Re: Daily Reckoning: Oddball Investing (James Boric)

verfasst von Firmian, 23.07.2004, 19:53

-->Oddball Investing

The Daily Reckoning

Baltimore, Maryland

Thursday, July 22, 2004

---------------------

*** Conditions"quite favorable"...for a bust!

*** Reflation trade back on! Nasdaq at new low for 2004...

*** Tobacco plantations and truck farms: it's crazy...!

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Greenspan's assessment of the U.S. economy was 'upbeat,'
says MSNBC. The Fed chief had looked around and said
conditions were"quite favorable."

We're glad to hear it; we just don't believe it.

We can look around too. And what we see are people trying
to upgrade their standards of living...while their real
earnings fall.

We see corporations borrowing less money - meaning they are
not intending to build new factories or hire new workers.

And we see the tax refunds petering out, consumer spending
softening and housing starts falling.

What we see is a nation near the end of a quarter-century
of credit expansion. Stocks, once cheap, are now expensive.
Interest rates, once high, are now low. And consumers, once
fearful and loath to spend, are now ready to gamble
everything in order to buy a new house with a big-screen TV
in the family room.

These conditions are quite favorable to something - but not
what Alan Greenspan wants. Not to a boom, in other
words...but a bust.

Over to Tom in London for the news...

---------------------

Tom Dyson, from the corner of Marigold Alley and Upper
Ground, Southwark...

- Publicly, Greenspan is hawkish. In his Humphrey-Hawkins
testimony, Greenspan assuaged Congress with claims that
economic growth in 2004 would be between 4.25% and 4.75%.
Inflation would remain subdued, he predicted...core
inflation would range from 1.5% to 2% in 2005. But this was
the highest level of inflation that the Federal Reserve
would consider acceptable, he said.

- Greenspan further emphasized his tough stance on
inflation. He said, in the typically muddled language that
we always struggle to comprehend,"We cannot be certain
that this benign environment will persist and that there
are not more deep-seated forces emerging as a consequence
of prolonged monetary accommodation. Accordingly, in
assessing the appropriateness of the stance of policy, the
Federal Reserve will pay close attention to incoming data,
especially on costs and prices."

- It's a bluff, dear reader, and we don't believe him. He
should be worried about deflation; he just can't say it.

- Overwhelming statistical evidence suggests that last
year's economic recovery started and peaked in the strong
third quarter. This year, despite the sound of cheering
coming from Wall Street, the economy is stagnating.

- Economists say the four key variables in the business
cycle are consumer durables, residential building, business
fixed investment, and business inventories. We turn to the
latest copy of the Richebächer letter for the hard
statistical analysis...

-"The growth rate of consumer spending on durables has
literally collapsed from a stellar 28% in the third quarter
of 2003 to negative 4.2% in the first quarter," says the
Good Doctor."The growth rate for residential building has
plunged over the same period from 21.9% to 3.8% and for
business investment in equipment and software from 17.6% to
9.8%."

- Greenspan counters:"Despite the softness of recent
retail sales, the combination of higher current anticipated
future income, strengthened balance sheets and still-low
interest rates bodes well for consumer spending."

- But what's this? M2 and M3 are collapsing too. Latest
figures show that year-over-year M2 growth has dropped to
3.72%, the slowest rate of growth in the money supply since
October 1995, also forewarning a slump in real GDP growth.

- It's turning into 2003 with a twist, an ugly twist,
explains Howard Simons at the Street.com."The markets of
2003 looked like a reflation trade, even though money-
supply growth was slowing and the reported price indices
were quite tame," he says.

- Then, in 2004, the Fed moved to take away the punch bowl.
"The yield curve would flatten, inflation would continue to
rise as the lagged effect of all that stimulus, and stocks
would do fine as profit growth would outweigh the effects
of higher short-term interest rates," extrapolates Simons.
"That misdirection lasted for just over two months."

- Now, as we move into this new period of soggy
unemployment, retail sales and economic growth, the Fed
will need to reapply the old accommodative policies. Viva
the reflation trade! But here's the twist...this time,
there will be no Baghdad bounce...

