The Daily Reckoning - Komrade Kapitalism (Steve Sjuggerud über Yukos)

verfasst von Firmian, 21.07.2004, 18:43

-->Komrade Kapitalism

The Daily Reckoning

Baltimore, Maryland

Tuesday, July 20, 2004

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*** Investment into U.S.A. Inc. declines: market share lost...

*** Old stones and gold coins; protect yourself from stupidity!

*** The road to Damascus, the road from the Kremlin...and more!

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Stocks...Iraq...

Two of America's most prominent obsessions have almost disappeared from
conversation. In their place is the obsession du jour - real estate. More
below...

But first, Eric Fry with the latest news:

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Eric Fry, still in Cooperstown, NY...

- Another day of ‘nothing’ on Wall Street, which wouldn’t be such a bad
thing if nothing weren’t so expensive. But the stock market’s quirky
version of nothing always seems to wind up with a minus sign in front of
it. Yesterday, the Dow lost 46 points to 10,094, while the Nasdaq managed
a slim half-point gain to 1,884. Gold added 90 cents to $406.70 an ounce.


- As your Manhattan-based editor is still ensconced in Cooperstown, the
Mecca of baseball, he is more in sync with America’s majestic home-grown
sport than he is with the national pastime: speculation. Yesterday, the
speculators had very little to show for their efforts, as most stocks
either lost ground or registered very slight gains.

- Making a buck in the stock market has become a very tough task of late.
So tough in fact, that it hardly seems worth the effort. For several days
now, many of Wall Street’s most prominent bulls have been calling for a
“technical bounce” from “oversold conditions.” Instead, the market has
been sinking like a Mastodon in a tar pit...doomed by its very girth.

- Perhaps this financial pachyderm will struggle free from its sticky
situation, but the struggle will not be easy. As we never tire of pointing
out, oil is expensive, interest rates are rising and terrorism is
pandemic. So maybe our beloved stock market will continue sinking for a
while. Short-term, we’d agree that the stock market feels a bit oversold
and is likely to rally a bit. But that’s hardly a reason to “back up the
truck” and buy stocks...

- “Stones and gold; that’s all I ever invest in,” a friend confessed the
other day. “I buy stone structures in Europe and I stash away a few gold
coins here and there...no matter what happens, the stones will still be
there.”

- “Can’t argue with that,” your editor replied. “But that’s not much of an
investment strategy...how do you know that you have the proper balance of
stones and gold to fulfill your long-term financial objectives? Has your
financial planner ever created a pie chart showing your optimal asset
allocations to stones and gold?”

- “No,” he chuckled. “No one’s ever done that. I admit; I don’t have much
of a financial plan. But the stock market has always seemed kind of crazy
to me. And besides, I just like stones and gold.”

- “Very well...you own more stones than I could ever afford. So you must
be doing something right.”

- “I think the secret is that these assets are difficult to sell,” he
said. “It’s not easy, for example, to be a panic-seller of an ancient
French farmhouse. And if it’s almost impossible to sell something when
everyone else is also trying to sell the same thing, you are protected
from your own stupidity...you are protected against selling something at
the worst possible time. That’s why I like real estate more than stocks.”

- Perhaps stones and gold explain the market’s lethargy. Maybe investors
are withdrawing their cash from the stock market and shifting it into
other asset classes, like real estate or gold or long-term bonds. Whatever
the reason, the American stock market seems to be losing market share to
competing investments.

- Indeed, the entire U.S. economy seems to be losing market share as an
investment destination. “China overtook the United States as a recipient
of foreign direct investment in 2003,” reports China’s People’s Daily, “as
companies broadened their strategies in emerging markets. The Organization
for Economic Cooperation and Development said the United States was the
worst hit by falling inflows of foreign direct investment to its 30
industrialized member countries.

- “Investment into the United States declined to $40 billion last year
from $72 billion in 2002 and $167 million in 2001,” the People’s Daily
continues, “while foreign direct investment in China dipped only slightly
to $53 billion from $55 billion.”

- $40 billion of direct foreign investment into the United States is
something more than nothing, but not by much. A great big economy like
ours needs great big investments to maintain its health. It needs
something more than nothing...

- Beware of nothing.

