transaction will stand as a monument to something, we are certain--if not to the development of the mainland's capital markets, then to the limits of full disclosure.

Bump in the road

No sooner did Tata Motors, of Mumbai, India, disclose a jump in its fourth-quarter net income than its share price fell. The date was May 22. Long-time bulls, of which Grant's is one, will thank Mr. Market for the opportunity to buy more. . .

Structured complacency

Credit markets are sanguine. Structured credit is proliferating. Could the first fact be related to the second?

Return of inflation

On May 23, the editor of Grant's addressed the Euromoney Inflation-Linked Products Conference in Paris. Following is the text of his remarks, including a couple of things that occurred to him after he had finished. We investors are the most cynical people on earth. And the most credulous. We alternate. A generation ago, when inflation ran rampant, we refused to believe that bond yields could ever fall. A quarter-century later, on the verge of a supposed deflation, we couldn't imagine they would ever rise. For all I know, we secretly believe that the Federal Reserve is directed by Opus Dei. Well, of course, that's preposterous. Everybody knows that the funds rate is actually under the thumb of the Freemasons. . . .

Cliche-adjustment alert

"The world is awash in liquidity," that stock monetary utterance of the past several years, is fast losing its relevance. With one big exception. . .

May 19, 2006, Vol. 24, No. 10

Hanging by a bad loan

A growing global economy depends on the improvident American consumer and the corrupt Chinese banking system. We are unlikely to get an argument over the word "improvident." In America, it might as well mean "optimistic." But there's no glossing "corrupt." It is an indelicate word in any language, and its appearance in this context, on the eve of initial public offerings by a pair of state-owned Chinese banks, will inflame both the Communist promoters and their capitalist bankers. . . .

Buy the dips

Monday's plunge in the gold price dislodged some of the bulls' gold inlays along with a number of leveraged long positions. Yet it did not mark the close of the bull market. . . .

Credit vigilantes nod

The steepening yield curve and rising gold price suggest that the sentinels of price stability are finally rubbing the sleep from their eyes. But there is no such stirring on the part of the guardians of credit.

This ‘rate’ falls

"Mortgage rates hit their highest point in nearly four years as bond investors come to grips with the idea that short-term interest rates are headed even higher and the economy is still firing on all cylinders." So advises, the award-winning personal-finance Web site owned by Bankrate Inc. From which we extract an investment idea. . . .

Buffett’s personal account

"Five or six years ago," Warren Buffett was saying two Sundays ago at the press conference following the Berkshire Hathaway annual meeting, "Korea offered extraordinary values." Buffett recalled scanning a one-page Citibank research summary listing company after company trading at approximately three times earnings. He said that he bought 20 of these castaways for his personal account (the market caps were too small to contribute meaningfully to Berkshire). "I don't know why it was so extraordinarily cheap at the time. . . ," Buffett went on.

Monetary policy for realtors

The Federal Open Market Committee might hold a certain Fort Myers, Fla, wholesale lender in its thoughts and prayers when it reconvenes next month.

May 5, 2006, Vol. 24, No. 09

Spring break at CentCom

Forty-seven picked Americans landed at McDill Air Force Base, Tampa, Fla., early Sunday after a week-long mission to the Middle East. The travelers, civilians all--middle-aged and amply fed, for the most part--would not easily have been mistaken for commandoes as they sleepily filed off their C-17 clutching carry-on luggage and shopping bags. . . .

New life for Annaly

Ian McCulley writes: Ben S. Bernanke is learning the hard way that the bond market doesn't cotton to mixed signals from the Economic Prophet-in-Chief. "[E]ven if in the Committee's judgement the risks to its objectives are not entirely balanced," said the rookie Fed chairman in congressional testimony on April 27. . . .

Bullish on Bunge

Ian McCulley writes: It is not inconceivable that the Archer Daniels Midland investor relations department had something to say about the new CEO whose hiring the company disclosed last Friday. Her name is Patricia Woertz, and she used to work for Chevron Corp. ADM is the nation's biggest publicly traded agribusiness company, but, to the deafening roar of the stock market, it is making a lucrative move into ethanol production. . . .

Currencies not the familiar shade of green

April 21, 2006, Vol. 24, No. 08

Hark! The sound of rotor blades

April 18 (Bloomberg) – The Goldman Sachs Commodity Index surged to a record, led by rallies in natural gas, oil and silver. . .

Markets make opinions

"Is it time to bury gold?". . .

Raise a glass

By the numbers, Libbey Inc., of Toledo, Ohio, and old-line maker of glasses, plates, knives, forks and spoons, is sick unto death. It has been losing money. . .

