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Happy and Merry 2014
To the readers, and--especially--potential readers, of Grant’s: This anthology of recent articles, our annual Grant’s Holiday e-issue, is for you. Please pass it along, with our compliments, to any and all prospective members of the greater Grant’s family. Not yet a subscriber? Make yourself the gift of a year’s worth of Grant’s and get two issues added on to your subscription. That’s a $200 value. We resume publication with the issue dated Jan. 9 (don’t miss it!). Sincerely yours, James Grant
Hugs for the hedged investor
In the year to date, the S&P 500 has risen by 11%, the average hedge fund hardly at all. For many long years, to hedge has been to lose. To all things come their season.
Baiting a hook
Panic, or the lack of it, is the subject under review. “Speculate like you mean it” is the message.
Remit No. 3
Monetary reaction to the whiplash markets of the ides of October is one point of focus. The cartoonishly oversupplied New York money market makes a second. Is the Fed willing or able to tighten?
Quest and ye shall find
There ought to be deflation, these pages have long contended. As the cost of making things falls, so should the price of buying them. Which brings us to a certain Big Board-listed case study in the progress of the species.
Preferred income
Mortgage REITs deliver income but not always serenity. The common shares pay big dividends until the yield curve becomes disarranged or mortgage prepayments accelerate. Then—poof! There are safer yield vehicles.
Opportunity in confusion
Herewith a survey of risk and opportunity in the junk bond market, post the energy bust. This is the time for security analysis.
Rootin’ for Putin
As to credit risk, these bonds share the triple A credit rating of their issuer. As to currency risk, they bear the mark of Cain. If a widow or orphan is reading, would he or she kindly now refrain?
Trap of a different kind
Try as they might, all the central banks can’t devalue every currency. At least, they can’t successfully devalue—all at the same time—against each other. But they seem to be testing the possibilities.
Read the footnotes
Vanguard Group Inc., which beats the mutual fund industry by not trying to beat the stock market, attracted more money in the first 10 months of 2014 than it did in any calendar year of its storied 39-year history. Costs, returns and fads are the topics under discussion.
Unaccountably cheap
If efficient-market doctrine were correct, the share price of a certain alternative asset manager would likewise, necessarily, be correct. As we doubt the doctrine, so do we doubt the price. It is too low.
Pick to not click
Mr. Stock Market is fully attuned to the problems of this major oil producer. Mr. Bond Market needs to focus.
Monetary action agenda
With respect to the radicalization of monetary policy, investors en masse resemble the sleepy frog in the warming saucepan. They don’t jump out while the jumping’s good.
Race to debase
A strong exchange rate is the Old Maid of global trade. If neither the dollar nor the euro nor the yen nor the franc nor the renminbi will bear a high exchange rate, which monetary medium will consent to excel?
Rise of the machines
On Oct. 15, the steady-eddy markets in senior securities underwent a 24 hour personality transplant. Was this a flight to safety, or a stampede from it?
Case for inactivism
Rare is the eminence who willingly addresses an unwelcoming audience. Martin Lipton holds forth at the Oct. 21 Grant's conference on the menace of activist "wolf packs," members of which had front row seats.
Red sunset
China has twice as much debt as a year's GDP. That debt is growing twice as fast as GDP. Charlene Chu probes the consequences of those interesting facts.
Three thousand millionaires
Capitalism, the rise of Home Depot, margin debt, political investing and common stocks are the subjects on Ken Langone's mind.
Man with a plan
Plan 'A' for the serious investor is to deal with the financial world as it is. Plan 'B' is--or ought to be--a monetary alternative. So says Simon Mikhailovich.
Just stay home
In lending and borrowing--and tractor maintenance, too--the local market's best, according to Bruce Greenwald.
Banking on Africa
Bob Diamond identifies the problem: undercapitalized, overly complex, meagerly profitable, too-big-to-fail European Banks. Now for the solution.
SNBN is the Ticker, in Zurich
The Swiss National Bank (it's a stock, incidentally) finds itself in the crosshairs of an angry public.
