-->Scripophily
The Daily Reckoning
Paris, France
Thursday, 13 February 2003
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*** A swift kick in the seat to the NYSE...
*** Stocks slump...capital spending down...even gold under
the weather...but Abby's still as bullish as ever...
*** Russian bonds, Afghani real estate, apartments in
Prague...and more!
As you'll remember, your Paris editors are still lost to
the world for the moment. So without further ado, here's
our man on Wall Street, Eric Fry:
Eric?
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Eric Fry, reporting from New York...
- The market just keeps sliding lower and lower. We are
referring, of course, to the market for seats on the New
York Stock Exchange. One of these coveted"seats," which
permits the owner to conduct trades on the floor of the
exchange, recently changed hands for $1.75 million. Until
recently, prices for NYSE seats had been holding up
remarkably well, considering how drearily the stock market
has been performing.
- But seat prices are now starting to drop more swiftly.
The latest transaction is down 24% from the end of October,
when one of these precious perches sold for $2.3 million.
Even $1.75 million seems like a lot of money to spend, just
for a place to watch stocks fall every day.
- Meanwhile, the share prices within view of these
expensive seats continue their rapid descent. Yesterday,
the Dow slipped another 85 points to reach 7,758, while the
Nasdaq retreated 16 to 1,279. Both indices are rapidly
approaching their lows of early October.
- Investment capital is finding almost nowhere to hide
these days. The stock market is certainly no refuge, and
hiding places are becoming increasingly scarce in most
other financial markets as well. Even traditional bomb
shelters like the gold market are becoming susceptible to
the occasional stray hand grenade of panic selling.
- Yesterday, a wave of selling blasted $10 off the gold
price, taking the precious metal down to $353 an ounce -
more than $30 below the levels it reached last week. Rumors
swirled throughout the gold market trying to explain the
seemingly inexplicable sell-off. One rumor, passed along to
your co-editor via email, theorized,"Barrick and JP Morgan
are facing large losses in gold derivatives and the NYMEX,
as directed by the Fed, is rumored to be announcing soon
another margin requirement increase to HALF the value of a
gold contract, or about $17,000 from the current $2,000, as
a direct effort to get the gold price down, to help bail
out Morgan in particular."
- We don't put much credence in such rumors, but we do find
them entertaining. Our personal theory is that prices
sometimes rise and sometimes fall...Yesterday, they fell.
- All those investors hoping - and praying - for a rebound
in the semiconductor industry might want to avert their
eyes from Applied Materials' latest earnings report. As one
of the largest suppliers to the semiconductor industry,
AMAT's results don't bode well for the chip sector.
- The company reported a loss on sales that fell 27% from
the prior quarter. New orders plummeted 35% from the prior
quarter. Addressing the dismal results, AMAT's CEO James C.
Morgan, told investors,"The extended downturn continues to
create a challenging environment for businesses around the
world. Weakness in the global economy and in the demand for
chips used in consumer and business technologies has caused
a number of our customers to postpone capital expenditures.
In the near term, we do not expect to see a significant
upturn in capital spending and will continue to implement
cost-cutting measures, as necessary, to better align our
operations with business conditions."
- As AMAT's results attest, capital spending on information
technology (IT) isn't rebounding as hoped. American
corporations, on the whole, are far more eager to conserve
cash and fortify their balance sheets than they are to
invest in IT projects of dubious necessity.
-"Two reports issued Tuesday paint a dire picture for
capital spending," Dow Jones News reports."Outlays for
technology products won't pick up until the middle of the
decade, and virtually all industries will keep their purse
strings tight this year, according to separate studies by
Merrill Lynch & Co. and Goldman Sachs & Co."
- The Merrill team does not foresee a recovery in the tech
sector until well into 2004 or even 2005. By comparison,
Goldman's outlook seems almost cheery. The Goldman team
expects capital spending in general to drop by at least 10%
this year after a 15% fall in 2002.
- Interestingly, as Dow Jones notes,"schisms still exist
at some Wall Street investment firms, where one team takes
a bearish view and another feels that investors should be
buying stocks aggressively. That's the case at Goldman,
whose downbeat capital-spending outlook appears to butt
heads with uber-bull Abby Joseph Cohen, the firm's chief
investment officer, who...sees the Dow Jones Industrial
Average rising to 10,800 this year, or 36% from current
levels."
- Hmmm...What does Abby know that the CEO of AMAT doesn't?
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Back in Paris...
*** Though the snow in New Hampshire is unabated, Addison
managed to send us the following note:
"I got off the phone with Bill yesterday and shivered. He
told me the weather is 'always perfect' at Rancho Santana.
Seventy degrees, or thereabouts. A westerly breeze blowing
off the Pacific pushes the clouds inward, so it's sunny
every day - except during the rainy season.
"Meanwhile, as I type here in New Hampshire, the
thermometer reads -9 degrees Fahrenheit..."
Addison Wiggin
The Daily Reckoning PRESENTS: Dan Denning takes a break
from the relentless drumbeat of war to talk about Russian
bonds, Afghani real estate, apartments in Prague and other
"alternative investments."
SCRIPOPHILY
by Dan Denning
In 1917, two million Frenchmen went crazy for Russian
bonds.
Russia was the"New Economy" of its day. In a 1997 article
in the International Herald Tribune, Mary Blume tells us
Russia had a powerful central government, huge natural
resource wealth, and lots of cheap labor. What it didn't
have was capital. Enter France.
