EyeDrMike: here are some thoughts over this weekend on upcoming markets & Vivus outlook this coming week.
Below is Alan Abelson's editorial were he quotes ' Mike's " concerns about market over valuation:
" The murkier outlook for margins is one of the reasons Mike is bearish
on the stock market. This is not, we should note, his perpetual
investment stance. He turned negative last year for the good and simple
reason that, a confirmed stockpicker, he found there was an alarming
paucity of stocks to pick, stocks at least whose price had some
connection with value. The last such group was the oil drillers when no
one wanted them, and he bought them hand over fist.
Earnings generally in '98, he feels, will exert a powerful investment
influence and not necessarily for the better. Not only does he suspect
we're in for a serious diminution of margin expansion, but companies are
going to have what he calls bad translation problems because their mix
of business includes vulnerability to bad currencies. And, there'll be
earnings surprises galore next year, Mike predicts, not a few of them
negative.
He also posits the possibility of external shocks in '98. One evident
potential trouble spot is the Middle East. And somehow he doesn't think
Saddam Hussein has been converted to the cause of universal brotherhood.
Mike's skeptical view of the market essentially springs from a
lifetime of investing according to some reasonable criteria of value. We
unfortunately don't have space enough to enumerate and do full justice
to the subtleties and reasons for his bearishness. But the bottom line
is that he thinks we're headed for a major crack next year. And, as a
rough gauge of how big a crack, we offer his assessment that the
market's P/E of 20-22 is perhaps twice as high as it should be, and even
at a multiple of 12, this market would not be irresistibly cheap.
^^^^^^^^
My thoughts on this in regards to Vivus is that I expect Vivus to make $ 2 /share in 98. Thus considering it's curent price of 25 , it's PE
would then be 12.5 which is coming PRETTY CLOSE to the above PE of 12 that might induce Mike oto buy a stock. Thus it would be reasonable to call Vivus " a defensive stock " !! for the hard times
ahead ( Re the just failed Yamaichi Japanese Bank with 25 Bill in debt; the tip of the ice berg .
I attached the full lenghth of the editorial below.
TA
**********************************************************
DOWN IS UP ?
As if marauding currency speculators, unreconstructed protectionists
and El Nino weren't enough, world trade and the wealth of nations
suddenly must confront still another powerful menace.
And one, moreover, that dwarfs in potency any of the other evil
forces now threatening to roll back the mighty tide of globalization
that has washed over virtually all the lands of the earth, fructifying
them with riches and prosperity.
We're referring, of course, to last week's agreement by the 29
members of the Organization for Economic Cooperation and Development, a
group, it saddens us to say, that includes the United States, to outlaw
the bribing of foreign government officials. In one very fell swoop, the
signatories to this accursed pact have trashed the most ancient and
enduring tradition in the extended and resplendent history of mercantile
man.
Since the dawn of civilization, no single invention -- not the sail,
the steam engine, jet propulsion, the telegraph, the telephone or the
computer -- has spurred the exchange of goods and services between
nations as much as the greasing of palms. Eliminating a practice so
universal, so honed over the centuries and so demonstrably efficient is
destined, we submit, to undermine the growth of international trade and
jeopardize the global ascendancy of capitalism.
Compounding the error of their folly, the crafters of the agreement
have mandated that bribes of foreign officials in pursuit of commercial
gain will no longer, as has been the case in many countries, be tax
deductible. Besides blatant interference with sovereign custom, the ban
breaches the sanctity of accountancy by arbitrarily making illegal an
obviously legitimate business expense.
The inspiration for the noxious pact was our very own Foreign Corrupt
Practices Act, which became law in 1977 in a spasm of moral
righteousness that afflicted the nation after Watergate. It took well
over a dozen years for our foreign trade to recover from the effects of
that ill-considered legislation, an experience that doesn't bode well
for the future of global commerce now that the bluenoses have foisted
their anti-bribery nostrum on the world's leading economic powers.
What tempers our dismay just a tad is our abiding belief that where
there's a will (or a Wilhelm or a Pierre or a Pietro or a Pedro),
there's a way, and that a business strategy that has been around so
long, has proved itself so cost-effective and is honored in so many
places will continue to flourish.
The anti-bribery action came at a particularly inauspicious time
because it tended to obscure a truly exciting piece of news trumpeting
the latest triumph in the crusade to spread the joys of markets and
investing. Word from Croatia is that the Zagreb Stock Exchange will
start trading derivatives on stocks, stock indexes and foreign
currencies next spring. For sheer thrills, those lucky Croats will
discover, selling naked puts in a rising market is even better than
sitting down to dinner with a Serb without a taster.
What the world economy decidedly doesn't need at the moment, as
noted, is another challenge to its equilibrium. Crumbling Korea and its
losing won in the wake of the financial leveling of Malaysia and
Indonesia and the irruptions elsewhere in Asia, the sympathetic quakes
in Latin America and the agonies of Japan, given fresh currency on
Friday with the reports that Yamaichi, one of the Big Four securities
firms, is about to fall on its sword, are proving more than sufficient,
thank you.
