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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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WATERFORD, IRELAND
THURSDAY, 18 OCTOBER 2001 |
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Today:
Timber
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*** "We Believe!"...tech stocks at bargain basement
prices!
*** Where was the "visible hand"?...Oil market heating
up...time to sell financials...
*** "Dracula bites" a model's bum...and more!
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"The United States historically has had a perfect
record when it comes to rebounding from the most
difficult times," writes Peter Lynch in a double-page
spread in Barrons. "In the past 50 years, we've had 9
recessions and we've had 9 recoveries...If you believe
in the strength of the American resolve, hard work and
innovation, then take a long-term view and believe in
our economic system. I certainly believe."
"Rate cuts, tax relief and fiscal stimulus will
aid the rebound in consumer spending and corporate
investment," writes market strategist Joseph V.
Battipaglia.
"The catastrophe could turn out to be the catalyst
for an economic and market recovery," adds my old friend
Robert Carlson.
Barrons, eager to give readers a way to take
advantage of this great opportunity, gives readers a
"shopping list" of "solid stocks...marked down 75% and
more..."
On the list, we find Sun Microsystems, down 84%,
and now available at just 88 times earnings. There is
also EMC, down 87%, at the bargain price of 74 times
earnings. And Yahoo!...now priced at only 113 times
earnings...after the market knocked off 95% of its
value.
Are these great bargains, or what? And, as we all
know, corporate earnings are going to bounce back in
2002, right?
Well, maybe not.
"It seems inevitable that for a long spell to
come, we'll be a nation looking over its shoulder,"
writes Alan Abelson. "To illustrate the potential
economic impact of a more apprehensive consumer, let's
suppose he or she chooses to save a little more, spend a
little less, not an unreasonable disposition in the
circumstances."
Abelson then does the same math we have done in
the Daily Reckoning, but uses a rounder number: "By one
reliable reckoning, [not ours], every 1% increase in the
savings rate is equivalent to $100 billion. So if
savings rise by only 1%...all the fiscal stimulus that
Washington is proposing, and then some, would be
canceled out."
What if baby boomers get in a panic about having
money for retirement...and savings go back to early 1980
levels? I would still believe in our economic
system...but I wouldn't want to own Yahoo!.
Eric, what's the news from Wall Street?
*****
Eric Fry in New York:
- Another day, another anthrax sighting. Or two. Or
thirty. This ubiquitous bacteria is proving to not be
bullish - except perhaps for the oil market. (More on
that in a moment).
- The stock market jumped higher from the opening bell,
thanks to some not-horrible earnings reports from IBM
and Intel. But early morning glee gave way to anthrax-
induced gloom, when the news hit the wires that the
deadly spores had turned up in Governor George Pataki's
midtown Manhattan office.
- Trying to explain the inexplicable rallies in the face
of continuing crisis, Options Underground's Adam Lass
writes of "Two things that I can see...One is the
inverse of the panic selling we saw at the top: 'Panic
buying' driven by the fear that one would miss out on a
wartime rally. While there are certainly gains to be
made...early entry into these rallies is frequently
punished by the bottom."
- The second is what Lass calls the "visible" hand, or
"someone buying like mad in the last 30 minutes of
trading...regardless of news or even sanity. Moves like
this were the hallmark of the Clinton era 'Plunge
Protection Team.'"
(http://www.indxtrader.com/your_wealth)
- Even if there is such a beast in place with the Bush
administration, he was nowhere to be seen yesterday. The
Nasdaq, which had gained almost 2% to start the day,
tumbled 4.4% by the closing bell. The Dow fell 151
points to 9,233.
- The bio-terrorism wave sweeping over Manhattan is
making this thriving metropolis feel more and more like
a vast petri dish. And yet, anthrax or no, I had lunch
yesterday at the Oyster Bar in Grand Central Station. My
Pemaquid oysters from Maine were delicious - and, I'm
delighted to report, contained neither marine bio-toxins
nor bio-terrorist toxins.
- But fear and anger are in the air, if not on the menu.
And that is likely to have a major effect on world oil
prices. In the Middle East temperatures are rising. In
Washington, even Democrats are sounding hawkish. There's
an old saying that a conservative is a liberal who's
been mugged. How true this is turning out to be: Al
Gore's former sidekick, Democratic Senator Joseph
Lieberman, has taken the lead in the U.S. Senate in
calling for the ouster of Saddam Hussein.
- Not that Lieberman is alone. Each new anthrax attack
unifies "both sides of the aisle" in Congress in their
approach to terrorism: Bomb the bastards.
