Grant piece took a while to load, but finally came up. Here it is-
Men in brown
"By rights, the first comment of the new century
ought not to concern an event of the last century,
but the late- autumn IPO of United Parcel Service
-the biggest one of all time-may well be the
phenomenon that most clearly defines the late
phase of the boom. This is a bold conjecture, we
know, as the parade of absurdities isn't getting any
shorter. For example, not long after the
AOL/Time-Warner transaction was announced, a
J.P. Morgan analyst declared that the combined
company 'should trade at a 100 times EBITDA
multiple,' which, if true, begs the question of why
there should be any multiple assigned to any
favored growth company. Why not invest on the
honor system? Maybe that's what an unidentified
analyst was driving at in Tuesday's Wall Street
Journal when he was quoted as saying (in the
special bear-market-warning-supplement), 'If you
have to ask about valuation, you can't afford it.' If
you have to ask about UPS, the trailing earnings
multiple is 37.6 times. But the most arresting fact
about the biggest IPO, we think, is that none of the
$5.3 billion in net proceeds was earmarked for the
usual corporate improvements. 'We intend to use
the net proceeds to fund a cash tender offer for
some of our class A-1 common stock,' stated the
prospectus. So plainspoken was the admission
that almost nobody seemed to absorb the meaning
of it."
Speculative playthings
"A friend of a friend, a bond arbitrageur, reports that
the opportunities have never been thicker on the
ground. Because risk capital has very largely
abandoned the fixed-income markets, potentially
lucrative anomalies abound. Underscore, please,
'potentially.' One such example is the recent
harvest of busted e-converts, convertible bonds
issued by Internet companies, broadband
manufacturers and other high-tech purveyors as a
means of giving fixed-income investors some
Internet exposure and equity investors some
coupon income. In not a few cases, the issuers'
common stock has plunged below the price at
which the bonds can be converted. Stripped of any
immediate equity value, the converts are now
quoted as junk bonds, a class of investment
security with which the Internet generation is
largely unfamiliar. Equity buyers won't touch them
because they have lost their equity essence;
high-yield buyers (especially the managers of
public funds) won't bite because of the bonds' low
coupons and current yields. Then, too, nothing fails
to succeed in a momentum-driven market like
momentum to the downside. All in all, observes
David Sherman, paid-up subscriber and principal at
the money-management firm of Cohanzick
Management, contrarians would seem to have the
field to themselves."
Answer the phone
"Gilman Gunn, longtime financial-markets thinker
and doer (besides serving as chief investment
officer for international equities at Evergreen
Investments, he was a contributor to Vol. 1, No. 1,
of Grant's Interest Rate Observer), calls our
collective attention to last week's news from
Telefonica de Espana. The Spanish phone
company said it intends to boost its minority
shareholdings in various Latin American
telecommunications companies to 100%. The
stock market implications, being obvious and
dazzling, were instantly seized by global equity
investors. The credit market implications, being
also bullish though perhaps a little less than
dazzling, are still available for seizure, or at least
for sober and deliberate action. As noted above,
the bond market is where the risk capital mainly
isn't these days. If the transactions go through, the
publicly traded debt of the various Latin phone
companies will become a risk of Telefonica de
Espana, an A-rated-i.e., investment-grade-credit."
See Washington count
"It's nobody's secret that the price of the average
American house is rising, but the consumer price
index contains almost no sign of this pleasant bull
market. Whereas the housing component of the
CPI, out last Friday, showed a gain of only 2.2%
for calendar 1999, the Commerce Department
survey of new-house prices for the third quarter
registered year-over-year growth of 6.1%. The
House Price Index of the Office of Federal Housing
Enterprise Oversight and the Conventional
Mortgage Home Price Index (a production of
Freddie Mac and Fannie Mae) showed similar,
approximately 6%, increases for the third quarter.
Like a drugged horse or very nearly any value
stock, the CPI just can't seem to keep up. 'I think
that the consumer price index is not the particular
index which tells the most we need to know about
consumer price inflation,' said Alan Greenspan, in
response to a question after his talk before the
Economic Club of New York last week. The
chairman did not directly address the anomaly of
house prices, nor did he suggest that the index
has begun to flatter American price performance,
but-who knows?-he may come around to that way
of thinking. We have."
Interest rate heresy
"The notion that prosperity is bearish for bond
prices is rejected out of hand by progressive
thinkers in the year 2000. It's inflation that drives
long-term interest rates, they say. If economic
growth has any effect on interest rates, the
argument goes, it ought to be bullish, as it isn't the
rich countries that tend to default on their debts.
The higher the national ratio of earnings to fixed
charges, the better. Here is an excellent
hypothesis, one that has given good and faithful
service in certain times, but-alas!-not in our own.
From the War of 1812 to the enactment of the
Federal Reserve System in 1913, long-term
government bond yields were low and relatively
stable (the Civil War epoch notably excepted).
Whether it was the existence of a gold standard,
the non-existence of a welfare state, or a cause
yet undetermined, the historians can decide, but
the yield on the millennium-edition U.S. Treasury
long bond would have caused the eyes of an
Edwardian creditor to bug out."
PLUS much, much more, and the data-laden
centerfold.
Cartoon Treasury
Click on cartoon for archive
"My nephew Andrew and I have
decided to close the account and
to trade the -- what do you call
them? -- tech stocks."
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