*** Light action on Wall Street...where will this rally go?
*** The dollar is going down...the dollar asset boom has
come to an end...
*** Is this a typical downturn? Greenspan is no miracle
worker...W R Grace at a P/E of 1... and more!
*** How long will the rally last? How far
will it go?
Probably not very long...and probably not very far.
*** Trading was light on the day after Christmas. The days
between Christmas and New Year's normally produce a good
move to the upside. But yesterday, the techs started out in
the wrong direction.
*** Broadcom, for example, was down about 12% by noon. Then,
a guest on CNBC mentioned it as one of his Top Picks, and
the shares went back to where the began the day. The Nasdaq
even managed a small gain for the day - 23 points. Still,
the Nasdaq is facing a 38% loss for the year - its worst
*** The Dow did better - up 56 points.
*** And in the humor category, TheStreet's Internet Index
fell another 3 points or so yesterday...bringing it down 72%
for the year.
*** The most significant market event yesterday was the
continued decline of the dollar. The euro rose over 93
*** All the things that went so right for the dollar a year
ago, seem to be going in the other direction now. A year
ago, a European investor might exchange his euros for
dollars and send the money to Wall Street. He might
reasonably expect a 17% capital gain on stocks - plus
another 10% from a rising dollar.
*** But now, what can he expect? A 20% loss in the average
leading mutual fund - as measured by Investors Business
Daily - and a falling dollar! So, what does he do? He sells
his U.S. dollar assets and converts the money back into
*** This causes stocks to fall on Wall Street...and the
dollar to fall too...which makes U.S. investments even less
attractive to foreign investors.
*** Foreign investors, who cares about them? Well, $682
billion of capital flowed into the U.S. in the first 9
months of this year - a record. It funded the trade deficit,
pushed up stocks and bonds, and levitated the dollar. Now,
the tide has turned. The inflow is turning to outflow.
*** "The last 10- to 15- year period, in which U.S. dollar-
denominated assets outperformed all others around the world
has come to an end," said Ray Dalio of Bridgewater
Associates, interviewed by TheStreet.com.
*** Dalio had a number of things to say that seemed
important, even prescient. The prevailing opinion is that
the world faces a typical slowdown which will be managed by
the Fed in the typical way. But, says Dalio, "we have a
situation here that is a whole different dynamic...it has a
life of its own. It is not as managed by the Fed as a
typical business cycle and so when we talk about a recession
this really won't be one of those typical recessions."
*** The typical way to manage a downswing is by lowering
interest rates. The idea is simple enough: the cost of money
(the interest rate) is supposed to be like the gas pedal on
an automobile...money is like fuel...the more readily
available it is, the faster the economy runs.
*** This quaint mechanical metaphor lodges in the mass mind
like a campaign slogan - simple, memorable and moronic. When
the economy turns sluggish, people imagine that Greenspan
and his fellow central bankers need only press harder on the
monetary pedal. And often, this appears to be the case.
*** But "25, 50, or 75 basis point cuts do not pull
economies out of recessions," says Dalio. The minimum rate
cut necessary, according to Dalio, is 290 points (2.9%). The
average recession since WWII took 550 basis points to fix.
But there was nothing average about the boom of the last 15
years...nothing average about stock market valuations...and
nothing average about the slowdown that lies ahead.
*** "There are 650 basis points between here and zero"
Ed Yardeni. But even that may not be enough. As I point out
with tedious regularity - the Japanese took their interest
rates down to zero - and still could not get their economy
*** Alan Greenspan, says Dalio, "is viewed as a miracle
worker...and he isn't. Events are likely to turn out worse
than the conventional wisdom..."
*** You may recall, also, the dominant idea of `90s
investing - that since price movements were random...and
since stocks always go up over the long run...the thing to
do was to buy and hold, regardless of price. Dalio's
comment: "History shows that investors who have bought
growth stocks without regard to the price they pay for
growth have done very poorly."
*** IBM rose sharply on Friday, after an analyst urged
investors to "back up the truck." But by Tuesday, rumors
were flying that the company would warn of softer sales and
earnings. So, it turned into a Big Blue day - with the
shares down 5%.