Case for an un-taper, Part II
America and the world are joined at the economic hip (a joint evidently in need of replacement). So the Bank of Yellen will do its duty for the world as it sees that duty. We write to refresh and reiterate the forecast that the Federal Reserve is stuck with the radical policies it has foisted on all the earthlings.
Yield times four
Savers need something besides consolation and a Social Security check. What they need is income—safe, dependable and (to the extent possible) lavish. Pending the return of the 6% Treasury bill yield, next best alternatives are the subject under discussion.
Yield to hope
The weight of debt in the world is one topic at hand. The puny yields attached to that debt is a second. Finally, just what does it take for a sovereign to be denied access to the bond markets?
The Rule of 72—a deflationary update.
People weaned on rising prices are struggling with stable ones.
What they wish for
Mario Draghi worries lest the euro go from hard to very hard. As it is, the single currency buys too much, holds its value too faithfully, the ECB president says in so many words. His preferred North Star? The consensus of speculative opinion concerning the remote future.
Yield on sale
Income is what many need nowadays—while balancing credit and interest rate risk, of course. Herewith, some ideas on how to procure it.
Bonds of debt
A certain Latin American energy company’s debts are ubiquitous. Are bondholders being compensated for the risks they bear? A story of credit, interest rates, politics--and liquidity too.
The dollar’s strength saps Asia’s
Over the past three months, the U.S. Dollar index has rallied by 7.7%. Export powerhouses like South Korea and Japan, you would think, should be booming. They aren’t.
The balance sheet that ate Switzerland
Like a celebrity in flight from the paparazzi, the Swiss Confederation demands protection from its pesky admirers.
‘Timing artist,’ RIP
Paul Macrae Montgomery, proprietor of the Universal Economics technical service, died on Sept. 6 at the age of 72.
Sell advisory
Physicians get sick, lawyers run afoul of the law and financiers make ill-advised financial choices. Herewith a skeptical look at the recent doings of some of the leading lights of Wall Street.
Heavy seas
Toward Russia, Ukraine, and the West, these pages have taken the approach, “this too shall pass.” It hasn’t yet, Mr. Market continues to remind us.
Wages of complexity
Central banks are printing rules almost as fast as they’re printing money. With apologies to Hyman Minsky, this is a monetary moment.
A cloud no bigger than a man’s hand.
Outside of the go-go, upsizing world of tech investing—Twitter and Alibaba make handy examples—cracks in corporate financing are starting to appear.
So long then, Cristina Fernandez de Kirchner
Inflation. price controls, capital controls and expropriation, do, ultimately, bear fruit in the shape of collapsed asset values. The Argentine opportunity is the subject at hand.
Narcolepsy blues
Sky-high margins, ultra-low tax rates and blisteringly fast sales growth are the historical facts surrounding a certain pharmaceuticals business. Falling margins, a rising tax rate and decelerating sales growth prove to be the prospective salient features.
Three amigos
That we love ‘em and leave ‘em—our long ideas, that is—is a longstanding criticism of the management of these pages. Hence the following “where are they now?” analyses of a trio of Grant’s names.
Cutting out the middle man
New Chinese credit flows in May and June jumped by 51%, year-over-year. The People’s Bank twice cut reserve requirements for smaller banks in April and June. Yet the world’s second-largest economy sputters.
Vacation delectation 2014
To the readers, and potential readers, of Grant’s:
This anthology of recent articles, our summertime e-issue, is for you. Please pass it along, with our compliments, to any and all prospective members of the greater Grant’s family.
Not yet a subscriber? Make yourself the gift of a year’s worth of Grant’s and get two issues added on to your subscription. That’s a $200 value.
We resume regular publication with the issue dated Sept. 5 (don’t miss it!).
Sincerely yours,
James Grant
Leave your worries in the inbox
To herd income-starved savers into junk bonds and equities was no trouble at all. To manage a comprehensive exit from those overvalued positions will prove a tougher undertaking.
Yield to steepness
Obscure, scarce, illiquid, generally callable, potentially volatile and not quite self-explanatory, these oddball securities may be. We judge that their merits trump even their flaws.
