Market Monitor-James Grant, Editor, "Grant's Interest Rate Observer"
PAUL KANGAS: My guest market monitor tonight, joining us from the NASDAQ market site in New York, is James Grant, editor of the highly respected publication Grant's Interest Rate Observer." Welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES GRANT, EDITOR, GRANT'S INTEREST RATE OBSERVER: Thank you, Paul. Nice to be here.
KANGAS: According to today's first quarter GDP report, the economy is hot but the stock market has been and remains rather cold.
GRANT: Yes.
KANGAS: What kind of investment strategy do you recommend to weather these conditions?
GRANT: Oh, I mean, I think the key to the strength of the economy is the literally super heated first quarter recovery that's being flattered by seasonal adjustments and the warmest winter in about a century. The trouble with the stock market, the trouble with our investment habits, so deeply conditioned over the past decade or more, is that we are not used to paying attention to valuations. And the stock market is really, really rich, even now. I mean it's down $4 trillion or so in capitalization and yet it's that rarest bird of plumage, an overvalued bear market.
KANGAS: Well, that's what you told us back in November when you were last with us. You said you can't imagine a market near a bottom with these kind of valuations. And that seems to be proving true. So what kind of a strategy are you employing here? What are you doing? Just sitting in money markets?
GRANT: Well, there are perhaps two ideas I can share. One is an income generating idea. Everyone who is in the investing world ought to have some income. It's a great thing. There's a company called Annaly Mortgage Management, NLY on the New York Stock Exchange. It's a virtual thrift. It buys mortgage backed assets, AAA rated Fannies and Freddies and home loan banks and that stuff.
KANGAS: Price range right now?
GRANT: Per share it's about $16 and change.
KANGAS: And that yields what?
GRANT: It yields 15 percent, which is probably not going to last. When you hear 15 percent, if you have a normal set of financial reflexes, you tremble because of the evident tightrope walking that the guys are doing to attain it. The people at Annaly are very conservative. They are levered.
KANGAS: Yes.
GRANT: They are speculating, but prudently, in interest rates. They're borrowing at about 2 1/4 percent, say, and they're investing at 4.9.
KANGAS: Right.
GRANT: And that spread is as wide as it's been for a long time.
KANGAS: Well, betting on interest rates reminds me of the problem with those geniuses at Long-Term Capital Management.
GRANT: Well, I think the people at Annaly know they are not Noble Prize winners and take precautions.
KANGAS: OK.
GRANT: I should say that I own this thing. So I'm speaking…
KANGAS: Yes, you do own the stock yourself?
GRANT: So I'm an interested party.
KANGAS: OK. All right, well, I would tell our viewers if a lot of people like that idea of 15 percent income - - and I'm sure they will -- be careful Monday morning before you buy the stock with a market order. Check the price. Wouldn't you agree with that, Jim?
GRANT: Yes. Widows and orphans should be doubly careful.
KANGAS: Right. Very good. All right, now what else? You're obviously very bearish on the stock market overall. How do you like gold? That's been a wonderful group.
GRANT: I am very, very bullish on gold. I think gold is the, it's the reciprocal of the celebrity of Alan Greenspan. It is the way to play what I think is an inevitable downgrading of the dollar in the eyes of the world. We, the United States runs an immense deficit with the rest of the world. We need $2 billion a day of investment in this country to finance this deficit. It has been a great attribute, you know, it's been a great thing for this country to have been able to produce so much less than we consume. That apparently is ending. And, indeed, against almost all currency, the dollar has turned suddenly weak. And, you know, gold has been in a 20 odd year bear market.
KANGAS: Right.
GRANT: It is known to be the worst thing you can put your money in.
KANGAS: Is a gold stock, is there one that you would buy now?
GRANT: Newmont Mining (NEM), I think, is about the best of the lot.
KANGAS: OK.
GRANT: You look at it and you get sticker shock. If you are familiar with gold, you can't believe how much it's up.
KANGAS: Yes, understood. But you're confining any new investments into high income type of, like Annaly and then some of the golds?
GRANT: Well, yes.
KANGAS: Bearish on the rest of it for the moment?
GRANT: Yes. As you know, I have some investments in Japan, but, yes.
KANGAS: Yes. How did those turn out?
GRANT: Well, we're very excited.
KANGAS: OK.
GRANT: Yes.
KANGAS: All right, we'll check the next time on those.
GRANT: OK. Great, Paul.
KANGAS: Thanks very much, Jim.
GRANT: Thank you.
KANGAS: My guest, James Grant, editor of "Grant's Interest Rate Observer." |
