Concrete And Oil

Today I write to you with an irony-free letter. No out- of-step ideas. No irritating reflections.

Instead, I offer you two ways to take advantage of the coming bear market rally – if there is to be one. Or, merely a chance to buy stocks that are good enough and cheap enough that you could hold them throughout the long, dark teatime of an economic slump…without worrying about them too much.

When Jeff Bezos was enjoying fame as the world’s smartest entrepreneur and was still selling for $88, in March ’99, someone asked if there was anything the Internet retailer would not sell.

“Cement,” came the jesting reply.

This made us immediately sympathetic to things concrete. Anything so un-hip, so anti-New Era, we reasoned, must be as cheap as Amazon was dear.

Since then, Amazon has drifted downstream…selling today for only $7.46 a share. The companies that make cement, meanwhile, remained where they were. Relatively cheap in 1999…they are still cheap. One of them seems not only relatively cheap, but absolutely so.

Might it get cheaper in an extended bear market? Yes. Earthquakes shake up everyone. But that is the benefit of sleeping on a low bunk…you don’t have as far to fall.

Cemex is the world’s No.3 cement maker. It is based in Mexico and operates in 30 different countries. Forty percent of revenues come from two markets – the U.S. and Spain, with the balance coming from emerging markets.

Selling cement in the late 90’s was hardly a glamorous business. Surely, the people at Cemex must have had a yearning to put a “.com” after their name or to start up a B2B Internet business. They must have felt a little d?mod? in their dusty, industrial age trade. So, they can be forgiven for trying to put at least one foot in the New Era. “The construction industry is ripe for a digital makeover,” says the annual report, “and Cemex is leading the way, transforming itself from a conventional to a digital enterprise.”

Fortunately, Cemex did not take this effort too seriously. It remembered that customers wanted tangible cement, not information, and it flourished. “Operating margins of about 25% and returns on equity of more than 15% have been the norm since 1991,” reports Grant’s Interest Rate Observer.

“On June 30, debt accounted for 42.3% of capital,” continues Grant’s, “…while EBITDA covered interest expense by 4.88 to 1.”

Here at the Daily Reckoning, we do not feel competent to judge the business prospects of a multinational cement company. But to the question, “Do you really want to own a cement company on the eve of a war?”, we answer: “Well…yes.”

And to the question, “Why Cemex and not another cement company?”, we reply: “Because Cemex is on the bottom bunk.”

At a P/E of 5.3 times 2001 estimated earnings, Cemex is less than half as expensive as rivals Hanson, Holcim and Lafarge. Its dividend yield, at 4.07%, is the highest of the group, and its price to book value, less than 1, the lowest.

Our second suggestion comes from Frederick Sheehan, ofJohn Hancock Asset Management.

“We…will face energy shortages and bottlenecks for a long time,” he wrote on September 6. “We are short of refining capacity in the U.S. and not much is being done about it. The U.S. needs more natural gas. The world needs more power plants. The world will need more gasoline. A lot of Asians who never rode in a car a generation ago now own one.”

Has anything happened since September 6 to change that situation? Probably not.

Sheehan lists 10 companies that he regards as “Rich and Neglected.” I give them to you with their P/Es:

Amerada Hess- 6.4

BP Prudhoe Bay Royal Tr.- 4.7

Frontier Oil- 7.9

Murphy Oil- 9.8

Phillips Petroleum- 7.1

Sunoco- 6.8

Tosco- 12.5

Ultramar Diamond Shamrock- 7.8

Unocal- 9.4

Valero Energy- 5.1

Why are these companies so cheap?

“All it takes is an announcement that gasoline inventory has risen over the past week, and these companies get sold. The thinking seems to be: ‘The energy problems are solved, let’s buy XO Communications.'”

“Maybe profits have peaked for some of these companies,” writes Sheehan, “but they are filling a shortage that won’t evaporate overnight.”

Energy and commodity prices have been falling, more or less willy nilly, for the last 20 years. Prices reflect the widespread view that the next 20 years will be like the last 20.

Will they be?

And here, dear reader, I permit myself a moment of reflection. We do not know what the future will bring. But we share the feeling with other Americans that something big has happened. Some realignment of the stars…some volcanic rumbling and tectonic shift…we don’t know exactly what it means…but we wait to find out.

In the meantime, we will sleep on the lower bunks.

Your correspondent…keeping close to the ground…and trying to understand what is going on in the world around him.

Bill Bonner
September 25, 2001

[Ed. Note: The Agora Wealth Symposium is still on! We’re gathering at the Las Vegas Regent from October 31- November 3, 2001. Bill Bonner, Eric Fry and Dan Denningwill be there. Hope you will be too!

To make your reservations today, call Agora Travel at 1- 800-926-6575 or 1-561-266-6570.

The Dow has lost 3100 points since its peak. The S&P is down nearly 40%. The Nasdaq has given up 74% of its gains.

All over the country, business executives gather together to try to figure out how to cut costs and survive the coming downturn. Consumers have slowed their spending. Debtors are having a hard time making their payments. And people are losing jobs. MSNBC reports the economy “screeching to a halt.”

So what does the market do? Without even waiting for the sound of gunfire, they blasted stocks upward yesterday. Could this be the beginning of a major bear market rally? Yes, it could.

But could this be merely a feint by Mr. Bear, a trap for unwary investors – to be snapped shut by an even sharper fall in stock prices – or even the panic selling we’ve been expecting – tomorrow? Yes, it could.