For the outcasts
Concerning a worrying, far-away geopolitical conflict, Grant’s takes the position, “This, too, will pass.” A bullish survey of pariah stocks.
Soil erosion
Farmland values climbed with rising corn prices and tumbling interest rates. Now the cycle turns. We write for urbanites, suburbanites, exurbanites and agriculturalists alike.
Macro-prudential Swiss cheese
Low rates and easy money are making waves across the Atlantic. An endless supply of a certain “hard” currency.
A short history of 2%
Having money and needing income, yield-deprived investors will invest in the opportunities that the promoters put in front of them. First comes the laughter, then the tears.
Meet Valeant Jr.
With its zippy share price and fashion-forward business model, Valeant Pharmaceuticals International Inc. has become a kind of drug industry idol. One of Valeant’s many votaries is the subject at hand.
Good dog, Snoopy
One particular passage in the text of last week’s Humphrey-Hawkins testimony had the owners of life insurance stocks blowing kisses at Janet Yellen. The bulls wish that she had said not one word more.
Fasten your seatbelts
This long-successful distributor of nuts and bolts faces intensifying competition and diminishing profitability. Is multiple compression next?
Stay-cations for Wall Street
Nearly four million pounds of paper money do create a sense of inflationary anticipation. But where’s the thing itself?
Sell to whom?
A revered bond mutual fund plays fast and loose with the gospel of liquidity. Advice to its investors: If it ever comes down to a run, run early.
Just you wait
Many lush bull-market months have skipped by since our upbeat analysis on a certain leveraged real estate company. The subsequent derisory rise in the share fairly demands a reappraisal.
Fun starts now
An influx of talent and capital into the single-family rental market has dampened the rate of rise in house rents to well below that of apartment rents. A temporary disappointment?
Left hand, right hand
Addressing a friendly audience at the International Monetary Fund last week, Janet Yellen pledged to tackle emergent financial risks with rules, not interest rates. “Good luck with that,” we say.
‘Doesn’t have to be a reason’
Millions of people can’t predict baseball, and billions can’t predict soccer. As for interest rates, commodity prices, exchange rates, GDP growth, the weather, and equities, the cream of Wall Street can’t seem to predict them, either. On the difficulties—and opportunities—in the top-down branch of the speculative arts called global macro.
FedEx’s little friend
A small REIT with a big dividend is the subject under discussion—that and the boom in e-commerce, the widening of the Panama Canal and the gift of scrawny interest rates.
Lucky or smart?
Almost exactly one year ago, this publication pitched an investment in warrants to buy bank shares coming out of the crisis-era TARP program. The warrants have levitated, though not for every reason adduced in our analysis.
Neighborhood’s changing
A defining characteristic of today’s boom is the legacy of yesterday’s bust—not just the memory, but the consequences. Herewith a survey of the central-bank-engorged commercial real estate market.
Bye-bye, Jay Carney
This publication wishes to thank the now former press secretary for his public service—and his market timing.
Ugly contest
Scandal-ridden New Jersey, where the Christie administration is under investigation for possible defrauding of bondholders, is just one issuer of dubious credit quality sporting a miniature interest rate.
Springtime for price discovery
Uber and Adam Smith stand for price discovery, the central bankers for price administration. The latter may be futile, but it’s not without consequences—or opportunities.
Book’s closed
The road to riches is poorly marked, long and winding. A bullish analysis of a complex financial business that travels some of the most remote stretches of that storied thoroughfare.
A million for Pierre
A survey of some of the most unloved and under-owned stocks in the world. Can you guess which legacy monetary medium they dig from the earth?
Heads I win
Single-B rated Cyprus, recently returned from the dead, is ready to meet the clamoring demand for new, low-yielding debt. Thoughts on better ways to snag a euro yield.
Upside breakout on heavy volume
Narenda Modi, who won the world’s largest election not so much in a landslide as in an earthquake, has already achieved the seemingly impossible. The meaning of this signal event for the readers of Grant’s is the subject at hand.
Going down
On May 21, a leading Chinese daily crystallized the mainland’s real estate situation: “The rich have sold, the banks are scared, the government won’t come to the rescue and developers are frantic.” On turning this predicament to profit.
