*** Techs get hit...Nasdaq 100 falls 6%... but still
"cruising for a bruising"...
*** No inflation...but what does it mean? 3
possibilities...
*** Junk bonds...bad credit...the exasperating euro...
France's right-wing politics and its kiss my '&$$'
leader...
*** Earnings were back in the news yesterday. Applied
Materials told investors that chip sales to mobile
telephone makers are weakening. This, along with the Fed's
failure to move to a neutral stance, was all it took to put
stocks into a funk.
*** Applied Materials fell 14%. Broadcom dropped $25.
American Greetings was the biggest loser for the day - down
42%. Sun Microsystems lost 7%.
*** At the end of the day the Nasdaq was almost back down
to the 3,000 level - it settled off 133 points at 3,031.
The Nasdaq 100 lost almost 6%.
*** The Dow did better - it fell only 51 points.
*** 1218 stocks advanced; 1650 declined. 78 hit new highs;
103 dropped to new lows.
*** The BLS said U.S. consumer prices rose only 0.2% in the
latest period. This low figure could be taken in one of
three ways: 1) that it is another meaningless number from
the Bureau of Labored Statistics; 2) that New Era
technology really is lowering costs, thus offsetting
inflation or 3) that prices are falling because we are
entering a period of recession and deflation
*** The evidence is mixed, but #3 seems increasingly
likely. Bonds rose yesterday. And "Credit trends are
clearly deteriorating," said a Merrill Lynch bank analyst,
adding, "We think that is very deflationary."
*** The FDIC warned earlier this week that U.S. banks face
a rising risk of real estate loan defaults.
*** And just as investors rushed to buy shares in dot.coms,
tech and telecom stocks - banks rushed to lend them money.
The loans piled up like manure...and must age a little more
before they really begin to stink.
*** In Canada, where lending to telecoms became very
fashionable, loans to phone companies now equal 47% of bank
equity. And Merrill Lynch says its bridge loans to
struggling telecoms rose 300% in the 3rd quarter.
*** Tech and telecom bond funds have lost 14% of their
value since January, reports Morningstar. And junk bond
funds, generally, are being hit by defaults, averaging a
1.2% loss for each of the last 3 years. Paine Webber's High
Income fund is off 28% for the year.
*** Reaching for yield has turned out to be expensive. The
worst 5 performing bond funds had more than 80% of their
assets in bonds rated B or lower. In the top 5 funds, by
contrast, only 58% of bonds were B-rated or lower.
*** Meanwhile, natural gas rose 4% on Wednesday to a new
record. Supplies are about 10% below last year. Heating oil
supplies are more than 30% below a year ago.
*** And people still seem to be building homes. Lynn
Carpenter reports that she has done very well with her
builder, Centex: "It was under-priced, going for a P/E of
5.6 last spring," she writes. "But as the market has fallen
this year, that boring old construction company began to
look good by comparison; then people discovered it really
was good and picked up the buying even more. The price rose
accordingly. Centex is up 47% since we bought it in April.
It hasn't even reached full valuation yet; it's only up to
a P/E of 8 even with this big rise."
*** That seems to be a trend in what she terms the market's
secret sweet spot: "When the floor fell out of the market
in October," says Lynn, "mid-caps still held on to a 9%
gain - compared to a 10% loss for the S&P 500 and a 24%
loss on Nasdaq. You could say that 2000 has been the year
of the mid-caps." (for more picks see: The Market's Secret
Sweet Spot
http://www.dailyreckoning.com/body_healdine.cfm?id=764)
*** The euro fell to 85.17 yesterday. If ever there were a
point of consensus in the investment world, it seems to be
centered on the euro. "People may be bewildered by the
politics," said a currency analyst, "but they know exactly
what they think about the euro. They hate it."
*** The euro is so ugly to so many investors' eyes...
shouldn't buyers be rewarded for owning it? We will see,
dear reader, we will see.
*** Investors no longer care about dividends. But maybe
they should. Steve Leuthold figured - reported by Richard
Russell - that over the last 100 years dividends added more
than $29 million to an investor's return. If your great
grandfather had put $1,000 into stocks in 1900, the total
return without dividends would have been an average of 5.9%
per year - or $319,694. With average dividends over the
period, the total return rose to 10.8% each year, giving
you, are you ready for this, $29,471,614.
