The Garden Party… And More Very Cheap Stocks

The wind blew. The rain came down in torrents.

We had been working at a furious pace – getting ready to leave for the summer. But when 6PM came we packed into two cars to drove about a half an hour to a tiny hamlet called La Barre.

Even with the intermittent downpours, the place was delightful. There were only about six stone houses, with a tiny road threaded between them. Flowers were in bloom everywhere – in window boxes, in the hedges, in the backyards.

Our hosts were a charming English couple who moved to France the same time we did – about 5 years ago. They live in a common farmhouse, a long, stone building with a red roman tile roof and a barn attached to the end. But they have given it the Cotswold touch – dolled it up with flowers stenciled on the walls, exposed beams, and English-pine furniture.

There are many English people in the area. They come because it is cheaper to live in France…and nicer too. A farmer with 100 acres in the south of England can sell his land for, say, $10,000 per acre. Here, near Poitiers, he can buy land for only $1,000 per acre. Without leaving the European farm system – with its elaborate rules and subsidies – he can end up with twice as much land, plus $800,000 in the bank. What’s more, it is less crowded, and prettier in France.

But among the people at the garden party was a new breed of English immigrant.

"God told me to come," said a pretty young woman with short hair. An older man, too, reported that he was on a mission from God. He wasn’t sure what the mission was, but he accepted it.

"It could be that God doesn’t want to attack the Catholic church directly. Maybe he is sending us here to renew the faith from the bottom up…" the young woman explained.

"Do you have a personal relationship with Jesus?" she asked…

"Well, I don’t think of it like that," I replied.

"But it is not just a matter of style," she continued. "The Bible tells us that you can only approach God through Jesus. You have to get to know Jesus, or you can’t know God."

Maybe my ambitions are too modest, dear reader. But I have never been on a first name basis with a divinity. I do try to figure out how the ‘invisible hand’ works, but it seems presumptuous to give it a shake.

Real truth, real beauty and real value are similar. You can’t just walk up and introduce yourself like a waiter in a bad restaurant. The best you can do is to work as hard as you can to discover them – thinking so hard "your brain hurts," as Heisenberg put it – and hope to meet them by accident.

Perhaps it is by modest expectations that great ones are achieved.

Modest expectations are built into the price of Maxxam stock. "Today…" wrote Jim Grant a few weeks ago, "the company is valued at less than half its net cash." But Maxxam has more than cash in its till. It also has shares in a company called Kaiser, which alas, has been dusted with the talc of financial disaster – asbestos. Kaiser shares have, understandably, already been deeply discounted. But even if the Kaiser shares disappeared, Maxxam would still have two dollars of assets for every one dollar of stock price.

The company does not have to shoot the moon in order for investors to come out ahead. It just has to avoid shooting itself.

Another deep value company is one whose condition I reported many months ago – W.R. Grace. Unable to predict how the invisible hand of the future might deal with the company, I modestly noted that the stock seemed to be a real value at the time.

The trouble was that while the company’s assets could be toted, its liabilities could not. Grace faced, then and now, thousands of asbestos-related claims. Seeing no other way out, management decided to put a bullet in its own foot…using the bankruptcy courts to create a wound of the sort soldiers dreamt about – bad enough to get them sent home, but not bad enough to kill them. Investors reacted unfavorably – W.R. Grace stock fell to even lower lows.

But all is not lost. Bankruptcy is a way of defining and limiting the extent of the asbestos claims. About 4 years from now, analysts believe the company will be resurrected with shareholders ending up with about $9 worth of assets per share. At a current price of $1.24, this would represent a modest, but healthy, return on investment.

Your modest reporter,

Bill Bonner
Paris, France
June 18, 2001

P.S. As I was discussing religious doctrine with a pretty young woman, a very big man was flirting with my wife.

"He was shameless," she reported. "He began by telling me he had been divorced for 20 years…and then he said he had been having ‘a relationship with a young woman of the opposite sex’… God only knows what he meant; I didn’t want to ask – opposite to what? Finally, he asked if I had come to the party with my husband. When I said

‘yes’ he looked terribly disappointed…

"I might have been flattered had he not been the size of a hippopotamus and just as dim."

*** Will the recovery begin next week? Next month? Has it already begun? Investors are not sure when it will begin, but they are sure that better days are coming soon.

*** This could be a dangerous week. People have been expecting a ‘second half recovery.’ Yet, the second half is almost here – with no sign of a recovery. In fact, the news just seems to get worse. Consumers’ net worth, for example, fell 8% in the first quarter, from a year earlier – the biggest drop ever. What a surprise it would be if the second half produced worse conditions instead of better ones. With a report from Wall Street, here’s Eric Fry:

– On Friday the Federal Reserve reported that industrial production (among factories, minds and utilities) slumped in May for the eighth month in a row. Also, the capacity-utilization rate plummeted to 77.4%, its lowest reading since August 1983.

