-->A Repentant Braggart
The Daily Reckoning
Stradham, New Hampshire
Monday, 17 February 2003
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*** Viet-Nam-War-protester-wannabe aging hippies storm New
York...American flags desecrated in the streets of Paris...
*** Triumph of the SBGS (stocks-bounce-gold-stumbles)
market to continue?
*** The U.S. and U.K. surprisingly similar (with
significant differences, of course)...looking for 'extreme
values'...and more!
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Here at the Daily Reckoning, we seem to be consistently
bewildered by modern technology.
With Bill still enjoying the 'perfect weather' of
Nicaragua, I woke early this morning, fully intending to
bring you the latest scoop on the markets...only to have my
computer erase my work just as it was nearly finished. And
to top it off, it's STILL snowing up a storm here in New
Hampshire.
But at least Eric Fry is still on the job (and his computer
is cooperating)...
Eric?
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Eric Fry, reporting from the Big Apple...
- Well, well, well...Old Man Market still has a bit of life
in him after all. His dispirited, iron-deficient behavior
early in the week yielded to a revitalized, youthful élan
late in the week. The Dow Jones Industrial Average gained a
sprightly 158 points Friday, lifting the blue chip index to
7,908 - a 44-point gain on the week. The Nasdaq Composite
added 2.1%, to 1,310.
- Gold, the stock market's alter ego, responded to the
upbeat action on Wall Street by tumbling more than $18.00
to $352.20. The gold market's retreat and the stock
market's revival both seemed to be reflecting the
possibility that President Bush may not get his war in Iraq
after all. Here in New York on Saturday, Viet-Nam-War-
protester-wannabes were out in force waving their peace
flags during a 100,000-strong protest march near the U.N.
After the march had concluded, your co-editor observed many
members of this motley crew strolling around Midtown, still
toting their various flags, signs and banners. One aging
hippie carried a sign that read:"Duct tape Bush's mouth!"
- We doubt that the global protest marches served to alter
anyone's opinion. But we don't doubt that they reflect a
growing public opposition to an invasion of Iraq. The
geopolitical significance of this phenomenon is debatable.
But the financial market significance seems all but
certain: a rally is likely to ensue.
- The shifting tide of global public opinion against an
Iraqi invasion coincides nicely with extreme bearish
sentiment readings toward stocks. Taken together, these
twin phenomenon make the prospect of a trading rally a
better-than-ever possibility...We wouldn't be surprised if
the stocks-bounce-gold-stumbles (SBGS) market continues for
a few more days. But what do we know?
- The U.S. and the U.K. share a number of interesting
similarities these days. WE want to bomb Iraq; THEY want to
bomb Iraq. WE've got a record current account deficit;
THEY've got a record current account deficit. WE've got a
stock market (the S&P 500) that has fallen 46% from its
bubble-era peak; THEY've got a stock market (the FTSE 100)
that has fallen 47%.
- Britain's unshakeable alliance with the United States
against Iraq is widely known. Less well know is the fact
that Britain's got a great big trade deficit, just like we
Yankees do."Britain last year notched up its worst trade
deficit since records began in 1697," the Guardian reports,
"as falling demand from the struggling global economy
squeezed exports. The trade gap expanded to an
unprecedented £34.3bn in 2002...Britain first started
totting up its trade balance in 1697," the Guardian
explains."Eight years after the Glorious Revolution
brought William and Mary to the throne, the board of trade
recorded commerce in wool, silk and spices from Britain's
colonies.
-"By 1697, the Bank of England had already been in
operation for three years...to help regulate the public
debt needed to pay for William of Orange's costly
continental wars...William made his peace with France in
1697, signing a treaty with Louis XIV, in which he was
recognized as legitimate king of England.
-"On the catwalk," the Guardian quips,"flounces were in.
Restoration dandies were kitting themselves out with
ribbons, feathers and petticoat breeches."
- Ahh yes, your co-editor remembers that former life very
fondly...and what dandies they were!
- But what about the British stock market? Jim Grant
recently contemplated an almost-bullish stance toward the
FTSE 100. Says Grant:"The London stock market didn't go as
high as the S&P 500 in the post-1995 bubble (88% vrs.
148%), but it's fallen as low in the bust...Although not
statistically undervalued, neither is it any longer
overvalued. According to Andrew Smithers, London-based
financial economist, it's probably at fair value. What does
'fair value' look like? Americans wouldn't know."
- But the British might know, says Grant."We should be
wary of committing too soon to a market that probably
hasn't finished going down," Grant cautions."However, we
should not be too fine about it."
- British stocks may not be an outright"buy," Grant
allows, but they are certainly closer to being a buy than
U.S. stocks, at least on the raw numbers."Whereas
approximately 24% of the FTSE 100 companies trade below
book value, only 13% of the S&P 500 do. About 61% of the
FTSE companies trade at less than 15 times earnings, while
only 48% of American companies do."
- We aren't exactly sure what an investor ought to do with
this information. But it might not hurt to keep a wary eye
out for British values.
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Back in New Hampshire...
*** While Eric was watching aging hippies protest in New
York, others were equally impressed by the European
versions of Saturday's marches. Jennifer Westerfield, a
colleague in Paris, sends the following note:
"As I got out of the metro Saturday afternoon, I saw people
marching with an American flag...it was torn and singed and
had a swastika painted on it, along with words to the
effect of 'down with American commercialism, hegemony &
belliegerence!' They carried pictures of George W alongside
Hitler as well...
