Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 30 JULY 2001
*** Slowdown "all in consumers' heads"...but Big Tech
endures a "brutal quarter"...
*** Poor John Teeples - successful employee of two of
the New Economy's most profiled companies...
*** Lance wins the Tour de France, again - 'it's really
quite annoying'...an old economy car-maker paying 11.3%
on accelerating revenues...and more!
|*** Bonjour, Addison here...Bill and la famille have |
headed south to Nicaragua for a couple of weeks of much
deserved vacation... Eric, too, is enjoying a little
R&R, so today it's just us chickens...
*** "Slowdown is all in consumers' heads," a Journal of
Commerce headline tells its readers...
*** I wonder if Tom Ahrens, the Canadian soybean farmer
we mentioned in Friday's Daily Reckoning is delusional.
You'll recall Mr. Ahrens retirement fund, formerly
brimming with $210,000 in Nortel, has shrunk to
$40,000... and he now owes his broker $30,000.
*** Or what about "Poor John Teeples?"
*** According to a report in the New York Times, "Mr.
Teeples, age 45, worked for six years as a software
salesman with Microsoft. He saved his money. He bought
stock options from a pair of brokers who persuaded him
to put his money - all of it - with them. He had amassed
$700,000 in his retirement account by putting in 80-hour
weeks. He was with the right company at the right time:
*** "Today, his retirement funds are down to $400. Not
$400,000 - $400.
*** "Of the 23 stocks that the brokers bought for
Teeples and his wife," says the Times story:
"12 were companies that Morgan Stanley had brought
public or provided with other investment-banking
services. Ten were rated buys by Morgan Stanley
analysts when they were bought. Three of these rose
slightly, but seven fell, generating $85,000 in losses.
By the time Teeples sold all his shares in those seven,
they had lost, on average, half their value.
"Teeples and his wife have taken out a second mortgage
on their home to pay their bills, and he went back to
work in November at a wireless-data company in Baltimore
that he would not identify."
*** Notes Dan Denning: "Mr. Teeples, at age 45, is
unlikely ever to recover his former wealth. He was with
Microsoft when it paid to be, and he was in Cisco
options when it didn't. Most people don't get one
opportunity like this in a lifetime, let alone two."
*** Microsoft, Cisco, Nortel...Sun Microsystems, Lucent,
Oracle... On average, second quarter profits at US
computer-related companies dropped 66%, a Bloomberg.com
report declares. Intel reports profits fell 94%.
JDSUniphase's $50 billion year-end loss made US economic
*** "It was a brutal quarter," a research analyst told
Bloomberg. "The third quarter is going to be even worse,
and fourth-quarter estimates are still too optimistic."
*** Neither consumers with the desire to "max out" their
Visa cards - nor businesses wishing to take the Fed up
on its inducements to 'easy money' - can keep pace with
overcapacity in the industry.
*** Layoffs by tech companies totaled 31,000 last week
alone. Alas, workers dreams of exploiting the
capitalists' may well have to be postponed until the
next boom hits Wall Street. When will that be? Well...
at the Daily Reckoning we do not presume to be able to
predict the future, but we're willing to hazard a guess:
not this year. Not even next.
*** The S&P 500 is experiencing its worst slowdown since
1958. "The rat-a-tat-tat of newspaper headlines
announcing 'plunges,' 'drops' and 'declines' in second-
quarter results adds up to this rather startling fact,"
reports grantsinvestor.com. "Not since the days of
poodle skirts and the Big Bopper have corporate
operating earnings declined to such a degree."
(See: A Nasty Case of Deja Vu
*** Well at least we can all be thankful that this
slowdown is "all in consumers' heads."
*** The indexes were a mixed bag on Friday. The Dow
dropped down 38 to close the week at 10,416. The S&P 500
index gained a couple to 1205; the Nasdaq added 6 to
2029. Year to date... the Dow has lost 3.5%; the S&P is
off nearly 9% and the Nasdaq is down 18%... the Nasdaq
100 - home to the largest techs - is off 28%.
*** But here's some good news... at least for some.
Lance Armstrong, the American cyclist who overcame
testicular cancer in 1995, won the Tour de France for
the third straight time here in Paris yesterday.
*** "Pandemonium," says Becky Kramer, the newest
addition to the DR intern squad. Becky was on the Champs
Elysees when the race finished. "One guy was parading
around with such an enormous American flag, I thought he
was going to get beat up."
*** "This American guy comes over here and wins three
Tour de France's in a row," said one of our French
colleagues this morning, "it's really quite annoying."