Gas under trees

Last September, Grant's identified a potential beneficiary of the ill wind named Katrina. Our nominee was Deltic Timber Co. (DEL), of El Dorado, Ark. With its Little Rock real-estate development business and its hundreds of thousands of acres in Arkansas and Louisiana timberland, we reasoned, Deltic was in an ideal position to serve the unhoused New Orleans diaspora. . .

If not the dollar . . .

It's not so easy to protect against the risk of currency debasement in this supposedly financially integrated and sophisticated world. Go ahead, law-abiding American citizen, try to open a domestic bank account in a currency other than the U.S. dollar. . . .

No more Mr. Nice Guy

Ian McCulley writes: The days of a regulatory light touch regarding exotic mortgages are fading. As we noted in our piece on First Fed (Grant's, March 10), the various federal bank regulators are proposing new guidance on "nontraditional mortgage products." No hard-and-fast rules as to loan types or underwriting standards are on the table . . . .

April 7, 2006, Vol. 24, No. 07

Question time for Mr. Volcker

At the Grant's Spring Conference last week, Paul A. Volcker, former chairman of the Federal Reserve Board took a pair of questions from the audience and tossed one back at them. . . .

Gold’s problem child

In response to the question posed by Paul Volcker--What is the endgame of the dollar?-not a few of the Grant's attendees had an answer at the ready. "A really high gold price," they would have volunteered. . .

2% without the 20%

Picture yourself at the top of a giant mutual fund complex. You should be happy – and, for the most part, you are. But have contracted an entrepreneurial itch. You resign to scratch it. . .

Up with financial services

J. Christopher Flowers, who traded a partnership in Goldman Sachs for a spot on the 2004 Forbes 400, told the Grant's crowd the story of the acquisition of what is today Shinsei Bank – arguably the greatest transaction in the history of private equity. . .

One long, one short

Michael Katz, a hedged investor who scours the world of value and anti-value alike, presented the audience with something to buy and something to sell. . .

Tyranny of ‘style’

How much better it would be, reflected Kennedy Richardson, star small-cap equity manager at Fidelity Investments, if mediocre were not such a magnetic force in professional investing. . .

Hedge fund confidential

"I preface these remarks," said Paul J. Isaac, chief investment officer at Cadogan Mangement, "with my unrelated personal opinion that more money is 'lost' in hedge funds through excess caution and risk control than through ill-advised risks and fraud...

Not Standard & Poor’s

If the SEC-sanctioned bond rating services-Moody's, S&P, Fitch and Dominion Bond – feel constrained to adopt a measured and statesmanlike analytical voice, Sean J. Egan does not. . .

‘Value bubble’

Jeremy Mindich, co-founder of Scopia Capital, a long-short equity hedge fund that actually hedges, proposed to the attendees that the bears are losing their analytical edge. Though heavily shorted stocks underperformed the market from 1994 through 2000, Mindich related, they went up more than the S&P 500 from 2001 through 2005. . . .

Issue joined

Constant readers can recite the bearish case on California real estate in their sleep. At the St. Regis, Larry Goldstone, president of Thornburg Mortgage. . .

Lucky or smart?

After the luncheon service was cleared away, Nassim Nicholas Tale, author of "Fooled by Randomness," described an experiment in probability. "You have a 50% chance of either winning or losing, and in year one you have. . .

Reward trumps risk (for once)

In the vast mulch pile of the world bond market-which in the year to date, has returned 95 basis points than cash, according the J.P. Morgan Global Bond Index-colleague Ian McCulley has spotted a gemstone. . .

March 24, 2006, Vol. 24, No. 06

Global low-cost producer—of chickens

Not once in his talk before the Economic Club of New York on Monday evening did Chairman Bernanke extend the hand of fellowship to the embattled leaders of the chicken and cattle and hog industries, though a word of advice from the chairman of the Federal Reserve Board (who seems to know so much) would have been gratefully received.

Parsing the yield curve

"Although macroeconomic forecasting is fraught with hazards," said Ben S. Bernanke in his Monday speech. Plainly, something had to follow this pregnant, dependent clause. A funnier central banker than Bernanke might have chosen silence--90 seconds or so of deadpan at the rostrum, an invitation to the audience to reflect on just how very hazardous a subject macroeconomics can be--but the chairman plowed ahead. . .

Billions buy funds

Your editor is not going to live long enough to understand the scholastic intricacies of modern portfolio theory. Then, again, maybe nobody else is, either. Prompting this rumination is a planned investment in commodity futures by the California Public Employees' Retirement System.

