Up and Down Wall Street: Think Viagra!
March 19, 2001
Up and Down Wall Street: Think Viagra!
By ALAN ABELSON
A friend called late last week to relay some intriguing intelligence about CNBC (we refrain from tuning into the channel because it's now established fact that watching it can be injurious to your financial health). Our observant pal, an intrepid soul who says fie to such concerns, was eager to bring to our attention a change in the nature of the commercials: Online brokers are out, Viagra is in.
What, our friend wondered, malice aforethought, did we make of the shift?
The most obvious -- and least interesting -- possibility that popped into our head was that a lot of e-brokers no longer had the scratch to advertise, while a drug outfit like Pfizer is enormously flush these days. But a little reflection strongly suggested something more calculated at work. To wit: The top tin at CNBC (they used to be the top brass, but the bear market is working a kind of reverse alchemy) worried about the dizzying plunge of stocks and its impact on the economy and ad revenues, decided to give help to the increasingly shrill but ineffective cheerleading by its cadre of professional airheads.
More specifically, they devised a devilishly clever scheme to unobtrusively instill a more positive attitude in their distraught and demoralized audience. Repeated often enough, they hoped, the Viagra spots would revive that audience's bullishness and incite them to buy stocks.
Just how? Why, by inducing viewers to subliminally transfer in their minds the miraculously superior performance promised by the Viagra commercials from romance to investing!
Scoff not: If the power of advertising can get millions of people to use twice as much shampoo as necessary every time they shower, it's not too much an imaginative stretch to suppose that same power can subtly blur the impulses that distinguish love and lucre. These are desperate times, after all, and demand extreme measures. So the top tin at CNBC deserve not derision but acclaim for their ingenious plan to rouse a supine market.
Will it work? Well, it's as likely to as anything Mr. Greenspan and cohorts will come up with at Tuesday's meeting. The Catch-22 for Mr. G is that if, as the markets now thoroughly anticipate, he lowers interest rates by three-quarters of a percentage point, the initial jubilation may well give way to anxiety that the very size of the reduction means the economy is in much worse shape than the Fed has been letting on. But if he temporizes with a 50-basis-point cut, the disappointment could freshly crater stocks.
Our own feeling is that investors have gone overboard in pinning their hopes on Mr. Greenspan. So far as monetary policy's impact on the stock market goes, the received wisdom that cutting rates invariably has been followed by a strong stock market is dangerously simplistic. Not the least of its shortcomings is that it ignores the sharp contrasts between the way things are today and how they were on relevant occasions in the past.
In his latest Gloom, Boom and Doom Report, the peerless Marc Faber addresses that very difference. Yes, he agrees, stock prices have typically risen following a period of Fed easing, but consider:
The first rate cut in the wicked 1973-74 bear market occurred in January of '74, in the midst of a vicious recession and after stocks had already been devastated: They stood 30% lower than in 1964, a full decade earlier. The S&P was selling at a mere seven times earnings. For its part, the Dow was trading at less than book, a 66% discount from replacement cost, and offered a dividend yield of 6%.
Much the same profile, marked by low P/E and high yield, was displayed by the 1981-82 market. The first rate cut came in the fall of '81 after a prolonged rise in the Fed funds rate from 5% in '77 to 20%. And it was followed by three additional reductions, inspired by the fiercest of postwar recessions, with unemployment vaulting over 10%. In the preceding 15 years, moreover, the market had lost 9% -- a loss, if you adjust for inflation, that balloons to an astounding 70%.
In terms of economic misery and stock-market damage, what we've seen so far is still small potatoes compared with either of those dark episodes. In terms of valuation, between now and then there's simply no comparison.
And, lest we forget, Marc points out, whatever it soothingly claims, the Fed is not dealing with an inventory liquidation but the much more intractable dynamics of a capital-spending downswing. Whether Mr. Greenspan can work his monetary magic against that particular economic phenomenon is quite problematic.
Problematic, too, for that matter, is whether his exertions can put the Humpty-Dumpty stock market together again. If it comes to a choice, our money's on Viagra.
Were you aware that Alan Greenspan is a member of OPEC?
Admittedly, the evidence is circumstantial. We haven't seen a membership card and certainly not an official cartel letterhead with his name on it. But then, he probably prefers to remain incognito, going under the name of Greensheik and asserting his considerable influence from the shadows.
What prompts such conjecture is that, on even cursory review, OPEC's actions over the past decade or so have been too consistently supportive of Mr. Greenspan's economic blueprint -- it has been entirely too willing to carry Mr. Greenspan's water -- to be coincidental. Thus, when he was eager to accelerate the economy, spur the stock market and keep inflation timid, OPEC obligingly suppressed oil prices.
When, however, he came to fear that irrational exuberance would lead to extremely irrational exuberance and put his prospective sainthood in jeopardy, OPEC dutifully boosted oil prices. That had the effect of slapping a $600-$700 billion tax increase on the world, which in the fullness of time did wonders to help cool an overheated economy and sizzling stock market. While, of course, relieving Mr. Greenspan of the need to do anything that would impair his popularity.
