“The place is so cheap,” writes Doug Casey in his latest newsletter, “I feel like I ought to be wearing a mask when I go into a store there.”
A value investor can find opportunities in many different places – in many different investments. But you have to know what you’re looking for. Doug is referring to prices in New Zealand…a subject to which I will return in a moment.
Friday, we examined the proposition of value as though it were an aesthetic principle. I will state it broadly – value is found where people don’t want to look, that is, where things are ugly. The more repulsive, the better.
Why is this so? It is because people do not suddenly become Al Gore when they buy investments. They are still subject to emotions, feelings, peer-pressures, fears, doubts, pride and so forth. So they end up buying investments just as they buy almost everything else. They buy the things that make them feel good about themselves. They want to live in fashionable neighborhoods – even though the TV reception is no different and the prices are higher. They buy designer clothes, even though they are made from the same fabrics and stitched by the same seamstresses that supply Walmart. They want to be on the winning side of a sports event – even though it makes no difference in their lives.
If a man wants to feel that he is really modern and hip…a `digital man’, to use Ed Yardeni’s expression… he buys tech stocks and feels superior merely for owning them.
This part of the investment was described in Grant’s as the “entertainment portion”. Applying another untested, intuitive principle – that the total return from all investments over time will be roughly equal – we arrived at the realization: the higher the entertainment return on an investment, the lower the financial return.
The ideal stock would be in a company where the `entertainment’ portion was negative – a stock so ugly that they would have to pay you to own it. Imagine a company, for example, that strip mines national forest land to get asbestos that it then puts in cigarettes – using sweatshop, child labor in India to roll the smokes by hand. No specific company comes immediately to mind, dear reader, but I will keep my eyes open.
The principle should apply to all manner of investments. Real estate, for example, should give a greater financial reward the less desirable and attractive it is to own the property. An apartment in the most fashionable area at the height of a boom should be expected to have a very high `entertainment’ return …and a very low financial return. Ugly commercial property, by contrast, ought to provide higher rates of financial return. Liquor stores in bad neighborhoods ought to produce, on the average, higher rates of financial return than those in good areas.
I do not know, but I would guess that pornography, drug dealing, and prostitution have high rates of return per dollar invested. They are activities that – except in certain milieus – you don’t brag about, nor feel good about.
Even currencies should be subject to the same law. Ceteris paribus, abject currencies that no one wants ought to provide greater financial rewards than the dollar – which everyone knows is `super’.
And so, with our customary cheerful perversity, we might look around the world for the ugliest money we can find.
Thus was this thought incubating in the back of my brain like the bovine encephalitis virus, when I began reading Doug Casey’s commentary on the New Zealand dollar.
“The NZ$ has been the worst performing currency in the world,” Doug observes, “…that’s not an exaggeration. The only one that’s done worse is the Zimbabwe dollar; even the Philippine peso and the Indonesian rupiah lost only 20%. The euro is down about 26%.”
Why has the kiwi dollar done so badly against the American brand? Doug provides two explanations:
“Part of it has been the weakness of wool, meat, dairy, timber and other basic commodities in recent years. The world has needed fewer NZ dollars to acquire the main things the country produces.”
The second reason is “surely the socialist government that was elected there last November. These are not just an ordinary bunch of knuckleheads going through the usual drill about stealing from the rich and giving to the poor, or even the old-style cloth cap-wearing, working man’s socialists. These people are very New Class, with academic backgrounds, which means they’re totally divorced from both `the people’ and reality.”
Doug continues: “When you look at who these people are and what they’ve done since their election it’s easy to see why the kiwi dollar has cratered.”
What they’ve done has been to increase the top marginal tax rate, from 33% to 39%…re-nationalize the health service… and embellish legal provisions favoring employees over their employers. Union bosses, for example, now have the right to examine a company’s books to see what kind of pay raises a firm can afford.
None of these provisions sound terribly radical to an American living in France. But, as Doug says, “a currency is, in many ways, tantamount to stock in the government that issues it.” The election of the socialists in 1996 was clearly a sell signal. Since then, the NZ dollar has fallen from U.S. 70 cents to its current level of 40 cents.
In the beauty pageant of national currencies – the Kiwi Dollar gets the “Miss Congeniality” title. Very nice personality.
If the currency is ugly, will investors be rewarded for owning it? “For at least the last five years, a Kiwi dollar would buy you in New Zealand just about what an American dollar would buy you in America…” The standard of living in NZ is about the same as the U.S., but last year, when the NZ dollar traded at about 50 cents, the cost of living was only half what it was in the U.S. Now, the NZ currency is even lower – at 40 cents. For every ugly dollar you spend in New Zealand, in other words, you get $2.50 worth of goods and services.
“This is a superb time to get on a plane and check it out,” Doug suggests, ” – especially now that winter is coming to the northern hemisphere and spring to the southern.”
“If you’re not of a mind to check it out personally,” he adds, “NZ government bonds are a good way to play the currency. I’d stick with short maturities, since guessing the direction of interest rates is a different game entirely. The bonds yield a little over 6.5% all across the yield curve – about a 75-100 basis point advantage on their American counterparts.”
“The current government…will be gone in two years, if not before,” Doug concludes.
Then, the NZ dollar might be far more attractive…and we’ll have to begin looking elsewhere.