Primer on counterparties

Imagine, in 2004, coming into the certain knowledge that, within two years, Ford and General Motors would be candidates for bankruptcy, AIG and Fannie Mae would be trying to clear their scandal-besmirched names (and straighten out their bollixed-up financials) and the Federal Reserve would very publicly be putting in place a set of contingency plans for the failure of J.P. Morgan Chase and/or the Bank of New York (Grant's, March 10). Knowing these astonishing facts, would you have been bullish or bearish on credit? Well, life is full of surprises. The resilience of our encumbered financial system is a source of unending amazement in this office. . . .

Bright light on ‘dark matter’

Ian McCulley writes: Tuesday before last, the Bureau of Economic Analysis revealed that the current account in 2005 hit a new all-time high of $804.9 billion. Buried inside this release was the important news that the surplus on investment income declined from $30.4 billion in 2004 to $1.6 billion in 2005.

March 10, 2006, Vol. 24, No. 05

Not too big to hit the wall

On the last day of February, a press release announced the founding of a bank without walls, employees, customers or coin-counting machines. This institutional skeleton is called NewBank, and it will lie dormant until something unthinkable happens. Actually, not unthinkable, because the Federal Reserve has already thought of it. . . .

Sell the FED

"I would expect a general decline [in house prices] of (#)% to (#)% throughout the country, some areas (#)%," warns the CEO of the nation's biggest residential mortgage maker, in the March 6 issue of Business Week. "And in areas where you have had heavy speculation, you could have (#)%." In few areas has speculation been heavier and hotter than California. . .

Message from Argentina

Interest rates are the lipstick on the pig of paper money, according to the Bank for International Settlements. Actually, the BIS--the central bankers' own Swiss bank--puts the matter slightly more clinically. It reports that 72% of the deposits placed by OPEC residents in the third quarter of 2005 were in U.S. dollars, up from a low of 61% two years ago. "[A] steady rise in U.S. rates from 1% in June 2004 to 4.5% has lured surplus Middle Eastern cash back," as the Financial Times notes. Now begins an update on the pig and the lipstick. . . .

House painters?

Average U.S. home prices jumped by 12.95% in the fourth quarter vs. the year-earlier period, reports the Office of Federal Housing Enterprise Oversight, a.k.a. OFHEO. In the fourth quarter, prices rose by 2.86% from the third quarter, or at an annualized rate of 11.4%. So said page one of a March 1 press release. However, the story is more nuanced. . .

Greenspan is short one book

How Alan Greenspan's rumored $8.5 million publisher's advance squares with the ideal of price stability may occupy the Federal Open Market Committee when it reconvenes March 27 to manipulate the federal funds rate. There's no telling. For all the transparency promised by Ben S. Bernanke, the interest-rate markets are back in the business of guessing whether the U.S. economy is "strong" or "weak" on the basis of the latest statistical sounding. . . .

February 24, 2006, Vol. 24, No. 04

‘The Fed is through,’ revisited

Grant's, in the prior issue, unequivocally stated that the funds rate would go no higher than (#)%. It was not so much as a forecast as a pronouncement. We might have said that the Fed "should be" through, or that it would be through if its new chairman were true to himself rather than to the expectations of his enemies, who mockingly call him "Helicopter Ben" just because of one slip of. . . .

For turmoil

Measures of interest-rate volatility are setting lows not seen since the prelude to the 1998 explosion of Long-Term Capital Management. Put less technically, the Treasury market is as still as a statue. If loitering were a crime under the securities laws, the government yield curve would be under arrest. . . .

Another dog’s tail

In corporate credit nowadays, the derivative might as well be the underlying. And the underlying might as well be the derivative. The defining fact of the corporate bond market in 2006 is that, by value, there are many more credit default swaps than. . . .

Deflation à la Eisenhower

"Of course, the chief of the Federal Reserve asserted, the board must be alert to the dangers of deflation as well as inflation 'and to counteract either with equal vigor.'" Ben S. Bernanke could have spoken those words. . . .

As the world tightens

Ian McCulley writes: When the European Central Bank finally raised its intervention rate last December after 30 months of inactivity, some took it as validations that the European economy was finally on the mend. Others . .

February 10, 2006, Vol. 24, No. 03

The Fed is through

Futures markets rushed to discount another 25 basis points of monetary tightening in the wake of the strong January employment report. Our view remains the same: 41/2%, the current federal funds rate, is as far as the Fed is going to turn the screws. . . .