"I've had a lot of anti-American sentiment blown my way in
the time I've spent here in Paris...but yesterday, I almost
started tearing up on the street. And I don't tear up
easily. It was all very surreal."
*** Computer willing (and snow notwithstanding), I'll be
back with more news for you tomorrow.
Until then,
Addison Wiggin,
The Daily Reckoning
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The Daily Reckoning PRESENTS: Although it may well have
quite a ways to rise in the long run, gold is definitely
off its low of three years ago. As Dan Ferris maintains
below, for investors looking for"extreme values", perhaps
it's time to look elsewhere...
A REPENTANT BRAGGART
by Dan Ferris
"When you feel like bragging about a stock, it's probably
time to sell."
- John Neff
I need to learn to keep my mouth shut.
Late one recent afternoon, I was talking to Pirateinvestor
founder and friend Porter Stansberry. I told him, with glee
in my voice, that I had some real money in gold since last
August. Yipee! Hooray! Good for Me!
As soon as I hung up the phone, my first thought was, Uh
oh, maybe it's time to sell. (See above quote by John Neff
for further clarification.)
Fortunately, most of my conversation with Porter focused on
small, beat-up stocks in industry, technology and retail.
On balance, I think our surmises about what to buy next
more than compensated for my bragging about what I bought
last year. No need to sell.
Close call, though...
With growing numbers of investors focusing on gold, and
with my unwilling flesh momentarily getting the better of
my diehard spirit yesterday on the phone...the yellow metal
is the last place I feel like looking to find value
wallowing at extremes of price.
Yes, if gold goes to some never-before-seen extreme like
$1,000, as friend and fellow speculator Doug Casey and your
own Daily Reckoning editor Bill Bonner both muse that it
could, then today's prices under $400 will indeed look - in
20/20 retrospect - like an extremely good buy.
But that's the way of extremes, relative as they are to the
moderation that helps define them.
The goal of a conscientious (read: cheapskate) value
investor is not to catch prices at a moderate level and
pray for the ascension. Rather, the quest is to find
valuable businesses and assets trading at extreme lows in
price. A bet on the natural tendency of such extremes to
moderate back to from whence they came seems the soundest
of all speculations. At $370, or thereabouts, with many
gold stocks trading above their reasonably ascertainable
net asset values, I must be content to listen for the din
of a gold market top and look elsewhere for value.
To find elsewhere, imagine a slingshot. Value at my
personal favorite extreme of price (low) resembles the
slingshot pulled back, ready to slam its cargo forward.
The force that stretches our proverbial sling backward,
i.e., that fells an equity issue's price, is usually bad
news. That's what keeps most investors away from the best
stock market investments, same as most of us keep away from
eccentric characters wielding prehistoric weapons like
slingshots. Makes sense. Nobody wants to get hurt. But if
you stand out of the way, it's a safe bet that, when you
let go, that slingshot will unstretch.
That's what value is all about. That's why I like companies
whose books carry things like virgin coastal land on the
Gulf of Mexico at $2 an acre. That's also why I like
companies with the financial wherewithal to buy back all of
their own outstanding shares, if the spirit so moved them.
Betting on what happens to the projectile after our
metaphorical sling unstretches is analogous to the guessing
and hoping in which most investors indulge. Again, that is
what gold looks like to my crotchety ilk at the moment.
What don't you want to buy right now? What haven't you
heard much about lately? What wouldn't you touch with a
ten-foot pole?
Those are questions you ought to ask yourself if you want
to identify the great opportunities - which buoyant gold
prices, Colin Powell, U.N. weapons inspectors, Michael
Jackson and reality T.V. are distracting you from.
There's no uniform answer. There are only different folks
and their different analytical strokes. For example:
James Grant, editor of Grant's Interest Rate Observer,
likes property and casualty insurers. They're languishing
at the bottom (?) of their very own private 25-year bear
market. (Sound familiar? Like gold two years ago?) The P&C
companies are now flush with cash, and turning an
occasional profit. Grant makes a good case, including the
paradoxically persuasive observation that nobody knows
exactly what goes on inside these companies, which helps
keep prices in check (for now).
Rick Rule, friend and founder of Carlsbad, California's
Global Resource Investments, writes from New Zealand to
express interest in small, low-priced U.S banks, and the
odd merger arbitrage play. (The Dollar?! What the...?!)
Me? Well...I haven't heard much about all those beat-up
energy merchants lately. Yet, there they are, trading at 3
or 4 times earnings, and one-tenth of book value. Most of
them are mired in debt, and loaded with other problems:
litigious shareholders, regulatory inquiries...a real mess.
Doesn't sound very appealing. Probably quite a bit of
opportunity there somewhere.
I would imagine that all three of these ideas sound about
as exciting to you as...well...gold two years ago.
Good Investing,
Dan Ferris
for the Daily Reckoning
P.S. Rick Rule's interest in small, low-priced banks sounds
good to me. Everyone is touting the dollar's fall. I wonder
what'll happen after the gold bubble bursts? I wonder which
financial institutions are the most conservatively run, and
are now trading at low enough prices to attract my money?
I'll explore answers to these and other (probably non-gold
related) questions in upcoming issues of my monthly
advisory service, Extreme Value. For a complimentary issue
- and a free peek at some remarkable values I've found
hidden in the current real estate market, see:
Extreme Value
http://www.agora-inc.com/reports/EVI/WEVID215/
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