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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 17 NOVEMBER 2000 

 

Today:  Ugly Stocks

*** 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 
oeuvre.


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UGLY STOCKS


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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