But you know how wild boys can be, and the fellows at OPEC, once they got a renewed taste of fat living, started freelancing instead of paying heed to Greensheik's script. And, inevitably, things got a bit out of control. So, even as we scribble these lines, they're gathering in solemn conclave to try to get back on track.
In fact, that OPEC feels compelled to have a powwow is very good news for mankind that hasn't been accorded the appreciation it merits. For what has forced this get-together is the recent drop in oil prices. The gang is worried enough that it purportedly will cut output by around a million barrels a day to forefend a further decline in prices (crude is off about $10 a barrel from its peak, and natural gas, we might note, has also been on the slide).
How effective the move will be is anybody's guess, but to us it smacks a little of King Canute at the beach. For one thing, there's always a danger that if prices shoot up again, the impact on a softening global economy could further weaken demand, which, if we recall our primitive economic text, would send prices spiraling downward once more.
More to the point, for a crazy-quilt collection of countries bound together essentially by one common interest -- greed -- maintaining discipline is much easier when prices are scraping bottom, as they were a few years ago, than when they're relatively high, as they are today. So our bet is that cheating, a normal pastime among many OPEC members anyway, will seriously vitiate any effort to rein in production.
This doesn't mean crude in the teens. But it likely means prices not too far from where they are currently. That should translate into lower electricity, heating-oil and gasoline prices, affording, to state the obvious, very welcome relief for the increasingly beleaguered consumer. Our advice, though, is not to spend the money until the savings materialize.
For there's something about oil products -- maybe it's a question of physics, or perhaps it's chemical -- that makes their prices go up like mercury but come down like molasses.
That oil prices are not destined to spurt into the high 30s and natural-gas prices are not primed to shoot back up to $10 an mcf, at least not tomorrow, doesn't mean that energy isn't one of the few interesting investment areas still extant. Quite the contrary. As Royal Dutch Petroleum's bid for Barrett Resources demonstrates, there are buyers for independents, particularly those with reserves in nice, congenial neighborhoods like North America, and buyers, moreover, blessed with deep pockets and a willingness to pay up for what they want.
Indeed, the stories we hear from the oil patch are that Royal Dutch's bid has really stirred the honey pot. Big buyers, not a few of them that don't do anything productive for a living but somehow amass vast pools of capital, are suddenly very keen to throw their big bucks at comely-looking oil and gas companies.
That could mean a competing bid for Barrett. More certainly, it means a mighty, volcanic eruption of takeover activity in oil and gas, with prices escalating as the bidding heats up.
And, finally, but this is a ways off, it means we will be witness to the end of another energy boom, since acquisitive interest is most intense at the peak.
We bounced these somewhat inchoate inferences off our friend Bernie, the oil maven, and, to our surprise, he didn't quarrel too much with them. (Bernie, we should explain, keeps a tub of cold water handy specifically to throw on other people's ideas.) The Royal Dutch move on Barrett (which Bernie recommended in this very space a couple of years ago and mucho points lower), he asserts flatly, raised the ante significantly as to what independent oil and gas outfits will fetch.
Chuckling, he notes that the major oil companies pretty much cleared out of the states 10 years ago, but Royal Dutch has signaled the prodigals' return. The wave of consolidation in the making, he anticipates with manifest pleasure, carries with it the prospect of some lush paydays.
So we asked the obvious question: Which companies look ripe, why do they look ripe and, most important, how much does he think they would bring in a buyout? In other words, we asked him what he owned.
He offered up two names: Vintage Petroleum and Comstock Resources. Both are real companies (neither has a dot.com after its name), and the stocks of both are selling a good cut below breakup value.
Vintage is a Big Board number with headquarters in Oklahoma and stakes abroad as well as in this fair land. Buoyed by rising gas and oil prices, it earned $3.35 a share last year and had cash earnings of $5.79. This year's profits could approach $3.50 a share, while cash earnings could run comfortably above $6.
What's to like about the company, besides its subdued evaluation, is that it has consistently done well replacing production and adding to reserves, while making good use of its ample cash flow to pare down its debt (now 42% of capital, versus around 60% a year ago).
The stock is selling for 19 and change; it has been as high as 28, as low as 16. Bernie figures, in a takeover, it'd go for 32-33.
Comstock's out of Dallas, and its oil and gas properties are in the Gulf of Mexico, Texas and Louisiana. Earnings last year were $1.2l and cash flow a hefty $3.28 a share, and the outlook for this year is for net of $1.75 or so and cash flow north of $4.50.
The shares, also on the Big Board, are going for a hair over 11 and have ranged over the past 12 months as low as 4 and as high 15. Bernie has targeted 16, but it wouldn't knock his socks off (those days he happens to be wearing them) if somebody came along and paid a few bucks more.
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