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Bill Bonner, back in Baltimore...where the strangers continue their
rediscovery of a very strange land...

*** Stones and coins!? We confess. Eric has just described a conversation
he had with us just a couple of days ago. And yes, ancient stones and
modern gold coins do figure prominently in our investment portfolio - they
are practically all of it.

We've reflected on the apparent nuttiness of this and assured ourselves
that it is less nutty than it seems.

“Why would we buy stocks,” we asked ourselves.

“In order to buy the things we want,” came the answer.

“What things do we want,” we continued the questioning.

“Old stones and gold coins!”

Some people have a weakness for old, stone houses. Others cannot resist a
pretty face. Still others are prey to good liqueur or bad whiskey.

But put a pretty girl in front of a stone château, with a glass of
Armagnac in one hand and a Krugerrand in the other, and we practically
fall apart. We drop down to our knees in delicious agony and reach for our
wallet.

We offer neither excuses nor apologies for this behavior. Nor do we
recommend it to others.

Still, it has its advantages.

***"I don't believe in stocks," said a friend at lunch yesterday."I
mean, I own stocks. But not many. And I think the average guy really is
better off in real estate."

"Yes, I know there's a real estate bubble in many areas," he went on."But
when a guy buys a stock - unless he's Warren Buffett, he has no way of
knowing what the business really is, or whether it makes sense or not.
That's why you get these huge swings in the stock market. One year a stock
may trade for $50...the next, it goes for $100. And it's the same stock,
of the same company, doing the same business it was the year before. But
the average stock buyer doesn't do any analysis...he just buys stocks he
hears about or reads about.

"Real estate is different. He can see it. And he can do the math. If he
buys an apartment building, for example, he knows it will cost him so much
to operate...and he knows how much rent he'll get. In other words, he
really does understand the underlying business...just like Warren Buffett
understands the businesses he gets into. That doesn't mean he won't make a
mistake, but it means he's much less likely to make a spectacularly stupid
mistake like buying one of those tech stocks that had no earnings."

*** Real estate investors may be doing the math, but the math itself may
be misleading. If your property is rising between 10% and 40% per year, it
makes sense to borrow at 6% to buy it. But that doesn't mean that interest
rates will stay at 6%, or that property will continue to rise. Even at 6%
there are costs to holding real estate. Upkeep, taxes, insurance. Many
real estate investors seem to be losing money every month - while betting
that their property will go up in price.

So far, they've been right. On both coasts, property prices are soaring.
Even here in Baltimore, where real estate, in real terms, sank for most of
the last 75 years, there is a boom underway.

***"Hallelujah..."

"You mean, because prices are finally rising in Baltimore...?" we asked
another friend while walking down Charles Street.

"No, ‘hallelujah’ because they finally cleared the riff-raff out of the
old Stafford Hotel. It was Section 8 housing...you know, designed for poor
people. But it ended up being a place where all kinds of drug dealers and
riff-raff hung out. I talked to a policeman who works around here...he
said that 80% of the crime in the area came from that single building...

"But now the Peabody Conservatory - the music school - bought it. They're
going to put their students in it. And you know, they're all Korean or
something."

"What did they do with the people who lived there?"

"I don't know, but they should have taken them out and shot them."

*** What's going on in Iraq? Hardly anyone mentions it.

"I read your commentary," began a conversation with a Dear Reader the
other day."And it is kind of funny. I mean, this is a war that is
costing, what $100 billion...and nearly 1,000 American lives. But people
don't really talk about it. They don't really know anything about it, and
don't know what to say.

"The war was probably pretty stupid from the very beginning. But most
people trust their leaders...and they don't know anything about al Qaeda
or Iraq. When 9/11 came, they just wanted the government to do something.
So, the government did something. Everybody was more or less in favor of
it. Even Hillary [Clinton] and Kerry voted for it.

"It kinda makes sense that most people...the people you refer to as the
lumpen...would want to go and kick somebody's butt. America's supposed to
be the biggest military power on earth. It just didn't make sense that we
couldn't even protect ourselves from a group of guys with box-cutters.

"Of course, that's the thing about a Republic. You're supposed to elect
people that are smart, sober and calm. And these guys are supposed to sit
around in solemn debate at times like this. They're supposed to carefully
weigh the merits of various arguments and decide what is best for the
country. They're not supposed to be swept along by mob sentiment. They
might do something dumb.