*** "Overstocked Retailers Must Slash Prices" proclaims an
Atlanta headline. Wal-Mart said that its sales too were
coming in "below plan." Investors took a 4% discount on WMT
*** Amazon, meanwhile, believes it will hit its $1 billion
sales target for the year. But only, as one analyst put it,
"by selling stuff below cost." Amazon is now down 85%
Jeff Bezos was named TIME's Man of the Year last January.
*** Anyone interested in an extremely ugly stock might want
to take a look at W R Grace. "GRA," reports a recent issue
of Grant's Interest Rate Observer, "was quoted at a P/E only
slightly greater than one." Even more shocking...
"multiplying Tuesday's closing price, 1 5/8ths, times the 65
million shares outstanding," continues Grants, "yielded a
market cap of about $100 million. Grace had year-end assets
of more than $2.5 billion."
*** Red Herring reports that 260 of the 350 IPOs of the year
2000 are in the red. IPOs from the nation's top 16
investment banks lost an average of 28% from their offer
price. If you'd bought them at the end of the first day of
trading, your loss would be 48%. Goldman Sachs' 47 IPOs, for
example, are down 16%... Forget buy and hold. The trick was
to buy at the offer price...and sell into the first day
trading hype. If you'd done that with all of Morgan
Stanley's 30 IPOs you would have mad a 93% profit. If you'd
held them until Dec. 20, you'd have lost 24%.
*** Insiders sold tech and dot.com shares when they hit
their peaks back in March. Now those shares are down 80% and
more. And guess what? The insiders are selling even more!
The Richmond Times Dispatch reports that insiders unloaded
shares in Vignette Corp. in March at $100. Recently,
insiders dumped even more shares - at prices as low as $15.
*** The New York Times reports that law firms are building
up their bankruptcy departments. "Demand is soaring" said
one lawyer. "A huge wave is coming," said the surfer
attorney, "and we want to make sure we catch that wave."
*** Natural gas is selling at its highest price in 10 years.
Oil gained 46 cents yesterday, following OPEC's announcement
that it would cut production by 500,000 barrels per day.
*** "Whether or not OPEC realizes it," writes John Myers
Outstanding Investments, "the biggest factor impacting oil
prices is not a conspiracy by Western governments but a much
more direct threat that cannot be blackmailed into
submission - a North American recession." (see: Gaddafi and
Chavez' Fatuous Bluff
*** Nothing much to report on the home front. I am stumbling
on roller blades, scooters, and remote controlled cars - or
getting run down by them. One of the few advantages of a
chateau is that there are long corridors and big rooms, in
which the kids race around as though they were in a skating
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Today's letter begins at the end of line of thought, the
beginning of which is littered with woe.
I refer to mushrooming evidence that things are not going
well in the financial world. The dollar is going down. And
when it goes down, it drags behind it, like climbers roped
together on Everest, all its fellow wayfarers: stocks,
bonds, the economy, pensions, jobs...as well as the
pretensions, conceits and fantasies of the New Era.
This Winter of Woe may herald a green and fulsome
spring...or it may be the beginning of many months, or even
years, of despair and depression. I don't know. But I am
beginning to explore the dark, nether reaches of human
economic history... "Could this be the beginning of
something really big?", I woke up asking myself the other
day. Could it be big the way WWI was big - marking the end
of one way of life and the beginning of the new one? Could
it be result of mass communications and collective
thinking... of big words and big empty thoughts?
Maria reminded of the big words that got the blame for WWI -
militarization, nationalization, mechanization. Could
another trio of Latinate abstractions - securitization,
globalization, and derivatization - be the source of another
sort of calamity...a financial one?
There is something about Latinate words in English - they
are linguistic lies that hide more than they reveal. But
that discussion is for another day...
Today's very modest goal is to make that discussion an
amusing and entertaining one. The world financial system may
experience a catastrophic meltdown, but your appreciation of
it will depend on your perspective. The collapse of the
dot.coms, for example, is comedy to us. But it is tragic to
those who hold the stock.