*** Einstein called it the 8th wonder of the world; he was
talking about compounding. Over a very long period,
compounding an extra 4.9% annually makes a very big
difference. But you can't compound zero. In 1978, 66% of
stocks paid dividends. Today, fewer than 20% do.
*** Leuthold also, this time via Barron's, sees tech,
"which still enjoys a 27% weighting, shrinking to as small
as a 17% weighting" in the S&P 500 within the next 18
months. Why? Leuthold: "The big cap tech stocks, like
Cisco, Sun and EMC are cruising for a bruising as fund
holders try to salvage something from the year..."
*** "If this were Nigeria or Kosovo, there would almost
certainly be accusations of impropriety," writes Marshall
Auerback about the US election, "investors would already be
rushing for the exits... so the question legitimately
arises as to whether, in such circumstances, a higher risk
premium ought to be factored into US dollar based assets."
(see: Should the US be accorded a higher risk premium?
http://www.dailyreckoning.com/body_headline.cfm?id=768)
*** Perhaps, the most honest and accurate picture of the
American economy, in the year 2000, can be had by looking
at the Port of Los Angeles. The month of October saw a new
peak in the number of containers handled by the stevedores
and forklift operators there. 251,000 containers came in -
mostly from the Far East, full of consumer items. 230,000
went out. But 136,000 of those leaving L.A. were empty.
Foreigners send us valuable goods. We return the containers
empty...and send them dollars.
*** Que pasa? Another milestone in the collapse of dot.coms
- the Hispanic site, quepasa.com, announced that it is
laying off 2/3rds of its workforce. The company went public
in June of '99...the stock shot up to $16. The CEO says the
company has "been achieving growth in its metrics" whatever
that means, but what counts is that it lost $7.9 million on
sales of less than half that much.
*** Elizabeth seems drawn to crusty, Old Money conservatism
the way some women are drawn to hats or Tupperware. We
dined last night with a group of right-wing politicians and
their wives, one of whom rides horses with Elizabeth in the
Bois de Boulogne.
*** But the right wing is at least as feathery in France as
in America. There are the monarchists of various stripes
(since there are rival claims to France's throne, if it had
one)...there are even a few of what they call "Liberals" -
people who prefer the persuasion of the market to the force
of politics. But the biggest group is probably the
Buchanan-style nationalists led by Jean-Marie Le Pen. Le
Pen's finest moment came several years ago when, annoyed by
reporters, he pulled down his pants on TV and told the
assembled journalists that they could kiss his derriere.
*** The host of the dinner, Jean Charles, was an
interesting man who had worked his way up from humble
beginnings. He was not 'old money' at all - but shared many
of the attitudes of the Catholic traditionalists. He had
recently been asked by the government to figure out what it
should do in response to the information revolution.
France's Minitel was the world leader in information
technology two decades ago. Now, the Minitel is a quaint
anachronism. Jean Charles' panel studied the issue and gave
its answer: nothing. "The government cannot do anything,"
he told us. "The centralized administration set up by
Colbert in the 17th century is just not suited to the new
technology. Something is going to give...and no one knows
what."
*** "Anyone who has survived his childhood," said Flannery
O'Connor, "has enough information about life to last him
the rest of his days." Yesterday marked the anniversary of
the debut of Marcel Proust's "Remembrance of Things Past."
At the age of 35, Proust confined himself to his apartment
in Paris and devoted himself to the 16 volumes of his
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You may recall where we left off yesterday - with the
realization that investors pay for the entertainment of
owning fashionable stocks. The inverse proposition - that
investors should be rewarded for owning unfashionable ones
- is the point of departure for today's letter.
If there is any justice in the market, investors who own
the most hip, fashionable and cool stocks should pay the
highest price. Quepaso.com is probably one such stock. So
is Dreamlife. In both cases, investors who bought the
stocks at their peaks of coolness will probably lose almost
all their money.
I can sense you are getting ahead of me, dear reader...
rushing me to pose the question: which are the stocks that
are not at their nadirs of coolness...stocks so unappealing
that you don't want to have anything to do with them...
stocks so un-fetching that you want your proxy statements
sent in plain brown wrappers?
If you wanted to find such a company where would you look?
Among the smokers...the polluters...the pornographers...
the companies doing the least cool thing, at the least cool
time, in the least cool way.
