Earth's Bright Side
"Did you see the news? Argentine workers are taking over the factories…"
"Yeah…the factory owners are probably glad to get rid of them…"
Your editor was having dinner with his friend from Argentina, mentioned above.
"My brother still lives there," the friend continued. "He said people are being forced to sell their furniture…even their wedding rings. Of course, it’s great if you’re a buyer."
As you know dear reader, here at the Daily Reckoning, we always try to look on the bright side of things. So, today, we turn away from the darkening days north of the equator and look south – where the sun shines a little brighter each and every day.
It has been a dismal season below the Rio Plata. The Argentine Bolsa has dropped 85% in the last 5 years. If that weren’t enough, the country has been in recession for the last 4 years – one that has been longer and deeper than the Great Depression of the ’30s…and worse than any downturn in the last 100 years. This year alone the national GDP is expected to decline another 16%.
Since January, the Argentine peso has fallen 60% against the dollar. So great has been the currency decline and the recession that typical monthly wages have dropped from near $1,000 at the beginning of the year to only $250 today. This places annual earnings of the average Argentine below nearly every country in Latin America. Even in Nicaragua, average annual earnings per capita beat those of Argentines.
Buy cheap, sell dear. Financial assets in North America and Europe are still dear, but getting cheaper. Financial assets in Argentina, meanwhile, are cheap. Mightn’t they get dearer someday?
The latest figures from the Homeland tell us that 1.3 million more Americans slipped below the poverty line last year, bringing the total to 32.9 million. But out on the pampas, nearly everyone has been reduced to living like hogs.
At the beginning of the 20th century, Argentina was about as rich as Europe, per capita. Penniless English aristocrats would send their daughters either to New York or Buenos Aires in the hopes of making a lucky alliance. Failing that, they could at least support themselves by becoming governesses and private tutors to the upstart families with plenty of money but little else…
And gone are the days when the poor of Italy or Spain would load the decks of cargo ships…hoping for a chance to make their fortune in the New World. Now the traffic is in the other direction, with Argentines immigrating to the lands of their grandfathers!
Once a land of boundless opportunity, it is rare to see Argentina described in the press today without a modifier such as ‘hopeless’ or ‘basket case’ attached. This does little for the self-esteem of the proud race of the pampas, but investment value and self-esteem vary inversely, or so we think we’ve noticed.
For wasn’t it the Japanese that had the most magnificent brand of capitalism the world had ever seen – just before they entered the long, slow-motion downturn which shackles them even now, 13 years later?
And wasn’t it agreed everywhere that the U.S. model of dynamic, entrepreneurial capitalism represented the crown of all creation…at the very moment when U.S. asset prices reached their most absurd excess?
And, last year, wasn’t Zimbabwe among the most corrupt, woebegone nations on earth? Yet, the Zimbabwean stock market has risen 120% so far this year – the world’s top performing market.
Which leads us to wonder: what market might investors loathe most today?
We have no ready answer. But we do not recall any comments about the wonders of Argentine capitalism lately. Searching the bookstore shelves, we see no books exalting the Argentine system nor any praising the genius of Argentine central bankers. Nor can we think of a single Argentine business tycoon, nor even a single product that makes its way beyond the country’s borders.
Come to think of it, we’ve never heard a single comment about Argentina business or finance that was not a joke.
It is either feast or famine on the bolsa. The Merval index began the last decade below 200. The ’80s had been a ‘lost decade’ with high inflation rates, incompetent generals and a disastrous war with Britain. But then, the ‘Brady Plan’ brought the country’s external debt under control and the Central Bank was liberated from direct government control. These measures helped make the Argentine stock market the world’s number one performer for 1991. Near 900 at the beginning of 1992, the Argentine stock market index collapsed below 300 in May of ’95. Then, it entered a new bull market that took it up 240% over the next 24 months. Since then, it has dropped back below 200 – wiping out a decade of profits.
If this is not the bottom for Argentina, it can’t be far away; there is just not that much room left on the downside.