All ahead full
A half-decade ago, few spared a thought for liquefied petroleum gas. Today, the United States is a growing net exporter of that shale-derived substance. One company, in particular, stands to benefit.
No way to win
In the "high"-yield market of 2014, Wall Street and the Federal Reserve have combined to create securities that present their holders with the near certainty of loss, should the price level rise or fall.
Reality check
One might suppose that corporate accounting conventions furnish less scope for make-believe than national income accounting protocols do. The truth is otherwise.
From Russia with value
You can have cheap stocks or good news, but you can’t have both at once. The profitable application of the Joe Rosenberg dictum is the subject at hand.
Couldn’t be better
A certain capital-equipment lessor has not one complaint about America’s weak-as-water business expansion—wherein lies the trouble.
Siren song of 6%
“Laws are like sausages. It is better not to see them being made.” In 2014—with all due respect to Count Otto von Bismarck—yields are like sausages.
Heavy lifting
The evident hack attack on the online wallet of the crypto-currency Dogecoin will cause no grave monetary loss; it’s the principle of the thing that’s telling.
Not enough houses
News that Americans bought 6.3% fewer houses in the first quarter than they did a year earlier fits right in with the prevailing new bearish script. What the housing bears might have overlooked.
None dare call it price control
Because the federal funds rate has fallen and can't get up, the Fed is engineering a new master money-market interest rate. Herewith an inspection tour of the "fixed-rate, full-allotment overnight repurchase facility." Dr. Feelgood is alive and well in Washington, D.C.
Alex Porter, RIP
The founding partner of Amici Capital died at his farm in Davidson, N.C. on Good Friday.
Sacrificial creditors
That $46 billion bid for Allergan Inc. by Valeant Pharmaceuticals is widely decried as "hostile." Bondholders would likely agree. A word on golf-course-gate.
Hurricane warnings
Tax-exempt investors have their own special metabolism. They seem not to react to bad news until someone presents them with an old newspaper and commands them to sit down and read it. In a certain Caribbean paradise, ominous news piles up.
Garbage time
Not so long ago, Americans were drowning in refuse. It seemed there was no place left to put it. That was then.
Model risk
The Federal Reserve and the Bank of Japan each meet on Wednesday. Different though the two institutions might be, they breathe the same erroneous theoretical ether.
The art of inflation
How many Old Masters for a seven-foot, $25 million Popeye? How many Esteban Murillos for a 21st century Oscar? Shedding bright new light on the cycles of taste and value in art and central banking alike.
Awful to bad
"My No.1 rule of investing," Arjun Divecha told the Grant's Conference-comers, "is you make more money when things go from truly awful to merely bad than when they go from good to great. And I'm going to show you some examples of truly awful." He was as good as his word.
Pretty darn rational
Some contend that markets are generally efficient. Others--perhaps better acquainted with the nut they call Mr. Market--deny it. Cliff Asness, money-maker and scholar, settled the argument.
Too few buildings
The editor of Grant's gently interrogated Jonathan Gray, global head of real estate at the Blackstone Group, on house prices, Indian real estate, the Blackstone Mortgage Trust, office buildings and other timely topics.
Treasury melt-up?
Surveying the bond market, Jeffrey Gundlach, CEO of DoubleLine, declared that Treasurys are historically cheap. That is, compared to Treasurys, nearly every other kind of debt security is historically rich. Wait till the bears have to cover.
Bubble's in biotech
Is 2,000 times earnings the right valuation for companies that, nine times out of 10, strike out? Joe Lawler weighed the evidence.
Cataclysm tomorrow
The junk-bond market suffered a disastrous 2009, all right, allowed Marty Fridson. But, he cheerfully added, just wait till 2016.
Land of refuges
As China decelerates and the Federal Reserve ruminates, what's an investor to do? Invest in Africa, proposed Francis Daniels.
When, oh when?
Story stocks are seasonal plantings; they flower in bull markets. Never-never stocks, explained Andy Redleaf, founder and CEO of Whitebox Advisors, are perennials; they bear fruit in all seasons--for the insiders.