- Simons concludes:"While bonds, commodities and foreign
currencies will benefit, stocks will not. This reflation
attempt, whether accompanied by rising monetary aggregates
[money supply growth] or not, will have higher reported
inflation, notwithstanding last week's producer price index
and consumer price index reports, slower economic growth
and profit growth and the prospects for higher federal
taxation with which to contend."

- Right on cue, the markets took an absolute pounding; the
Nasdaq set a new low for 2004, surpassing the previous mark
set on May 17. The tech index lost 43 points, or 2.2% to
close at 1,874. The index had opened the day 16 points
higher, but ended with a huge 59-point swing to the
downside.

- The Dow also chalked up a massive loss, declining 103
points and settling at 10,046. It had been as high as
10,237 in morning trade before the reversal took place. The
S&P shed 15 points or 1.3% to 1,094.

- In other corners of the markets, the dollar continued
Tuesday's rally. Gold was hammered as a result, dropping
back down below $400 again. And the euro dropped 0.8%
against the buck to $1.2226. Oil climbed above $41 on
Wednesday, but was beaten back down to $40.66 by the end of
the session.

- And here's the rub...even with the strong deflationary
pull revving up again, from our lofty perch above London's
dirty River Thames, we can't see any deflation for miles.
That's because Greenspan, Bernanke et al will do everything
they can to haul that M2 and M3 growth rate back up. It's
2003 with a twist...

---------------------

Bill Bonner, back in Baltimore...

***"Tobacco was once a major industry in Maryland," said
an old friend the other day."Now it is just a rip-off..."

Everywhere we go, we try to gauge the temper of the times.
Sometimes we are amused. Sometimes, we are saddened. Often,
we reminisce.

"I tell you, Bill" our friend continued,"it just isn't
like it used to be. We've all got those fancy kitchens with
the islands in the center and that fake marble on the top.
We've all got air-conditioning and wall to wall surround
sound. But it seems like something got lost along the way.
But maybe it's just me...I'm beginning to feel like a
cranky old fuddy-duddy."

It's hard to draw a bead on life when you're moving through
it so fast. Your point of reference shifts everyday. You
drive around and remember old landmarks. You recall how
things used to be. You think they were better. But you tend
to forget the ugly parts.

Rural Maryland used to be pretty - at least, as we remember
it. Where we grew up, there were horse farms and tobacco
farms. On the Eastern Shore, there were truck farms. As a
child, we heard about 'truck farms' and wondered. If they
could grow trucks over on the other side of the Chesapeake,
why couldn't we plant a few Fords or Chevvies on our place?

Growing trucks must be easier than farming tobacco, we were
willing to bet. Tobacco was the world's most disagreeable
crop. It has resisted mechanization for 3 centuries. In the
1950s...as now...harvesting was done by hand. Our first job
was working in the tobacco fields. We would get out at dawn
and begin cutting down the plants. One by one, row by row,
hour after hour.

The tobacco plants had to lie out in the sun for a while in
order to relax. Then, we would work our way down each
row...picking up each plant and spearing it onto a stick.
This went on through the heat of the day, sweat running
down our arms, and soaking our shirts...tobacco gum got all
over our hands and clothes.

By the late afternoon, if we timed it right, we'd be ready
to drive the tractor between the rows and throw the sticks
- each with 5 or 6 plants on it - onto the trailer. Then,
they'd be taken to the barn and hung up to dry.

It was miserable, exhausting and dirty work. But it was a
living and a life for hundreds of thousands of people.
Maybe it still is.

Once, an uncle was dying of cancer. We had all gathered at
his house to say goodbye. Naturally, the conversation
turned to what everybody did and what everybody knew:
tobacco.

Suddenly, the dying man interrupted.

"They won't be planting any tobacco where I'm going."

Being around a dying man can be awkward. You don't know
quite what to say. For a child it is almost frightening.
You're afraid to get too close for fear the dying man will
take you with him.

An uneasy silence fell over the group of cousins. No one
wanted to contradict our elderly uncle...but they didn't
want to acknowledge that he was a goner either.

But an aunt, her face red and creased from years of hard
farm life, feared neither death nor dying. In fact, she
feared no man either...and seemed almost on an equal
footing with God himself.

"How the hell do you know what they'll be doing?"