"But now you've got CNN and the Internet...and everybody gets whipped up
at the same time...and the politicians just go along with whatever is
getting high numbers in the polls. That's not the way it is supposed to
work, but that's what happens...and it's just what - who do you keep
referring to - de Toqueville...warned about. Or maybe it was George
Washington. I think you had the quote in the Daily Reckoning...'I leave
you a Republic...if you can keep it.'

"Well, it turns out that we couldn't keep a Republic any better than Rome
could. Now, we have a circus in Washington and a clown in the White House.
And I agree with you...Kerry wouldn't be any better. In fact, he might be
worse.

"You had a good line in the Daily Reckoning the other day...what was
it...oh...that America will be great as long as she is good. I think that
was from de Tocqueville too. But like ancient Rome, it looks to me that we
stopped being ‘good’ a long time ago. Good people don't go bombing other
people just because they think they may be up to something. And they don't
let other people pay their bills for them either - but that's another
issue.

"But getting back to my point...I think most people still think that the
war against Iraq was a pretty good thing. It got Saddam out of there. And
we didn't know what threat he posed...but at least we found out...and now
he poses no threat at all.

"The scary thing is that almost no one was against the war for the right
reason...and that's still true today. People argued that it wouldn't work.
But almost no one said it was wrong to go kill people. If the war had gone
well - almost everyone would be happy with it. That's what I mean about
America not being good. Everyone wants it to be great...and no one seems
to care if it’s good or not. Maybe it was always that way...I don't know.
You reach a certain size and a certain power...and maybe you can't help
but throw your weight around. I think you've been saying something like
that in the Daily Reckoning. Anyway...it's only because it didn't go well
that people are now against it.

Heck, I guess it's better that it didn't go well. If it had gone well,
we'd be in Damascus by now."

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The Daily Reckoning PRESENTS: The fundamentals are excellent, everyone
hates it and the trend has turned up...this speculation is giving off all
the right signals in Dr. Steve Sjuggerud’s opinion...we suggest you take
note!

Komrade Kapitalism
by Dr. Steve Sjuggerud


"All the airports in the country are closed. Fogged in again."

A private plane to hustle around Argentina two weeks ago seemed like a
good idea...but what good is a private plane when every airport is closed
for hundreds of miles?

"Let's go ahead and go," the pilot said."I called some people up in
Eldorado. They say it's sunny." He must have caught a glance I gave him,
wondering why we'd fly when the airport was closed. So then he added...

"You do things by the law here until you can't get any further. And then
you don't."

We took off from Posadas (a large modern deserted airport - there wasn’t a
soul around) and landed at Eldorado, a dinky deserted airport...no sign of
anyone here either."If anyone asks, we didn't land here," the pilot said
as we got off the plane. But who was going to ask?

The pilot was right. There was no fog in Eldorado. And there wasn't a
single person at Eldorado airport. For all I knew, the guy in charge at
Eldorado wanted to sleep in, and fog was the best excuse. With nobody else
there, who would know?

This was standard operating procedure in Argentina, and when you know what
the Argentine people have been through, you can see where it comes from -
the government.

The government failed its people. If the government won't follow the laws
that it makes, and won't keep its promises, and will confiscate most of
the citizen's wealth, why should the citizens follow the letter of the law
to a tee? Heck, the fact that they follow the laws at all, after what
they've been through, is amazing...

The government failed the people of Argentina, culminating in a massive
economic crisis that bottomed in early 2002. The stock market fell more
than 90% in U.S. dollar terms from peak to trough in this time. The
banking system collapsed, shutting down the banks for 60 days.
Effectively, three quarters of the people's savings were confiscated. On
the streets, survival became more important than obeying the government,
which saw five Presidents in three weeks.

Then a funny thing happened...things just started to get less bad.
Argentina reached a point where things couldn't get worse. Stocks became
extremely cheap. By late 2001, the price-to-earnings ratio of the entire
market was 5 (compare that to the P/E of the Nasdaq today of 62). Now the
government has become just a little less ridiculous. And as things have
gotten less bad, the stock market has risen by 292% in dollar terms (from
the 2002 lows to today).

I tell this story because it relates to another interesting investment
opportunity...