What they wish for
The consumer price index rose by 1.5% in March, measured year-over-year, the Bureau of Labor Statistics announced on Tuesday. Shoulders must have sagged in the Eccles Building.
Killing them with kindness
Janet Yellen has already secured her legacy as the most empathetic chairman in the history of the Federal Reserve. Her remarkable speech in Chicago on Monday can be read as nothing less than an indictment of the institution of price discovery.
Yield to worst
"The food is terrible," to quote the famously ambivalent restaurant review--"and the portions are so small." Much the same can be said of today's junk-bond market. The yields are terrible--and there's not enough new supply to satisfy the clamoring demand. On the art of selling what you don't even own.
Somewhat efficient
On March 25, Facebook Inc. agreed to buy Oculus VR, a private, development-stage maker of virtual-reality goggles, for $400 million in cash and $1.6 billion in stock. Oculus had a very good day--as did one homonymic other.
Banking on India
On average, the Indian stock market is neither cheap nor dear. The heart of the investment narrative is rather revealed in the investment peaks and valleys--one fertile and ill-favored valley in particular.
Borrowing way too well
Expressed as a percentage of world output, borrowings of governments the world over jumped to 79% in 2013 up from 62% in 2007, according to the IMF. And what did the sovereigns get for their money?
To India and back in just six days
The oft-told Indian growth story would be a gift to the world if it finally did unfold--say, under a new leader who redirected the Indian bureaucracy away from its customary work of thwarting Indian enterprise. Herewith, a financial travelogue.
Pirates of the Caribbean
King Neptune himself would quail at the difficulties of bringing the deposits of this royalty trust into production--unless, perhaps, he were a qualified investor looking for a high-risk, high-reward option on higher energy prices.
Middle Kingdom report
The big news from China is that even the good news leaves something to be desired. Debt is the old problem, but there's a new twist.
Slippery slope
While exploding reserves at American banks have not yet led to surging money growth, we are still early in an unprecedented monetary experiment.
All together now, buy stock
We humans seem genetically incapable of buying low and selling high. Especially are we prone to do the opposite when gathered together in corporate boardrooms. Share repurchases--their use and, especially, abuse--is the subject at hand.
Drug dealer
A financialized age has at last produced a financialized pharmaceutical company. Herewith, a long look at an enterprise that does its compound-hunting not in the laboratory but in the stock market.
Heads in the cloud
Lenders and borrowers long ago put risk aversion in the rearview mirror. New evidence suggests that the credit cycle is entering its manic phase. Heed the wisdom of an "old, beat-up commercial finance guy."
Under the Boardwalk
Shares of a certain master limited partnership was sawed in half last month. It was a mortification--indeed, a double mortification. Now for an analytical reassessment.
Thieves break through and steal
The spate of digital robberies may lead the bitcoin world where many a libertarian wishes it wouldn't go. On the competition between the alternative money you can't see, on the one hand, and the one you can, on the other.
Up and at 'em, Mr. Bear
Picking up where the Bernanke market ended, the Yellen market leaves a vapor trail of joy and doubt. As to the latter, we have boatloads.
Lucky strike
Scavenging for yields presents one kind of risk, smoking cigarettes another. Combine the two, and you get tobacco bonds. Bad news and good news have lately vied for the market's attention.
Anchors aweigh!
Christine Lagarde doesn't seem to want prices to fall, Raghuram Rajan doesn't seem to want prices to rise, and Charles Evans doesn't seem to want prices to remain the same. What the poor nations can teach about the art of inflation.
Terra frisky
Relative to other asset classes, "land prices, I would say, suggest a greater degree of overvaluation," Janet Yellen testified last week. Taking our cue from the chair of the Federal Reserve Board, we investigate the ground on which houses grow.
Warsaw to Mt. Gox
When early this month the Polish government seized $51 billion of private pension assets and claimed them for the state, the out-of-pocket investors asked, in so many words, "whose money is it anyway?" Money gone missing is the subject at hand.