- Iraq's Hussein is clearly the next target of choice -
and that may mean that anthrax is bullish for the price
of oil. "If [U.S.] intelligence agencies find an Iraqi
link to the anthrax attacks, that would obviously
increase the chances of a major military offensive
against Saddam Hussein," says ISI's political analyst,
Tom Gallagher. "Iraq exports more than 2 million barrels
of oil a day, which could be directly disrupted. In
addition, our coalition partners in the Middle East,
including Saudi Arabia, could be expected to strenuously
object to an attack on Iraq and might be less
cooperative on keeping oil prices lower."
- Our man in the resource sector, Outstanding
Investments editor John Myers, has been cautioning for
weeks of the simmering instability in the global oil
market.
Just days before the World Trade Center attack, Myers
wrote, "Even as you read this letter, the clock is
ticking down on Middle East peace. Soon a bomb could
erupt that will blow the lid off of energy prices and
put a premium on North American oil and gas supplies...
North America's vulnerability is that conventional oil
supplies in United States and Canada have fallen
dramatically over the past two decades. That means there
is a critical reliance on Persian Gulf oil."
(see: Wolf At The Back Door)
- For now, complacency rules in the oil market.
According to Tuesday's American Petroleum Institute
inventory report, the country is swimming in crude oil.
But if our national cross hairs train on Iraq and Saddam
Hussein, we could expect to see a little less crude oil
in inventory and much higher prices.
- Suddenly inflation doesn't seem so far-fetched a
possibility.
- For those investors who anticipate resurgent
inflation, or even the possibility of it, but still
can't bring themselves to buy gold - you know who you
are - Jim Grant proposes an alternative: The Treasury's
inflation-protected securities (TIPS). A recent issue of
Grant's Interest Rate Observer noted that TIPS were
priced to reflect an implicit CPI inflation rate of 1.6%
a year over the next 10 years, even though, since 1970,
the CPI has never averaged less than 1.9% over even a
three-year time-frame. "TIPS [are] a bargain."
(http://www.grantspub.com)
- The flip-side of buying TIPS is to sell financial
service stocks. That's because inflation leads to the
kind of rapidly rising interest rates that shrink or
eliminate the profit margins on lending. "There's a
developing opportunity in short selling and put-option
buying on U.S. financial and banking stocks," DR Blue
editor Dan Denning writes this week.
- Mr. Denning might be on to something; mortgage lender
Washington Mutual dropped 11% yesterday. When Grant's
Investor analyst Robert Tracy examined this financial
stock last month, he concluded, "Wall Street looks at
Washington Mutual and sees a safe haven. We see
worsening asset quality with insufficient reserves and
riskier loans with paltry returns. Take a long look at
WM's stellar results - they won't last."
*****
Et Voil�...Mr. Bonner:
*** Back in Dublin...I'm just passing through, on my way
to visit the International Living worldwide headquarters
in Waterford Ireland.
(http://www.internationalliving.com)
*** The anthrax hysteria has reached Ireland...a man
called police after receiving a letter with white
powder...
*** But by page 3 of the Irish Times, the paper has
found its stride. It reports that a woman is suing her
employer, the prison system, after accusing her boss of
"breaking wind and belching" in her presence. Later in
the paper, a model has also sought justice in the
courts, after falling upon a board with two nails
sticking up. She claims that she is left with what she
describes as "Dracula bite marks on my bum."
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TIMBER
by Bill Bonner
A report in the Figaro yesterday brought good news.
Europe is enjoying a baby boom, with France leading the
way. Birth rates had fallen so low that it looked as
though Europeans might be exterminating themselves. But
the world wasn't going to end without a bang, it
appears. Now birth rates are rising sharply. Europe is
saved.
Another article in Figaro included a photo of a forest
being burnt off so that the land could be used for
farming. This, along with the baby boom, served to focus
our attention on a subject we promised to address many
weeks ago: trees.
Jeremy Grantham has surveyed the investment landscape of
the last 100 years. He noticed that every bubble -
wherever, whenever and in whatever it occurred - had
sooner or later reverted back to trend. He also found
that one investment - trees - had provided fairly
consistent healthy yields throughout booms and busts,
bulls and bears, inflation and deflation.
What about war? The interview pre-dated the terrorists'
attack and so no mention was made of it. But we presume
that, even during wartime, trees - like children - still
grow.
We promised to look into the matter. In the following
letter, we keep our promise.
Our research took us back to an issue of Grant's
Interest Rate Observer from December 1999, a month in
which the Grant's team had evidently decided to shrug
the burden of watching interest rates and go back to
nature.