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by Jay Akasie
With its subcompact New Beetle turning other small cars
into bland econoboxes - and its shiny Bentley,
Lamborghini and Bugatti's redefining the superluxury
space - it's no wonder Volkswagen AG is on a roll.
Especially when you consider that between those eye-
catching opposites lies an impressive middle fleet of
retro Audi TT roadsters, chiseled Passat sedans and even
hot-rod Skodas that make Czech housewives dream of
racing at Le Mans.
But even better than a new set of wheels, we think, are
VW's deeply discounted and often overlooked preferred
Unlike most U.S. preferreds, the VW brand offers an
upside potential nearly identical to the ordinary shares
but are cheaper and pay a richer dividend. It sounds to
us a bit like buying a Bentley for the price of a Bug.
Indeed, with Volkswagen's margins increasing and its
revenues impressively on the rise - even as questions
arise about the health of the global economy - the
preferreds currently offer low-priced participation in
one of the world's best-positioned automakers.
So just what are these preferreds?
Let's take a look. They pay higher dividends than the
ordinary shares, and they take precedence over the
ordinaries in the payment of dividends. The preferred
shareholder also has a senior claim on company assets
over the holder of ordinary shares in the unlikely case
of a Volkswagen liquidation.
What's not to like? The preferred shares do not have
voting rights. Nor do these 'preferreds' carry a fixed
dividend. The VW board adjusts the dividends on the
preferred just as it does with the ordinary shares.
But an analysis of the past 10 years shows roughly
identical year-to-year percentage changes, implying that
the preferred and ordinary dividends are equally
influenced by annual earnings. What's more, over the
same 10-year period, the payout on the preferreds has,
on average, exceeded that on the ordinaries by about
The 'preferreds' currently trade at 33.4 euros per share
with a dividend of 5.4%, vs. 51.5 euros and a 3.3%
dividend for the ordinaries. They have a price-to-
earnings ratio of 5.7, while the P/E for the ordinaries
is 8.8. If you don't care about voting rights - and with
this deal, why should you? - the preferred stock is
definitely the better bargain.
What's more, the 'preferreds' are gaining more notice,
thanks to a brouhaha over the so-called Volkswagen Law
in the German state of Lower Saxony - home to VW's
The law prohibits any single shareholder from
controlling more than 20% of VW's, or any other native
company's, voting power. It's a handy little law for
Lower Saxony, which, with about 19% of the vote, is
itself VW's largest shareholder. And it can work to your
The preferred stock issue aside, VW is an attractive
investment on its own terms. Its balance sheet has
steadily improved, thanks to Ferdinand Piech,
Volkswagen's patrician chairman and chief executive, who
has emphasized cost-cutting.
At the same time, overall sales are growing at a steady
pace despite the uncertainty in global markets. Trailing
12-month revenue totaled 87.6 billion euros as of March
31, and the five-year compounded annual growth rate
averaged 13.6% at year-end 2000.
Moreover, the company had its strongest U.S. sales month
in 28 years this June. Last year, its overall world
market share rose to 12.2%, and its North American
market share rose nearly two points, to 6%. Volkswagen's
collection of car brands - from Seat in Spain to Skoda
in Eastern Europe - surpassed the five million-delivery
mark for the first time last year. The company has a
commanding presence across Europe, Asia and South
Volkswagen runs with an efficiency that is the envy of
the automobile world. The entire company's offerings,
with the exception of niche products like the Bentley
and the Lamborghini, are built off of just four
Sharing parts and platforms has helped keep costs down,
and Volkswagen's margins continue to rise. Gross margins
rose to 12.64% in 2000 from 11.34% in 1999, while EBIT
margins accelerated to 3.8% from 2.5%. Hendrik Emrich,
an auto analyst at Berenberg Bank in Germany, estimates
the company's platform strategy will save about one
billion euros next year, or about 1.4% of the cost of
sales in 2000.
All the more reason why individual shareholders
shouldn't give a hoot whether or not their shares have
"Volkswagen's one of the few truly global automakers; it
sells just about everywhere. And it has an incredibly
strong brand portfolio," observes David Moorcroft, an
auto analyst with Commerzbank. "Buying the preferreds is
a cheap way of getting into an automaker that has, for
starters, 20% of the Western European auto market."
Our sentiments exactly.
For The Daily Reckoning
Jay Akasie is a staff writer for Grantsinvestor.com. As
a reader of The Daily Reckoning you are cordially
invited to join GrantsInvestor.com, "a new destination
for thoughtful investors," for a 30-day free-trial.
Follow this link: http://www.grantsinvestor.com/agora.html.
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand sends it off by e-mail before most Americans
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get upnot only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early 90sopening offices in Florida, London, Paris, Ireland, and
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.