Barron's mentions one candidate - a company whose chairman
is such an out-of-the-box thinker he needs to invent his
own verbs. "We continue to sell nonstrategic assets and to
highgrade our reserve base." The company is Cabot Oil and
Gas.
Cabot, says Scott Black, Barron's Roundtable panelist, "is
ridiculously cheap." Since ridiculous is what we're looking
for, we will look further: Cabot is in the ridiculously old
fashioned business of drilling natural gas wells in such
ridiculously unfashionable areas as the Green River Basin
of Wyoming and the Cajun backwaters of Louisiana.
But Cabot was even more ridiculous before people began to
notice oil and gas in 1999. Then, it traded as low as $12.
Now, it's $20. But Black thinks the breakup value of the
company is $26 a share - conservatively valuing its oil and
gas holdings. "In other words," says Barron's, "you can buy
Cabot's assets for 75 cents on the dollar." Black thinks
the stock will go up 50% in a year or so.
Another ugly mutt you might want to adopt is International
Aluminum - mentioned in the same Barron's article. The
company earned $3.18 a share of profit in 1995. In fiscal
2000, it managed to cut its earnings down 29 cents a share.
IAL is not a growth company, in other words, it is a shrink
company. But the shares are selling for less than half of
their price in 1998 - about $15. And has turned down an
offer to sell all the shares for $18 a share.
IAL makes things such replacement windows, patio doors and
tub enclosures. Not very cool. No bandwidth plenty...no
cosmic dimension...no media stars among the shareholders.
Indeed, the leading shareholder is the 85-year-old
chairman, Cornelius Vanderstar, who still comes to work
every day. An investor might be inclined to take more than
a casual interest in Mr. Vanderstar's health - since it is
quite possible that the company could benefit from the
Carnahan Effect, should something happen to him. That is,
investors - like Missouri voters - might find Mr.
Vanderstar's stock more appealing once its owner is no
longer at the controls of the enterprise.
The stock is not attractive. But, our hypothesis is that
the market pays you to hold ugly stocks and charges you to
hold pretty ones. IAL pays well - an annual dividend of
$1.20 - about 8%. Getting 8% on your money - while waiting
for the stock price to shape up - is not a bad deal.
But there are degrees of ugliness, just as there are
degrees of pulchritude. We are familiar with beauty
pageants - and the staple of the financial press: 10 Best
Stocks for the New Millenium -- but what about the 10 worst
stocks? What about the real mirror-crackers?
As so often, the Grants team has done the screen tests -
and discovered some stocks that are at least worthy of
being County Fair Queens of unsightliness.
Armstrong Holdings, for example, has had its credit rating
reduced (on October 25), and its line of credit at the bank
was not renewed. Armstrong is one of a handful of companies
that make up a kind of very dirty dozen in what might be
properly termed the asbestos litigation defense business.
WR Grace, Federal Mogul, and Kaiser Aluminum are also
mentioned in the Grant's article. WR Grace, for example,
ended 1999 facing 105,670 asbestos cases, each one
representing, potentially, millions of dollars of extra
costs.
Similar businesses have already cracked under the strain -
Owens Corning went bankrupt on October 5, Celotex went
belly up in 1997; National Gypsum rolled over in 1990 and
Johns Mansville began the trend back in 1982 when it sought
the protection offered by the U.S. bankruptcy courts.
So, here we have bag-over-the-head scale hideousness - the
crooked nose of pollution, the warts and open sores of
lawyers... What could be better?
At Grace, says Grants, we have "a large, but probably not
devastating, legal liability. The stock trades like an
option - a very cheap option."
How cheap? "At less than $4 a share," Grant's figures, "the
specialty chemicals and materials company is valued at
about two times net income."
Kaiser Aluminum, meanwhile, is perhaps the Miss America of
Ugliness. Not only does it face the lawyers,
environmentalists, and bankers...it has also had to contend
with a protracted labor strike and an explosion at one of
its main plants in Gramercy, La.
Just as a man who courts an ugly woman must get a reward of
some sort, Mr. Market cannot expect investors to line up
for the hand of this particular daughter without a
significant dowry. Thus, investors who act quickly have an
opportunity to buy senior debentures from Kaiser priced to
yield 24%.
The shares might also be a good deal - they are certainly
not as attractive as Cisco.
Your correspondent, obeying the Law of Perverse Outcomes...
and searching for the ugliest investments in the world...
Bill Bonner
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