In a few minutes, all of us were speculating about planting
tobacco in heaven and about the Great Reunion we would all
enjoy some day as we gathered in those celestial fields to
begin chopping down the plants.

Somehow, it all seems so rich...those memories, that is.
That time. That life.

But it is all gone.

We look out our car window and see houses where tobacco
fields used to be. And where tobacco barns used to sit. Now
they are little shopping malls, filled with commuters,
picking up supplies on their way home from the office.

"Get this...you won't believe it," continued our friend.
"They're now offering tax credits for preserving tobacco
barns. You get paid to keep them up. The state decided they
were kind of picturesque."

What was once function is now pure form. What was once real
life...is now a fraud. Is it better, dear reader?

"I tell you, this tobacco stuff has gotten really crazy.
The state legislature wants to stop people from growing
tobacco. You know, everybody's against smoking. So, they
pay tobacco farmers not to grow the stuff. They want
farmers to switch to growing Chardonnay grapes or
something. Can you imagine any of our relatives doing such
a thing? It's absolutely wacky.

"You know, when we were growing up...nobody had a dime. You
worked like a dog in the tobacco fields and if you were
lucky, you could make a living at it. But then they came up
with these crazy 'land preservation' deals. You could sell
the development rights to your farm. It was great, because
you were just agreeing not to do anything you weren't
already doing...you were agreeing not to cut up your farm
and sell it as lots. Heck, who wanted to do that
anyway...unless you were dying or something.

"So, you could sell the development rights for a couple
thousand dollars an acre - I think it's up to $5,000 or
more per acre now - I don't know, I haven't kept up with
it. But if you've got a 200-acre farm, you've got a cool
million bucks...for doing nothing different.

"And then they come along and pay you not to grow tobacco
at all. They pay you based upon what you were getting from
it. So, if you had earned $50,000 a year growing tobacco
last year, they'd pay you - I don't know - maybe $40,000 a
year not to grow it. And then, to top it all off, they give
you a tax credit to fix up your tobacco barn so you'll have
a place to put the tobacco they're paying you not to grow.
It's crazy."

---------------------

The Daily Reckoning PRESENTS: Contrary to popular opinion,
there's only one proven way to make consistent big money in
the stock market. Don't believe us? Read on...

ODDBALL INVESTING
by James Boric


It all started with Forrest Berwind"Bill" Tweedy in
1920...

Bill was a strange fellow. No one really knows where he
came from or when he was born. And if you saw him today,
you would probably laugh.

The man wore suspenders, had a bushy mustache and a good-
sized potbelly. He never married or had kids. He ate lunch
at the same place at the same time every day. He was an
oddball, to put it bluntly. And if you happened to walk
past 52 Wall Street, chances are, you would see Tweedy
working at his cluttered desk - busy writing letters and
looking through company reports.

Tweedy's business was his life. And it was a successful one
at that.

He owned a small niche brokerage house that specialized in
trading tiny illiquid securities. Day after day, Tweedy
scoured the market for publicly traded companies that had
between 50 and 150 shareholders on the record. He attended
their annual meetings, wrote down all the shareholders'
names and sent them personalized letters. His goal was to
find out who wanted to sell their shares and who wanted to
buy more. From there, Tweedy paired the buyers with the
sellers and brokered the deals himself.

It was a brilliant idea.

Bill Tweedy quickly became one of the only small- or micro-
cap brokers in New York - the"broker of last resort," as
he was called by the many shareholders who couldn't trade
their shares anywhere else. And although I don't know how
many small-cap stocks there were in 1920 relative to the
number of major blue chip stocks, you can bet there were
thousands more - just like there are today. That left
Tweedy with a real monopoly in the market for brokering
small-cap trades.

Tweedy's business was successful throughout the 1920s and
into the 1930s. Then he got his big break...

In the early 1930s, Tweedy developed a client relationship
with Benjamin Graham - the father of value investing. At
the time, Graham was a professor at Colombia University and
had recently finished writing his now-famous books Security
Analysis and The Intelligent Investor. If you aren't
familiar with Graham, I strongly suggest you read both of
these books. They are two of the best primers you'll ever
find on investing. But in case you don't have time to read
the books right now, I'll give you an abbreviated version
of his main points...