There, we discovered that throughout the last century
"trees beat stocks," as Grant's put it. A chart shows
real growth in timber prices rising at twice the rate of
the real rise in S&P prices, 12.8% compared to 6.4%.
There, too, we found Jeremy Grantham, discussing what
must be a favorite subject: "Since 1910," said Grantham,
citing U.S. Forest Service data, "real timber prices
have compounded at 3% per annum." Compare this to the
real price per share of the S&P 500, which compounded at
2.2%, he suggested, or real earnings per share of the
S&P 500, which compounded at 1.4%. And though timber
pays no interest, it does produce yield: on average 6%.
But here at the Daily Reckoning, we are suspicious of
very long periods of above-market performance. They are
often followed, we've noticed, by very long periods of
below-market performance.
"The risk in timber," Grantham explained, anticipating
by two years our objection, "is that it stops raining,
or the sun stops shining. [Or] if we have a meteorite
hit and we get several years of dust." In addition,
there are man-made disasters, such as bear markets.
"There were three this century for American
stockholders," Grantham continued. "In each of them,
however, timber prices were as stout as oak."
But we Daily Reckoning readers are skeptical. Nature
does not give something away without taking something
back.
"What's the catch?" we ask ourselves. "The catch is that
it takes patience to grow a tree," we answer our own
question, "and the expectations are modest, after all."
Grant's article was written at a time when the world had
little patience and very immodest expectations.
Investors greatly preferred the fast growing weeds of
the "new economy" to the great oaks of yesteryear. Two
timber companies were featured in the article. Evergreen
Forests was then selling at a 38% discount to net asset
value, with a market cap of just $32 million.
Sino-Forest, another timber company with large holdings
in China, was compared to a dot.com with interests in
the same part of the world:
"China.com is valued at 191 times annualized nine-month
revenues; Sino-Forest at 0.88 trailing 12-mo. revenues;
China.com at no multiple to nonexistent earnings, Sino-
Forest at a multiple of 4.2 to fast-growing earnings.
Sino-Forest has a website, too."
What happened to China.com might have been predicted. It
is now trading at a little over $2 - down from a split
adjusted peak of $166 (which occurred, ironically, a
month after the Grant's article was published). What's
more, China.com has a big N/A in the P/E column.
What about the timber companies?
I turned to my old friend, Rick Rule, who discloses that
he is a major shareholder in Evergreen, for an update:
"The timber markets are headed broadly lower," Rick
writes, "with Evergreen being no exception. Globally,
pulp and paper demand is soft and getting softer, while
dimensional lumber (used in frame construction) demand
is plummeting."
Rick tells me that "Wild Harvest" supply - timber from
non-cultivated sources - enjoys an implicit subsidy in
many areas. It is often owned by governments that
distribute cutting rights below fair market value as
economic development incentives...or for other less
popular reasons.
"My belief is that the next two years will be lousy for
log pricing," says Rick, "except in the good old U.S.A.
where quasi-protectionist legislation shields U.S.
producers from formidable Canadian competition, NAFTA
not withstanding. In New Zealand (Evergreen's domicile)
the near-term woes are compounded by the impacts of 35
years of direct and indirect government subsidy to the
silvicultural industry. Timber plantations that are
currently maturing have substantially more timber
available than the milling and processing industries
have either markets or physical processing capacity for.
The situation is so extreme that the standing inventory
- unharvested trees - is referred to as 'the wall of
wood.'"
So why play in such a decimated sector?
"Because two years is not such a long time," suggests
Mr. Rule, "and because the assets are of extraordinary
quality and CHEAP." The finest timber play on the globe
for most investors, he says, is right there in the good
old USA...
"Plum Creek Lumber: a REIT owning about 7,000,000 acres
of fee timberland, making it the second largest fee
landowner in the country. The company's enterprise value
(market cap + net debt) values the land at roughly $800
per acre...very cheap. The company sells at a steep 23
times trailing earnings and 12 times trailing cash flow
to yield 8.4%.
"Longer term the company's superb timber assets will pay
for a lifetime. If panic selling brings the price of
this company down to 22 this will be a legacy buy."
Of the Grant's recommendation from '99, Rick has this to
say: "Evergreen is a special case. They control some of
the finest cultivated timber in New Zealand. The short
term outlook for New Zealand timber is lousy, but 5
years out it is superb..."
Evergreen currently sells for about a third of what Rick
estimates its replacement value to be and half of his
estimates for the discounted value of its future after
tax cash flows.
"Timber land is the only 'developed' real estate asset I
know that truly grows over it's productive life," says
Rick, "but this game is not appropriate for the
impatient speculator."
Bill Bonner, biding his time...patiently.
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and 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 up—not 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 ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
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.
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