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Strategies & Market Trends : Value Investing
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To: sjemmeri who wrote (7298)5/23/1999 5:43:00 PM
From: James Clarke  Read Replies (2) of 78596
 
Raw diamonds are not priced off supply and demand like copper or corn is. The DeBeers cartel controls the global market, and will hold massive amounts of inventories if that is what it takes to keep diamond prices stable. There was a threat that Soviet exports would undermine DeBeers, but that has not happened. This is a cartel much stronger than OPEC because there are so few players that there is limited incentive to "cheat". In the case of OPEC, a small producer has a big incentive to cheat.

This is important because Lazare's net working capital is almost all diamond inventories.

The risk I see in Lazare is that a lot of the high end U.S. market for luxury goods has to be linked to stock market wealth. I need some of the catalysts to fire before the U.S. stock market tanks. In the high-end diamond market, though, a Japanese recovery might trump weakness in the U.S. market. That certainly has been the case in reverse - weakness in Japan has just killed DeBeers and Lazare in recent years despite strength in the U.S.

JJC
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