Thanks, Brazil

"We have secured low teens contract-price increases for our North American business," Samuel C. Scott III, chief executive officer of Corn Products International, said on the fourth-quarter conference call. Not one listener audibly gasped, the analysts being out of practice at absorbing good news from that source (besides, the fourth-quarter earnings were a penny light). The price increase was the company's first meaningful bump up in 10 years. Here begins a dramatic story. . .

Chinese metals play

So rapid is China's growth that inattentive Americans are frequently surprised to discover that they are unable to identify the names of Chinese cities with populations greater than that of Los Angeles. And what about you, Mr. or Ms. Sophisticated Investor?

Mini-bar bonds

On February 3, the editor of Grant's addressed the clients and staff of Standard New York Securities Local Markets, a subsidiary of Standard Bank of South Africa, in Vail, Colo. Following is the text of his remarks, expanded to include a few things that occurred to him only after he finished:

The Fed is through, part two

The FOMC has lots of reasons besides the yield curve to confound the economic forecasting consensus. . .

January 27, 2006, Vol. 24, No. 02

Yes, diversify! No, never mind.

"We are bearish on the dollar," was the interpretation given by monetary sinologists to the deceptively bland New Year's resolution issued by the Chinese monetary bureaucracy ("to continue to broaden foreign exchange reserves' investment channels"). As that combustible thought raced through the currency markets, other Chinese monetary sources hastened to. . . .

Spec Home Depot

Softening house prices and weakening residential sales volumes are old hat by now. What's new is Home Depot's strategy to cope with them. We judge that these adaptive methods pose risks to the HD shareholders (as do the circumstances that forced the attempted adaptation). Non-HD shareholders will find in the story now unscrolling another case study in the aftermath of a house-price bubble. . . .

No worries, cheap insurance

"If you'd told me in 1999 [that] Russia would issue a bond of more than one year, I wouldn't have believed you," a Moscow portfolio manager, Alexander Krapivko, tells Bloomberg. Believe it, comrade capitalist. The Russian government is about to sell the equivalent of $1.1 billion in 30-year, ruble-denominated debt bearing a coupon of only 7%. The rate of Russian consumer price inflation in 2005 was 10.8%....

Easy does it

Ben S. Bernanke, imminent new Fed chairman, will err on the side of accommodation. He will inherit a funds rate and won't raise it (his first FOMC meeting is March 28). The Federal Reserve tightening cycle is over. . . .

January 13, 2006, Vol. 24, No. 01

Risk is dead—long live risk

"The big trade over the past year-and-a-half?" one hedge fund-guy recently remarked to another. And he completed his own thought: "Selling risk premia." Here's one for the capital-markets edition of "Ripley's Believe it or Not." Hedge funds are supposed to hedge. Yet, if our anonymous informant is even partially well-informed, not only are they not hedging, but they are also taking the other side of the trade. . .

Big up, big pharma!

People are living longer. This fact is the source of anguished ponderation in the investment world. Low interest rates bedevil the pension-fund managers who must somehow match long-dated (and lengthening) liabilities with unremunerative and short-duration assets. What they do, they wail?

Change of command

Almost before he had a chance to find the officers' dining room, the newly installed chairman of the Federal Reserve Board, Alan Greenspan, was cleaning up after the 1987 stock market crash. And shortly after his installation as chairman, Paul A. Volcker, was ordering an all-out assault on inflation. . .

To have and to hold

Brookfield Asset Management--does the name ring a bell? Attendees of the fall Grant's Conference heard speaker Adam Weiss sing the company's praises (Grant's, November 4). Now unfolding is a recapitulation and update. The preview to the update is that we, too, are bullish on BAM, the rally in its share price to $49-and-change from $42 notwithstanding. We anticipate rising earnings, a rising P/E multiple and a shrinking share count. Timing is--as usual with us--uncertain.

Cobalt with hair

On November 14, after its third-quarter earnings release and conference call, OM Group, New York Stock Exchange-listed maker of cobalt- and nickel-derived products, disclosed it was hiring its fourth finance chief in four years. The nearly biblical succession of tribulations that made this otherwise shocking news appear, in the OMG context, not very newsworthy at all, is succinctly given in a recent Moody's ratings action. . .

Yield curve, where is thy sting?

The yield curve is presaging a recession, economists keep saying, but we keep wondering: Why is this cluster of market prices any more prophetic about business activity than alternative clusters? The graph at the top of this page plots the yield curve (three months vs. 10 years) against the Bloomberg financial index. . .

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