Likewise, we want to be entertained, rather than chagrined,
by the next stage of this drama. To that end, I direct your
attention to a study of the gold price done by Paul van
Eden, quoted here many months ago. Van Eden noted that the
price of gold varies inversely with the foreign exchange
value of the dollar. As the dollar goes down on global
markets, the price of gold goes up. Gold is the dollar's
Gold is an enigma. It is money...it is a store of value...
and it is a useful commodity - all at the same time. When
people have confidence in paper money - they don't need gold
as money, and it trades like a commodity. But when they
begin to lose confidence in paper money and paper assets,
gold's monetary features become attractive.
"Gold is the only asset," says Doug Casey, "that is not
someone else's liability." Recently, it was disclosed that
Paul Allen, Bill Gate's fellow multi-billionaire at
Microsoft had placed a "collar" on $3.5 billion worth of
shares. In effect, Allen had a put option that protected him
on the downside. Unlike the fantasy "Greenspan Put," the
Allen Put was real. But it meant that someone on the other
side of the trade was taking a big loss. The speculator's
"asset" (the right to profit as MSFT shares rose in price)
turned into a huge liability. As the credit bubble deflates,
many of these speculators will go broke. Genius will fail.
The speculators will go broke and be unable to make good on
their commitments. Thus, not only the speculator's asset
will turn into a liability...but Paul Allen's asset could be
at risk too.
There are, of course, people who are long gold...and those
who are short the metal. But unhedged gold has no
creditors...no bills to pay...no `burn rate'...no balance of
payments to worry about.
It is its eternal lifelessness that makes gold a valuable
asset. It may go nowhere...but neither does it disappear.
This quality is especially valuable when other forms of
money run into the trouble and wealth disappears. Already,
more than $3 trillion has disappeared from U.S. capital
markets. Yet, except for a roll of coins I seem to have
misplaced, not a single ounce of gold has been lost.
But how to invest in gold? How about a gold mining company
that has no debt, a half billion in cash and which you can
buy today for only about a half as much as it would have
cost you a year ago? At a recent price - about C$15 - the
company had cash and securities to cover nearly 50% of the
The company is Franco-Nevada, recently the subject of a
review in Grant's Interest Rate Observer. "The most
prominent feature of the Franco-Nevada income statement,"
report the Grants team, "other than its 45% net profit
margin, is that its single largest expense is income taxes."
A handy comparison chart provided by the interest rate
observers shows that Franco-Nevada can hold its own in any
company. Comparing the figures for the 9 years ending
calendar 1999 (or fiscal 2000), Franco, at 27.4%, has
greater annualized revenue growth per share than Intel and
only slightly less than Microsoft. Its net income per share
growth rate is three times Coca-Cola and 50% more than
Fannie Mae. And its growth in book value per share is
roughly the same as Fannie Mae, more than Intel and more
than twice Coca Cola's.
Yet, the share prices are hardly comparable. Recently, you
could have bought five shares of Franco-Nevada for every
share of Microsoft or Intel.
"What exactly does this enterprise do?" asks Grants.
cashes royalty checks. It owns a portfolio of more than 60
royalties in six countries (some 87% of its revenues are
derived from U.S. mines). Precious metals constitute almost
90% of the royalty-producing resource base, of which gold
amounts to 75% to 80%. Platinum and palladium fill out the
balance of the metals resources. Other assets include five
million acres of undeveloped land...This land the company
makes available for exploration and development by contract
"Even one meaningful success," Grants quotes Steven Bregman
of Contrarian Research, "could be enormously additive to the
Franco-Nevada future cash flow and current net asset value."
Cashing royalty checks must be a good business. "In the
years 1991-2000," Grants continues, "its average after-tax
profit margin was no less than 57.1%." And, Franco, "if it
were ever blessed with a gold bull market, would earn
considerably more than the already stunning returns it has
managed to generate in a gold bear market."
No one can predict the future - a point I make often and
demonstrate frequently. But if this is one of those times
when people lose confidence in paper assets - holding
Franco-Nevada shares should make the whole spectacle more
Your unreconstructed gold bug
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Last modified: April 01, 2001
Published By Tulips and Bears