As of June 17, things just got less bad in Russia. As of June 17, Russia's
President Vladimir Putin - after a year of mugging business tycoon Mikhail
Khodorkovsky - just got a little less ridiculous. If you've got a
speculative bone in your body, it's time to buy...

"The Russian authorities, the government and the economic officials of our
country aren't interested in seeing [oil giant] Yukos go bankrupt," said
President Putin.

Over the last year Putin has been trying to settle a personal score
against Mikhail Khodorkovsky. Khodorkovsky's claim to fame was that he was
the leader and largest shareholder of Yukos, the world's second largest
oil company in terms of oil resources. Khodorkovsky was dumb enough to
break Putin's unwritten contract between business and government, that
says: Russian businessmen can have all the power and money they want, as
long they don't challenge the power of the Kremlin. Khodorkovsky used his
economic and political clout to interfere with government reforms, and you
don't do that in Putin's Russia.

Last October, Khodorkovsky was arrested at gunpoint and taken to jail. His
trial on tax and fraud charges dating back to the mid-1990s is just
beginning. He shrugged off the accusations as simply"business as usual"
in Russia at that time. Back then, Russia was like the Wild West...and
back then, just like Argentina in 2002, you did things by the law until
you couldn't get any further, and then you didn't. This is a witch-hunt,
and Putin will get what he wants.

Now Putin is going after Khodorkovsky’s fortune, even though the oligarch
is already behind bars. Since Khodorkovsky is the largest shareholder of
Yukos, Putin recently ordered Yukos to pay $3.4 billion in back taxes for
the year 2000 - that would be a tax rate in excess of 100% of profits that
year. And that's just one year...there may be more bills for back taxes to
come.

As you might imagine, shares of Yukos have been on a roller-coaster ride.
Between April and mid-June, the shares fell by 60%. Then, shares rose by
over 30% on Putin's announcement that the government wasn't interested in
forcing Yukos into bankruptcy.

Two weeks later, and the shares were clobbered again. This time, the hit
was prompted by the announcement that authorities has frozen Yukos’ bank
accounts and threatened to seize its assets. Yukos, which produces 2% of
the world’s oil, unable to pay customs for the right to pump, would have
to halt production.

It still looks ugly...but the trend in Yukos shares and the overall
Russian market is up in the last two weeks. As my regular readers know,
the perfect time to buy a share is when everyone hates it, yet it’s
starting to rise.

“YUKOS will continue to use all possible measures to arrive at a
settlement that is acceptable to the Government,” said the company in an
official statement and last Sunday, Yukos put its money where its mouth
is...the company was reported to have offered to pay the government $7.5
billion if it's given three years to make payments, and to have offered
its 35 percent, $4.7 billion stake in Sibneft, a smaller oil company, as a
deposit.

Even after this second bounce, the stock now trades at a forward P/E of -
get this - 4. It's like Argentina in 2002... stocks are super cheap... and
things just got less bad.

If you're not familiar with Yukos, you should be; Yukos has more oil than
ExxonMobil, or BP, or RoyalDutch Shell, or ChevronTexaco, and anyone else
you care to name.

As stocks are expensive in the States, the stock market value of
ExxonMobil is nearly $300 billion ($293 billion, to be exact). But the
stock market value of Yukos, which has more oil, only $24 billion. So
ExxonMobil is over 12 times larger than Yukos in the stock market. Yukos
takes in an estimated $400 million to $500 million a month.

Until Putin claimed he didn’t want to push Yukos into bankruptcy, the oil
giant was either a zero or a home run. Now the prospect of a zero has been
taken away. The 30%-plus move in the shares was a reflection of that.

I expect Yukos to have an Argentina-like run from here. And at a P/E of 4
based on 2005 earnings estimates, the downside in Yukos should be limited.
The fear of the unknown is what's holding down the stock. But we know what
we need to know...Putin won't send the company into bankruptcy. The rest
(like the billions in back taxes) is really just details.


Regards,

Dr. Steve Sjuggerud
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - Komrade Kapitalism (Steve Sjuggerud über Yukos) - Firmian, 21.07.2004, 18:43
  • The Daily Reckoning -"wann startet die Rallye?" - Sorrento, 22.07.2004, 08:10