Yamaichi, incidentally, is evidently a typical brokerage house, with
a mentality very much akin to that of its American counterparts. Thus,
so an informed investor (he's short the stock) pointed out to Kate
Welling last week, Yamaichi's own frantic buying lifted its shares from
a low of 65 yen to 102 in the final two sessions. The sad and
predictable consequence of this little exercise in throwing good money
after bad will become painfully evident when -- or maybe it's if -- the
shares open for trading this week. Why do we have a feeling that
Yamaichi's creditors won't be too pleased?
Just to give you a little perspective on the amount of grief the
global financial system already has had to absorb, a shrewd
markets-watcher we know reckons that the total value of all the world's
stock markets is something like $21 trillion. To date, the damage
inflicted on Asian stocks and currencies -- excluding Japan -- tops $1
trillion -- and counting. Not exactly piddling stuff.
Paradoxically, every knock on the rest of the planet is being taken
by U.S. investors as a boost for us. For example, when the story of
Yamaichi's woes circulated in the Street Friday afternoon, the market,
after a little hesitancy, quietly celebrated the prospect of another
Nipponese financial disaster, just as it had earlier belly-up news from
Japan. Obviously, if the whole country were to declare bankruptcy on
Wednesday, the Dow would hit 10,000 on Thursday.
The reasoning may not be as perverse as it seems, but it's somewhat
shy of Kantian. To begin with, the argument runs, panicky investors in
beseiged foreign markets will seek a safe haven in the U.S., which means
a flood of new capital into our stocks and our bonds. At the same time,
just as every new crisis in Korea strengthens the likelihood of an IMF
bailout, so the failure of a large bank or brokerage firm in Japan
strengthens Tokyo's resolve to use the vast trove of public savings to
rescue the floundering survivors and otherwise take recuperative action.
There's some logic at work here -- but not a whole lot. And whatever
the short-term benefits to our markets, the long-term impact looks more
than a little malign.
Which, more or less, is what Mike Rouzee thinks as well. And Mike
happens to be one very bright, clear-eyed fellow, a consummate portfolio
pro, battle hardened by a bunch of years on the investment front lines.
He also has a grasp of markets beyond Wall Street and considerable
knowledge of the greater world. He's conceptual without being pedantic,
insightful without being dogmatic. Topdrawer, in other words.
Mike even has a title: president of Friends Vilas-Fischer Trust Co.,
which manages a couple of billion for European insurance companies and
rich folks here at home. Mom always told us never to trust a securities
outfit named "Friends," but in this case Friends refers to the big
British parent, Friends Provident, which came by its name honestly via
Quaker origins.
Mike owns up to having been worried for more than a day about the
ultimate impact of the so-called Japanese carry trade, which, as he
nicely puts it, allows any smart guy to borrow the second-largest
currency in the world at next to nothing. At the very least, it has
fueled the speculative flames around the globe.
He's also been bothered by the fact that every time the Japanese
banks, as banks of any nationality are wont to do, have gotten into
trouble someplace, Tokyo has obligingly reflated them with cheap money
and sent them out to finance some other speculative interest. He cites,
as only the latest instance of this determined mischief, all the dough
poured into Indonesia and Malaysia.
Mike believes the competitive devaluations that we're unhappy witness
to are part of a process that goes back to 1990; since then, he points
out, scores of countries, European and Latin American as well as Asian,
have devalued their currencies. And this process of
beggar-their-neighbor has a ways to go.
Nor will Hong Kong escape. Either the peg to the U.S. dollar will go
first or the Japanese yen will go to 150; when one happens, the other is
bound to follow. But both, in his view, are fairly sure things.
While he grants that the first effects of the downward spiral of
currencies are helpful to a massive importer like the U.S., the downside
for us is neither pretty nor small. He raises the possibility of erosion
in areas of growth in which we're now preeminent. Aircraft, for example.
Boeing, he notes, is having typical end-of-the-cycle problems working
off its backlog of big airplanes. Meanwhile, customers like United and
Continental are eyeing smaller planes for shorter domestic runs, planes
that are made in Canada and Brazil, where cheap currencies translate
into much lower costs.
In brief, we could eventually find ourselves losing significant share
in stuff like computers as well as aircraft, where we're now dominant.
More immediately, he espies a huge global overcapacity, thanks to a
long stretch of excessive capital investment in Asia and elsewhere, that
poses a serious threat to producers here. To compensate for their
sagging economies, the Koreans, Chinese, Japanese et al. have been
churning out goods by the carload, undercutting each other. In the
process, demand for all sorts of commodities, from antimony to zinc,
might rise and their prices along with it. U.S. manufacturers could face
a double whammy: downward pressure from imports on the price of the
stuff they make and upward pressure on the price of the stuff they buy.
Known, we believe, as margin squeeze.
The murkier outlook for margins is one of the reasons Mike is bearish
on the stock market. This is not, we should note, his perpetual
investment stance. He turned negative last year for the good and simple
reason that, a confirmed stockpicker, he found there was an alarming
paucity of stocks to pick, stocks at least whose price had some
connection with value. The last such group was the oil drillers when no
one wanted them, and he bought them hand over fist.