Graham (who, among other things, is famous for teaching
Warren Buffett the ropes of value investing) proved you
could make a fortune investing in companies that were
selling for a huge discount to their intrinsic value. In
other words, if a company was trading far below what its
assets were worth (minus all liabilities - things like debt
and accounts payable), Graham was confident that, over
time, the company's true worth would be discovered...and
anyone who invested while it was cheap would walk away much
richer.

Think of it like this...if you went to a flea market and
saw a rare three-legged 1937D Buffalo nickel selling for
$900, you would buy it - knowing that the real value of the
nickel was somewhere between $3,000 and $4,000. In other
words, if you sold it later and ONLY got the nickel's fair
value, you would still make about 233% to 344% on your
investment.

Not a bad deal, right?

Well, that's exactly the philosophy that Graham used to buy
shares of a company. He looked for bargains - companies
selling for 60% to 70% LESS than they were worth. And it
just so happened that many of the small, illiquid companies
Tweedy tracked fit Graham's"value" model simply because
they received no coverage on Wall Street and were
undervalued.

Thanks to their shared investment strategy, Tweedy quickly
became Graham's"go-to" broker. And Graham became Tweedy's
largest customer - so big that he moved his office right
next to Graham's office on 52 Wall Street so they could
work together more efficiently.

Over the years, Tweedy's business grew. Howard Browne (who
started his career as a runner on Wall Street at the ripe
old age of 16) became Tweedy's partner in 1945. And the
company slowly grew from a simple brokerage house (with
about $88,000 in capital) to a full-fledged investment
advisory business...that currently manages over $10 billion
in assets.

Although Tweedy, Browne is a large money manager today (not
the same small niche broker it was in 1920), one thing has
NOT changed in its 84-year history. The company still looks
to buy stocks that are trading for huge discounts to their
real worth.

Here's how it's done...

One of the surest ways to spot an undervalued stock is to
look at its price relative to the value of its assets. If a
company is priced LESS than its assets are worth, you want
to own the stock. It is undervalued. And you want to stay
away from the companies that are selling for a huge premium
to their asset value.

So how can you tell if a company is cheap relative to its
assets?

The easiest way is to scan the market for companies that
have a low price-to-book value. A company's book value is
its net asset value minus its intangible assets, current
liabilities, long-term debt and equity issues. Divide the
market-cap by the book value and you get the price-to-book
ratio.

If a company has a P/B value under 1, it is said to be
undervalued. And if a company has a P/B value above 1, it
is selling for a premium.

You want to own stocks that are undervalued and have room
to grow. Historically, these are stocks that provide
investors with the highest returns. For instance...

Tweedy, Browne looked at all the stocks trading on the
major indexes from 1970 through 1981 that had a market cap
of at least $1 million and traded for no more than 140% of
book value. They ranked the 7,000 companies into nine
groups - ranging from those that were overvalued (trading
between 120% and 140% of book value) to those that were
undervalued (trading between 0% and 30% of book value).
What they found was incredible.

The lower the P/B ratio was, the higher the returns you
could expect - without fail.

Stocks that traded between 120% and 140% of book value rose
an average of 15.7% in a single year. The stocks that only
traded for 80% to 100% of book value rose 18.5%. And the
truly undervalued stocks, those trading between 30% and 0%
of book value, rose an average of 30% a year.

That's pretty impressive when you consider the S&P 500 only
returns you about 8.5% a year. And in dollar terms the
numbers are equally impressive.

If you had invested $1,000 in all the companies trading for
30% of book value or less in 1970 (and rolled that money
over each year into the next group of stocks that were
trading for 30% of book value or less) it would have been
worth $23,298 by 1982. That same $1,000 invested in the S&P
500 would have grown to $2,662. In other words...

By investing in undervalued stocks (those trading for 30%
of book value or less), you can expect to make about nine
times more money than simply investing in the S&P 500.

Who said investing was hard?


Best regards,

James Boric
for The Daily Reckoning

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gesamter Thread:

• Daily Reckoning:" Warum uns keine Deflation wegen höherer Arbeitszeit droht" - Sorrento, 23.07.2004, 18:34
  • Re: Daily Reckoning: Oddball Investing (James Boric) - Firmian, 23.07.2004, 19:53