03/11/05: "Market Monitor"-James Grant, editor of "Grant`s Interest Rate Observer"
PAUL KANGAS: My guest "market monitor" this week is James Grant, editor of the widely followed publication "Grant`s Interest Rate Observer." And welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES GRANT, EDITOR, "GRANT`S INTEREST RATE OBSERVER": Thank you, Paul. Nice to be here.
KANGAS: Federal Reserve chief Alan Greenspan recently described the fact that long-term interest rates are easing despite rising short-term rates and he called it a conundrum. Do you think that word defines this phenomenon correctly?
GRANT: No, it`s a little paradox and we can straighten it out for him. First of all, the bond market takes what you give it. If you give the bond market the apparent certainly of funding cost that is 2 percent or 2.5 percent, people will borrow at that rate at the Federal funds rate and they will invest in higher rates for longer term. Then too the bond market has some muscle memory. It has been watching bond yields fall, bond prices rise since about 1981. People, for better or worse look backwards at times like this, not forward. I think that rates are going up.
KANGAS: So in the past, however, you believe that demand for the longer term yield is what is keeping that particular issue down?
GRANT: Indeed. People are demanding longer term bonds the world over. France, dear France, recently issued a 50-year bond, priced at all of 4 percent that was denominated in euros. These are the same, this is the same European country that has debased its currency off and on since France became a nation. So imagine the opposite of 1981 when people turned up their noses at 15 percent. Nowadays they are falling over themselves to seize 4 percent.
KANGAS: OK. In this period of generally low income return on investments, do you see signs that investors are taking more risks to enhance what they earn?
GRANT: There are signs all over the place Paul. The popularity of junk bonds is perhaps the foremost. These are speculative grade securities that ought to be returning equity-like levels. They ought to be returning 12, 15 percent a year. They`re priced for half of that. That`s how much people want yield and they will wind up get a lot less than they expect.
KANGAS: Are we close to a bubble stage?
GRANT: I think we are in a global bond bubble. The fixed income world`s equivalent about of the stock market five years ago.
KANGAS: Now on your last visit with us, July 9 of last year, you had four buy recommendations. Let`s see how they`ve done. Annaly Mortgage management is up 8 percent and it`s made some nice dividends for those that own it. In the meantime, how much dividend money has come in since then?
GRANT: About $1.50 to $1.48.
KANGAS: Well, that`s a pretty nice return. Are you still with it? You saw today Smith Barney put out a sell on it.
GRANT: I did. And Smith Barney I think was, reasoned well. It said that Annaly is at risk of rising short-term interest rates. It is, it said, so, Annaly is among the very best of a kind of sorry lot of income producing securities available to retail investors. The management is terrific. I still own it. You are supposed to own it for over the long pull of cycles. And 15, 16, 17, it`s good time to buy it. Twenty is probably a good time to sell it.
KANGAS: OK, now we had the Tocqueville Trust Gold fund up nearly 10 percent and you had two other recommendations back in July. First, Eagle fund, another gold, up over 10 percent and Newmont Mining, the granddaddy of the golds up 8.2 percent. Good calls. Are you with them all?
GRANT: Thank you. Yes. These are plays for dollar depreciation, which I believe is still going on.
KANGAS: We have one minute left, Jim. Got new recommendations?
GRANT: Yes, the Korea Fund is a closed end mutual fund. It invests as you might guess in Korea. Korea is a land of cheap stocks.
KANGAS: How many stocks in this closed end fund?
GRANT: 78 or so.
KANGAS: Well, that`s separate good diversification. How about another?
GRANT: Well, there`s something called the Korea Electric Power Company, the monopolist for electric generation in Korea. It`s very, very cheap. It`s going up because the currency is appreciating against the dollar but it`s only 6 1/2 times earnings. Yield`s about 4 percent.
KANGAS: OK, so good diversification and a nice yielding stock. Very nice indeed. Do you own both of those?
GRANT: I own neither. These are purely platonic thoughts, Paul.
KANGAS: OK, excellent. Thanks very much for being with us once again.
GRANT: You`re welcome, Paul.
KANGAS: My guest "market monitor," James Grant of "Grant`s Interest Rate Observer."
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