"The unprecedented level of the downfall that the Argentine economy experienced in the last four year presents a unique opportunity for equity investors," writes Marcelo Mindlin in the latest issue of Mark Faber’s Gloom, Boom and Doom Report.
"Argentina is very close to its record bottom and could rebound strongly over the coming months."
Faber makes a recommendation:
"IRSA is the largest and most diversified real estate company in Argentina, with interest in office buildings, shopping centers, hotels, apartment buildings and other residential developments."
The company manages 60% of Buenos Aires’ shopping center space, for example, and 12 office buildings with 941,510 square meters of gross leasable area.
"Down from a market cap of $800 million," Faber continues, "IRSA is now trading at a market cap of $80 million, with only $120 million in debt…
"If you can pick up real estate in an emerging economy at less than 10% of the value of its London or New York equivalent, I feel reasonably confident that is value will increase significantly in the future."
You can buy low in Argentina. We will wait to find out if or when you might be able to sell dear.
Your editor, signing off for the week,
September 27, 2002
Where are we?
We stand on tiptoes this morning and raise our heads to take a look around.
It was – yes – 3 years ago that we first sniffed the air and thought we smelled the sweet aroma of Fin de Bubble. How we enjoyed those warm autumn days! There was such a spirit of loony optimism and so much to make fun of.
But then the bubble popped…and then came 9/11…and suddenly it wasn’t so funny anymore. Loony excess moved from the market to politics with terrorist attacks, war… and the invention of the ‘axis of evil,’ the Homeboyland and the doctrine of ‘preventive war’.
Meanwhile, one by one, the ice sculptures of the Great Bubble Era melted down and our crystal heroes turned into soggy villains. And now, the last of them, the benighted Alan Greenspan, is mocked and booed in the press – after admitting to the world that he didn’t know what he was doing and couldn’t have done anything anyway.
There is a new chill this autumn air…and a new scent upon it…the odor of fear and fretting, desperation and sweat.
But a man who frets about his money or his wife might just as well kiss them both goodbye, in our opinion, for he is beyond hope. Wives and money are to be enjoyed… admired…appreciated. Properly cared for, they will provide comfort and companionship in your old age. But take them too seriously and they go bad.
A man who worries about his money loses his sense of perspective. He forgets how to manage it. He may hoard it like a miser…or gamble wildly, hoping to ‘get even’ on some new trading system or the next rally.
We cannot guarantee success in this life. We can only deserve it. But a man who worries about his wife or his money doesn’t deserve either. He becomes so cloyingly attentive that they will back off in contempt for the poor fellow. It is just a matter of time before his wife despises him and his money runs off with someone else.
Eric…what say ye, oh sage one from the island of the fretful?
Eric Fry in Manhattan…
– Two for two!…What do you know? The Dow managed to string together two consecutive triple-digit gains. The blue chips climbed 155 points to 7,940. The Nasdaq was not quite so lucky, dropping 1 point to 1,221.
– But happily, for those of us of a bearish persuasion, even when the stock market rallies there’s no lack of potential doom and gloom to report. For example, feast on the latest dire forebodings from Morgan Stanley’s Stephen Roach: "Sept. 11 may have been a defining event for America, [but] it was not a defining event for the economy or the financial markets. That role belongs to the stock market bubble of the late 1990’s that finally popped in March 2000…The bubble expanded high enough, and for long enough, to have infected the behavior of consumers and businesses alike.
– "There is good reason to believe that both the property and consumer bubbles will burst in the not-so-distant future. If they do, there is a realistic possibility that the United States, like Japan in the 1990’s, will suffer a series of recessionary relapses over the next several years. Yet denial remains deep, just as it was when the Nasdaq composite index was lurching toward 5,000. Few want to believe that this economic expansion may be built on such a shaky foundation."
– Remember, you don’t always get what you want, and in fact, contrary to the message of the Rolling Stones’ song, "you don’t always get what you need." But often, you get what you deserve.