Quantitative wheezing
The Bank of Japan increased the monetary base by 51.9% year-over-year in January, but GDP only grew by an annualized 1% between the third and fourth quarters. The results from QE seem wanting.
The case for an un-taper
In so many words, the presidents of the Richmond, Dallas and San Francisco Federal Reserve banks vow to continue to taper, come what may on Wall Street or in that portion of the world situated outside of the 50 states. We have our doubts.
Deal us out
If QE made investors complacent, tapering may make them anxious. If so, the short-selling trade may yet have its day in the sun. Herewith, a bearish analysis of a company that, under the spell of monetary ease and a rising stock market, has gotten more hall passes than a high school quarterback.
Gov. Alejandro Christie
One public pension crisis is merely a ticking time bomb, while the other has already exploded. Which presents the better opportunity?
Unfasten it
"I made the mistake of selling it once before…," a major shareholder of a certain industrial supply distributor wrote to his investors last spring. "The memory of that sale is still painful." If the following analysis is on the beam, it's the memory of not having sold that will soon trouble the company's ardent fans.
Farmland boom tapers
Corn prices have fallen by 30% since April. Farmland prices, too, are softening. What continues to make new highs are the expectations of the starry-eyed sellers.
Channeling Arthur Burns
The Fed plucked dollars from the digital ether to expand its balance sheet at a 30.7% annualized rate over the last three months. Yet, over the same three months, growth in broad money grew at just a 2.6% annualized rate. Where is the fruit of QE?
So close to the sun
What kind of inflation does the Fed wish to raise up? Each kind: The stock-market variety to foster the confidence that leads to a faster pace of consumption and the checkout-counter sort to protect against a return to the economic environment of "The Grapes of Wrath." Herewith a look at one of the central bank's warmest friends and worst enemies, all in the same ticker.
Paycheck to paycheck
Our pick not to click is an outlier in many respects. Its growth is supersonic, its sponsorship is first class, its margins are otherworldly--and Amazon has so far failed to lay a glove on it. A skeptical analysis of a stock that only seems to want to go up.
Heretofore unimagined
Bank footings in the People's Republic represent a third of world GDP, yet China's economic output amounts to just 12.2% of world GDP. Which will serve to introduce the story of a company that ought to be better than it is.
From outer space
"Two years ago, it was a career risk to hold peripheral debt," The Wall Street Journal quoted a man from UBS Wealth Management as saying the other day. "Now it's a risk not to hold it." On the consequences, macro and micro, of the rout of the credit bears.
Your gold is 'in the mail'
Despite the Fed's swollen balance sheet, Federal Reserve remittances to the U.S. Treasury last year fell by 12.1% to $77.7 billion. Count the Bank of Bernanke front and center among victims of repressed interest rates. Leveraged bond investment isn't the Fed's only revenue source.
One last gasp for Treasurys?
As we read the new year consensus of investment sentiment, people love stocks, hate bonds and feel sorry for gold. Perhaps the trader's maxim applies: "If it's obvious, it's obviously wrong." If so, it may behoove us, aged and grizzled bond bears, to imagine a contrary scenario.
Not Great Northern
Over just two trading days, the share price of a certain eccentric security plunged by 60%. Sometimes Mr. Market just doesn't seem to pay attention.
Collision course
On the authority of the retiring chairman of the Federal Reserve Board, things are looking up in America. If he's right, woe betide the high-flying shares of a certain replacement-parts vendor. Then again, now that we've analyzed the situation, woe betide them anyway.
Paradise under review
Puerto Rican financial officials responded last week to rating agency concerns about "constrained market access" by announcing plans to issue public debt by the end of February. Herewith a new look at the obligations of the tropical commonwealth that knows not the polar vortex.
Nature's own bitcoin
They won't be overproducing bitcoin if the shadowy progenitor of the crypto-currency is as good as his word. Supply is fixed at 21 million units while 11.5 million units circulate. The supply of what might be considered the legacy form of bitcoin is the subject at hand.
Rocks roll in China
On Dec. 31, the People's Republic released its audit of local government finances to reveal that the obligations of these busy borrowers have been soaring at a 23% annualized rate.