Your humble and obedient servant,
Paris, France November 20, 2000
*** Well, it has been 10 days and still neither George W. Bush nor Al Gore have been elected president. So far, so good.
*** Today, the leftist newspaper in Paris, Liberation, proclaims “America Without A Head.” But something interesting happened on Friday morning. It looked for all the world as though George W. Bush had become the head that America so nervously awaited. The Dow shot up 90 points. The long-awaited post-election rally was apparently beginning. Instead of continuing upwards, however, prices soon reversed course and began to fall – even before the Florida Supreme Court forced the corks back in champagne bottles in the Austin, Texas.
*** What is this telling us? Wall Street favors Bush…but even news of his victory is not likely to produce much of a rally.
*** “Stocks are headed south for the winter,” said Bill King. The election is just a distraction.
*** On Friday, the Dow logged another 26 points towards the equator – that is, south. The Nasdaq went in the same direction, but not quite as far. It ended the day down just 4 points.
*** The Nasdaq is down 41% since March. Any way you look at it, this qualifies as a bear market. But you’d never know it from reading the popular financial press. “They haven’t figured out,” wrote Doug Casey recently, “that denial isn’t just a river in Egypt.” In the minds of investors and financial journalists markets are always closing “off their lows.” A bottom is always in sight. And a light is at the end of every tunnel.
*** And most professional analysts still have never met a stock they didn’t like. Few downgrade a stock below “accumulate” or “market perform.” `Sell’ is a four-letter word on Wall Street.
*** And yet, the destruction is visible in every direction. “It breaks my heart…” said an analyst from Thayer Capital Partners, to a reporter from the Washington Post, “our whole technology community is falling apart.”
*** Among the things falling apart is a company called PSINet. As you drive north from Washington on highway 95 you find PSINet on the Ravens’ stadium in Baltimore. The big neon sign must have been put up at a time in the company’s life when the future seemed brighter than it does now. The stock, which traded at $60 in March rose by 19 cents one day last week – to $2.
*** The chairman of the company, a Mr. Schrader, had pledged his own shares to the bank to collateralize a loan. Alas, a $60 stock is much better security than a $2 stock – and news emerged last week that the bank had taken more of Mr. Schrader’s stock than he expected – and was selling it. Mr. Schrader thus experienced the same sort of drama that has visited Bernie Ebbers of WorldCom and Jay Walker of Priceline.com – the “margin call from hell”.
*** On a personal note, the editor of Target Marketing called me some weeks ago. He had put my photo on the cover of the magazine in 1998 and named me “Marketer of the Year.” Amid all the dreams and extravagant hopes I once held for my career – being Target Marketing’s Marketer of Year was not one of them. Still, mindful of Sid Vicious’s remark that the only bad publicity is in the obituaries, I was grateful for the recognition. Little did I know, the title came with a curse.
*** “How’s business,” he asked. He then chatted a little about the goings on at Priceline.com and explained that, following my moment of glory, Jay Walker succeeded me as “Marketer” for the next year. He also allowed that almost every “Marketer of the Year” subsequently stumbled badly.
*** Have I stumbled badly too? I will leave that to you to decide, dear reader. I just hope that my `call from hell’ does not come with an invitation I can’t refuse.
*** The Post article on PSINet informs us that it is “one of the world’s largest networks for Internet traffic,” and that it lost $1.38 billion in the last reporting period. Could that last figure be a typo? Why didn’t the bankers call sooner?
*** A small detail in the story also records that 12% of the shares in PSINet are owned by Janus Capital Corporation. Janus is deeply invested in techs – with 47% of its holdings in the sector. My guess: we are about to see another face of the Janus people.
*** Technology is cyclical, of course – like the mining sector. But, like mining, the cycles can be long and deep. Too long and too deep for casual investors to survive.
*** Amazon has fallen to $27.50. The bond market is pricing Amazon’s obligations as though the big River of No Returns is going to dry up completely.
*** From the WSJ, we hear on the street that George Gilder was not quite as drifty as he appeared. He was not merely a shill for the Promethean Light of the New Era – he was also chained to specific companies who paid him to talk up their stocks.
*** “Bankruptcy Epidemic on Horizon,” proclaims a piece by John Crudele in the NY POST. Crudele cites a study by SMR predicting that personal bankruptcies will rise 10-20% next year, continuing a 10-year trend.
*** One quarter of homeowners have less than $1,000 in the bank. 27.5% have between $1,000 and $5,000. Now, with higher energy prices, and falling stock prices, these people are feeling the squeeze. David Levy of the Levy Institute: “The chances are 2 to 1 that we’ll have a recession in the next 12 months.”
*** Debt has been growing 2 times as fast as income. A recession, and rising bankruptcies, would deflate the credit bubble and bring things back to `normal’.
*** In the old economy, as in the new one, things are slowing down. The auto industry led the nation in job cuts in October. Now suppliers to the auto industry are cutting back. Weirton Steel announced that it would lay off 3,200 people over the Thanksgiving holidays while it drew down inventories.
*** The euro fell on Friday – to 84.83 cents. It was off 1.3% – but still holding above its all-time lows.
*** Mr. Deshais, our gardener, is fattening up the turkeys. He cooks a big pot of potatoes to feed them. They look healthy – but not fat. He’s going to kill one of them on Thursday. France does not celebrate Thanksgiving. The children will be in school. So, we’ll have our dinner on Sunday.
*** Mr. Deshais has returned to his wife. He may have returned to his old habits, too. But more on that some other time.