France issued over 3,000 types of Russian bonds in 1917
alone. French investors scooped the bonds up in a wave of
Gallic enthusiasm. Even the bed-ridden Marcel Proust was
roused enough to buy bonds in the North Caucasian Oil
Field.
And then, at the peak of the mania, Lenin and his communist
thugs came along...and refused to make good the debts ran
up by the Czar. French bondholders were left high and dry.
But in 1997, a strange thing happened. After some high-
level political wrangling, the Russians began honoring the
Czar's bonds. The French bondholders didn't get paid face
value or interest on the bonds. But the bonds actually
traded on the Paris exchange for a while. There were
stories of investors scavenging Paris flea markets, or
making backroom deals with compliant French bankers to
"secure" the old bonds.
Of course, the moral of the story here is NOT to go buying
financial instruments at the top of the market. Or to buy
them and then wait 80 years for them to pay off. You might,
however, consider buying some antique bonds.
That's just what an eccentric friend of mine, a gentleman
by the name of Sven, talked about last week in London over
an Italian dinner in Soho. Sven is an unusual character.
Quite the traveler - he spends time in a different country
each month of the year - Sven's reddish beard and
ubiquitous fedora have been spotted in many-an-odd corner
of the globe. He's willing to entertain almost any
investment possibility...as long as the chance for a big
return is there.
For example, over a steaming plate of lasagna, Sven
wondered aloud whether now would be a good time to go to
Afghanistan and buy stocks. I thought the market might be a
little illiquid.
"But it might be mobile," he said.
"How's that?"
"Well, say the market is the back of somebody's car. Trunk
open, market open. Trunk closed, market closed."
Finding alternatives to conventional stock market investing
is a real problem for investors today. Sven is currently
looking at a bond issue similar to the Russian one. And
although he's not willing to go into more detail until he's
closed the deal, he promises to let us know all about them
when the deal is put to bed.
Another, safer route for 'alternative investments' is in
collectables and antiques...and even antique stocks and
bonds. If you enjoy irony, and have a fancy for late 19th
century or early 20th century stock and bond certificates,
this is perfect. You can profit by collecting the
certificates of failed businesses and bond issues. The
business might not be worth anything anymore. But the paper
could be.
Collecting old physical stock and bond certificates has
even got a name. It's called"scripophily."
For example, there's an 1886 bond for the New Jersey
Junction Railroad Company on the market. The story goes
that the bond was issued after J.P. Morgan settled a
dispute between the Rockefeller and Vanderbilt railroads to
take over the entire line.
Ever the dealmaker - and since he had stakes in both sides
- Morgan proposed linking the railroads and boosting prices
for both parties. The stock certificate for the company
depicts Morgan's yacht, the Corsair, where the deal was
struck. According to Cigar Aficionado, it's also the origin
of one of Morgan's famous remarks. Someone asked him how
much the yacht cost. Morgan replied,"If you have to ask,
you can't afford it."
Call this the adult version of collecting baseball cards,
mingled with the aesthetics of stamp collecting and art.
It's also a way for you to own a piece of American history.
Or as collector Bill Hogan said:"It's a souvenir of the
American capitalist market, which we'll never see again."
"Never see again" may be more accurate than an antique
collector's insight. Today we wouldn't even be discussing
"alternative investments" at all if J.P. Morgan's firm -
along with the rest of the Wall Street - had not
participated in the most enormous financial asset bubble of
all time.
A recent Bloomberg article suggested that the stock market
today is so confusing, you've got to hit the history books
to make sense of it. By history they meant you had to delve
all the way back to the bear market of 1973-1974.
We suspect the folks at Bloomberg haven't gone back far
enough. The world today may be a lot more like 1932 - or
even 1837 - than we suspect. We know from our fathers and
grandfathers about the Great Depression and then the War in
Europe that soon followed. But the only other time in
history the U.S. stock markets fell four years in a row was
from 1836 to 1839...
That panic of 1837 started with the collapse the central
bank of its day: the Second Bank of the United States.
Andrew Jackson fought against extending the Bank's charter.
And in 1836, it ceased to function. Financial crisis
ensued. Then in 1841, and in the first months of 1842,
eight separate states and the"territory" of Florida
defaulted on their sovereign debt. It wasn't long after
that the Union's economic problems mutated into the Civil
War; the most violent and destructive war in history to
date.
Today, I believe we are on the edge of another seismic
shift in the world markets. And may be a prime time to be
looking for investment opportunities outside of the
mainstream.
So what else can you do? My adventurous investment friend
suggested buying houses.
"Here in the U.K. I asked?"
"Oh no...of course not. The U.K. housing bubble is even
worse than the American one. In fact one of my
acquaintances was able to secure a mortgage based on her
income as an escort. I'm talking about Eastern Europe. You
can get a great apartment in Prague for less than 5,000
pounds."
"Hmmm," I said."Apartments in Prague?"
You'll recall U.S. Secretary of Defense Donald Rumsfeld
lambasted France and Germany for not supporting their war
effort last week, calling them"old Europe". Perhaps he's
right. The Franco-German-Russian resistance to the U.S. war
plans could be a high water mark for"Old Europe."
If so, real estate in Prague could start looking - and
selling - like their counterparts in"Old Paris"...making
the £5,000 entry price a real bargain.
Stranger things have happened.
Regards,
Dan Denning
for The Daily Reckoning
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