– Nortel Networks, JDS Uniphase, McDonald’s, Nokia and Juniper Networks all announced shockingly poor earnings trends for the current quarter.

– In a report headlined, "Nuclear Winter," Merrill Lynch analyst Steve Fox predicted that earnings from Corning Inc.’s fiber-optic operations will "be below even our worst-case scenario."

– Mr. Market took the news at face value. The Nasdaq registered its worst weekly performance of the year falling 8.4% to 2,028.

– The earnings shortfall announcement out of the Nortel Networks was particularly alarming, given its sheer magnitude. As Reuters reported, "[Nortel] announced plans to slash 10,000 jobs and predicted a huge $19.2 billion second-quarter loss as demand for its equipment that moves Internet traffic slows to a trickle. The job losses, on top of 20,000 cuts announced in April, mean that the company.will have axed a third of its global workforce."

– Chief Executive John Roth: "We have had better times. Is this the end of it? We sure hope so, this is a brutal experience."

– As part of its desperate, sweeping overhaul, Nortel promised to shutter an astonishing 8.8 million square feet of office and manufacturing space. With announcements like this, is it any mystery that North America’s largest commercial REITs are reporting both an unanticipated falloff in demand and fewer inquiries from brokers looking to fill space?

– The, a bullish financial Web site catering to day-traders, lost its editor-in-chief last week. The affable Dave Kansas resigned to leave behind the not- affable James Cramer and his beleaguered Web site. During the mania, it was fun springing out of bed each morning to write about tech stocks that go up every day. But lately, Kansas must have felt like Casey Stengel, manager of the 1962 Mets, considered the worst professional sports team of all time. "The only thing worse than a Mets game is a Mets double header," Stengel once said. For Kansas, the only thing worse than watching the tech bubble burst has been watching it burst some more.

– "Listen up, all you bottom-believers," writes’s Edward Moy, "tech-stock auguries are dropping like canaries in a coal mine. In Taiwan, where prosperity depends on the high-tech economy’s demand for semiconductors, global trade plunged 26%. On the demand side, U.S. orders for computers and semiconductors have collapsed, dropping 40%, according to International Strategy & Investment (ISI). From our perspective, it’s way past time for investors to exit the high-tech mines. All that’s left is the shaft." (see:

– Lynn Carpenter has pieced together a string of winners, of late, in her trading service The Contrarian Speculator. I mentioned her 271% ‘put’ on Nokia last week. Now, in her regular letter, she’s actually recommending that you buy another telecom – but a very unusual one. The company has an average return on equity of better than 20% (34% last year) even as competition has grown and the tech industry has melted down. "The shares have been beaten down to $19 and change," says Lynn. "In a normal market environment they’re worth $50 at a minimum – and within two years, Wall Street will be paying that much." (see: The Fleet Street Letter)

– John Lonski of Moody’s observes, "Dollar exchange rate appreciation in the face of the US’ record-smashing current account deficit underscores the strength of the world’s demand for dollar-denominated assets." In particular, Lonski notes, "Foreigners hold a near-record 36.7% of all outstanding U.S. Treasuries, a record 13.3% of federal agency bonds, and an unprecedented 22.7% of U.S. corporate bonds." Lonski suspects that waning foreign appetite for U.S. assets will begin to undermine the dollar’s strength.

*** "Confidence in the US$ is all that holds this
termite house together," asserts Harry Schultz. "Only confidence keeps the US$ up, despite having printed too many & removed its gold backing; the same with a stk mkt that’s still dangerously overvalued fundamentally. Only confidence keeps people buying in shops. Greenspan must lie hard to keep all those balls in the air, defying gravity to do it. But doubters are starting to come out of the adoration closet." (see: The Ultimate Con Game)

*** On what, one wonders, does confidence in the dollar rest? "The average wealth of the poorest 40% of Americans fell by 76% between 1983 and 1998," the Blue Team’s Dan Denning says, citing a Barron’s article on research by Edward N. Wolff… "and by 1998, median net worth for the US had fallen to $1,100." The great bull market of ’82-’98 not only failed to lift all boats, but "most Americans missed the boat altogether," Denning concludes. (see: Crack’s In The Dollar’s Hide)

*** Are we rich yet? Cerulli Associates reports that the rich doubled their assets in the last five years – from $4.4 trillion to $9 trillion. Cerulli breaks the rich into 3 classes. There are the lumpencapitalists, who Cerulli call the ‘mass affluent,’ with $500,000 to $5 million in assets. Only 200,000 people have more than $5 million. The ordinary rich have from $5 million to $50 million. Beyond $50 million, there are a few ‘ultra high net worth’ people.

*** If you are embarrassed by wealth, Wall Street has professionals who can help. Four California professors examined Wall Street’s buy and sell recommendations for the year 2000. They found that the most highly recommended stocks under-performed the market by 31%. The least favorably recommended stocks, meanwhile, beat the market by 49%.