– Will there be a double dip recession? "There already is one," comes the answer from two chief credit officers of two of America’s largest banks. These two gentlemen privately informed a friend of mine that the balance sheets of many of their customers are deteriorating quickly. Demand for new loans with which to invest is also dwindling. Both trends are hallmarks of a recessionary economy.
– And as we’ve pointed out repeatedly, household balance sheets keep going from bad to worse. In short, the burden of debt is starting to weigh on the world’s biggest economy. According to the American Bankruptcy Institute, 2001 was the worst ever year for bankruptcies, with households accounting for more than 97 percent of all bankruptcies. Bear in mind however, that colossal bankruptcy filings like Enron’s count as only a single bankruptcy.
– "Household debt is at a record high relative to disposable income," the ABI relates. Francois Velde, a senior economist at the Chicago Federal Reserve observes that over the past 50 years, U.S. household assets have held steady at a range between 4 and 5 times Gross Domestic Product. In an alarming contrast however, household liabilities have tripled, rising from 24 percent of GDP to 78 percent.
– "It’s always good to meet subscribers in person," Dan Denning says of his recent junket to Colorado Springs for a meeting with the Supper Club. Dan and I both attended the confab and had the good pleasure of meeting many of the faithful Daily Reckoning readers…and various other saints.
– "The Supper Club is a private venture capital investment group of accredited investors," Dan explains. "It meets about four times a year to review the business plans and investment opportunities of three to four venture-stage companies per meeting. I must say that in the two years I’ve been coming to the group’s meetings, I’ve become more and more impressed with both the quality of the investment opportunities and of the club members. Many of the Supper Club members are themselves successful entrepreneurs or business professionals who possess a specialized knowledge of the types of businesses ventures under review at the club meetings. Often, they’re able to ask targeted, expert questions of the presenters that help the rest of the club members to arrive at intelligent conclusions.
– "The Supper Club is a terrific forum for those looking for the kinds of investment opportunities not available in public markets," Dan concludes. "I realize that this sort of investing isn’t for everyone. But it can be a fascinating and worthwhile complement to traditional long- term investment strategies. If venture-stage investment opportunities interest you, I encourage you to attend the upcoming Venture Capital Investing Crash Course here in Baltimore on November 13th at the Waterfront Marriott from 8 a.m. to 4 p.m. You’ll hear from Agora personnel on how to analyze a venture capital opportunity – from evaluating business plans and accounting projections to exit strategies and how to value the potential return of a start up business. It should be a good day." For details, see:
The Supper Club
Back in Milan…
*** Even during the downturn some investors are still making money. "Investors seem to forget about small cap stocks," wrties our own James Boric, editor of a newsletter called Penny Stock Fortunes. "Yet, week in and week out small cap stocks are some of the best performing stocks on the market. In fact, 9 of the 10 best performing stocks this past week are small cap stocks. And 6 of those trade for under $10. The average gain on those 9 stocks is 19% – and that’s just in 3 days time. That seems like a real way to make money to me."
See: Penny Stock Fortunes
*** Indeed, the bear market will end someday. But not when some dope on CNN tells you it’s over. It will end when investors give up and pull their money out of the market. How much further to go before that happens? Well, so far, only 2.6% of the money in equity mutual funds has been taken out. $2.3 trillion remains…
*** The global downturn has gotten to be such big news that even the IMF has noticed it. "We need to be concerned about the strength and durability of the ongoing recovery and the stability of the international financial system," says the agency’s number one. The risks, he went on, "are tilted to the downside."
*** "My friends call me and tell me I should become a citizen," said an Argentinean friend over dinner last night. "I’ve been living in Washington for the last 20 years…and I always thought about becoming a citizen. You know, if you’re not a citizen you have no rights. That why all those suspected terrorists are in jail without being charged with anything. But I came to the U.S. to get away from all that kind of thing. Because America was a free country. You didn’t have to worry about getting rounded up by the police…or ‘disappearing’ at night…"