Could this be an opportunity to sell your stocks, and get out of this crazy market until prices finally hit bottom at decent prices (10 times earnings, or lower)?

Yes, it could.

Eric, what happened yesterday? (By the way, Eric is hosting CNNfn this week. Look for him from 9:30 – 11:30 a.m. e.s.t.)

Eric Fry in New York:

– The big relief rally finally arrived, and what a relief it was. There’s nothing quite like a bear market rally to get the speculative juices flowing. The Dow soared 368 points, or 4.5%, to 8,604 – chalking up its best one-day gain of the year. The Nasdaq bounced more than 5% to 1,499.

– Some of the day’s notable winners included some of last week’s biggest losers. Boeing, for example, gained almost 9%.

– As greed reasserted itself on Wall Street, many of last week’s “fear” trades crumbled. Treasury bonds, oil, and gold all gave ground. Oil suffered a particularly dismal day. The price of crude fell almost $4, to $22 per barrel – the biggest one-day drop in more than 10 years.

– So let’s take a quick tour of the financial markets. Are we near a bottom? Near THE bottom? Or still just tumbling down haphazardly from the top?

– Certainly, stocks are relatively cheap – relative, that is, to where they were trading in March 2000. But, as a hedge fund manager I spoke with yesterday told me, “It would be hard to say that stocks are absolutely cheap. They just aren’t.” Even now, the S&P 500 index sells for about 25 times earnings. Valuations like thisused to occur only at market tops…

– Sir John Templeton, one of the world’s most respected investment advisers, says that the downfall in the stock market over the past year is bigger than the crash of 1929, and he doesn’t expect a recovery anytime soon.

– In an interview last weekend with, Templeton said the run-up in market was “the biggest financial insanity ever in any nation in history.” Templeton said he is warning investors that the recent “technology bubble…was far bigger than any previous bubble of any nation ever…now is not the time to buy common stocks.”

– “Two weeks after the terrorist attack on the World Trade Center, the economic costs total $40 billion and are likely to climb,” Crain’s reports. “The disaster will likely be the most expensive ever, surpassing Hurricane Andrew, which cost $30 billion, and the Northridge, Calif. earthquake, which affected more than 2,200 square miles.”

– Worse, the aftershocks of the terrorist attack are rippling far beyond the epicenter.

– Crain’s cites a typical example: Tom Cat Bakery. “The wholesaler, which sells bread to hotels and restaurants in Manhattan, was forced to reduce its employees’ hours and thus their pay by 20% last week, because revenues are down about 35%. Four of Tom Cat’s biggest customers are hotels that either don’t exist anymore or are shut down indefinitely. The bakery’s other customers, in midtown and upper Manhattan, have slashed their orders because of the shortage of tourists in New York.”

– There may well be fewer tourists in New York these days, but those that are here are swarming to Lower Manhattan to catch a glimpse of “ground zero”. They seem to easily outnumber the emergency workers. It’s almost impossible to walk down the sidewalk on Broadway.

– “Bits of fine dust and ash still coat the windows of buildings 10 blocks away,” writes the Blue Team’s Dan Denning, who visited New York this weekend to bear witness. “Clean up crews are busy trying to get the city back to normal. Their efforts are being hampered by thousands of tourists looking for the best angle to take pictures of the smoldering ruins. It seemed like poor taste to me.”

– “[A]ll over the metropolitan area,” the New York Times reports, “people are slowly returning to shops to buy what they must: groceries, school supplies, new sneakers for the children. But the big-ticket items – cars, jewelry, huge-screen televisions – are moving slowly, if at all.”

– “In wartime, markets do not operate freely,” cautions Marshall Auerback. “There is a tendency toward increased regulation and centralized, government-directed activity – even those governments which, under normal circumstances, would champion free markets. Profit maximization, returns on capital and investment, all of these otherwise laudable capitalist objectives are temporarily subsumed in the pursuit of a broader objective.”


Back in Paris…

*** I heard from the FBI yesterday. They’ve asked for a copy of my message from September 11th with the prophetic headline – “Something’s Coming, Something Big.” Of course, I had no idea what was coming. But I knew there must be something, which in the sightless eyes of the FBI classifies me as clairvoyant.

*** And several Daily Reckoning readers wrote yesterday to warn me: “Watch out,” said one. “You are in danger of losing your audience. You just can’t imagine the sentiment over here. Returning from Europe, I was shocked. I’ve never seen anything like it.”

*** “Something big has happened,” Elizabeth explained, demonstrating that geography is no barrier to collective sentiments. “It is more terrible than you seem to realize. We Americans have been attacked. Thousands have died. We are no longer safe. This is no time for jokes or ironic reflection. It would be like telling jokes at a funeral.”

*** “After the tragedy,” today’s International Herald Tribune quotes sitcom producer Steve Levitan, “being funny almost seems treasonous…and when you laugh, you feel guilty.”

*** “It’s not that irony is dead,” said John Aboud, editor of Modern Humorist, “It’s just that feelings and honesty are in.”

*** “This incident has made everyone a lot more thoughtful,” added producer David Ladd. A DR reader summed up the situation: “You have no idea what it is like here. Flags flying everywhere…everyone unified as I have never seem them before. It is wonderful. And a little scary, too.”

The Daily Reckoning