Earnings generally in '98, he feels, will exert a powerful investment
influence and not necessarily for the better. Not only does he suspect
we're in for a serious diminution of margin expansion, but companies are
going to have what he calls bad translation problems because their mix
of business includes vulnerability to bad currencies. And, there'll be
earnings surprises galore next year, Mike predicts, not a few of them
negative.
He also posits the possibility of external shocks in '98. One evident
potential trouble spot is the Middle East. And somehow he doesn't think
Saddam Hussein has been converted to the cause of universal brotherhood.
Mike's skeptical view of the market essentially springs from a
lifetime of investing according to some reasonable criteria of value. We
unfortunately don't have space enough to enumerate and do full justice
to the subtleties and reasons for his bearishness. But the bottom line
is that he thinks we're headed for a major crack next year. And, as a
rough gauge of how big a crack, we offer his assessment that the
market's P/E of 20-22 is perhaps twice as high as it should be, and even
at a multiple of 12, this market would not be irresistibly cheap.
He's particularly down on financial stocks. An old banker, he has
grave reservations about the bank stocks and thinks the banks are going
to take some very resounding hits from their foreign-exchange exposure.
The American Banker, he notes, periodically publishes salary numbers for
the banking industry. And, he relates, if you were to look back over the
last 15 years and see who were the highest paid generic vice presidents
in the banking system at any given time, you could identify the next
area where earnings problems were going to show up. The highest-paid
generic vice president in the banking system right now is . . . a
foreign-exchange trader.
He's especially appalled, we might add, at the eagerness with which
the banks are paying up to five times book for other banks. He sighs
that he worked in a bank long enough to know that after you draw a line
under the entire operation, the book value consists of the assets on the
balance sheet -- and in the case of most banks, those assets are loans.
Nothing more, nothing less.
And finally, he wonders what happens if one of the Japanese banks
that goes under is obligated to pay the other side of some derivative
that a major U.S. bank holds. "Who stands up and makes good on that
trade?"
As if marauding currency speculators, unreconstructed protectionists
and El Nino weren't enough, world trade and the wealth of nations
suddenly must confront still another powerful menace.
And one, moreover, that dwarfs in potency any of the other evil
forces now threatening to roll back the mighty tide of globalization
that has washed over virtually all the lands of the earth, fructifying
them with riches and prosperity.
We're referring, of course, to last week's agreement by the 29
members of the Organization for Economic Cooperation and Development, a
group, it saddens us to say, that includes the United States, to outlaw
the bribing of foreign government officials. In one very fell swoop, the
signatories to this accursed pact have trashed the most ancient and
enduring tradition in the extended and resplendent history of mercantile
man.
Since the dawn of civilization, no single invention -- not the sail,
the steam engine, jet propulsion, the telegraph, the telephone or the
computer -- has spurred the exchange of goods and services between
nations as much as the greasing of palms. Eliminating a practice so
universal, so honed over the centuries and so demonstrably efficient is
destined, we submit, to undermine the growth of international trade and
jeopardize the global ascendancy of capitalism.
Compounding the error of their folly, the crafters of the agreement
have mandated that bribes of foreign officials in pursuit of commercial
gain will no longer, as has been the case in many countries, be tax
deductible. Besides blatant interference with sovereign custom, the ban
breaches the sanctity of accountancy by arbitrarily making illegal an
obviously legitimate business expense.
The inspiration for the noxious pact was our very own Foreign Corrupt
Practices Act, which became law in 1977 in a spasm of moral
righteousness that afflicted the nation after Watergate. It took well
over a dozen years for our foreign trade to recover from the effects of
that ill-considered legislation, an experience that doesn't bode well
for the future of global commerce now that the bluenoses have foisted
their anti-bribery nostrum on the world's leading economic powers.
What tempers our dismay just a tad is our abiding belief that where
there's a will (or a Wilhelm or a Pierre or a Pietro or a Pedro),
there's a way, and that a business strategy that has been around so
long, has proved itself so cost-effective and is honored in so many
places will continue to flourish.
The anti-bribery action came at a particularly inauspicious time
because it tended to obscure a truly exciting piece of news trumpeting
the latest triumph in the crusade to spread the joys of markets and
investing. Word from Croatia is that the Zagreb Stock Exchange will
start trading derivatives on stocks, stock indexes and foreign
currencies next spring. For sheer thrills, those lucky Croats will
discover, selling naked puts in a rising market is even better than
sitting down to dinner with a Serb without a taster.
What the world economy decidedly doesn't need at the moment, as
noted, is another challenge to its equilibrium. Crumbling Korea and its
losing won in the wake of the financial leveling of Malaysia and
Indonesia and the irruptions elsewhere in Asia, the sympathetic quakes
in Latin America and the agonies of Japan, given fresh currency on
Friday with the reports that Yamaichi, one of the Big Four securities
firms, is about to fall on its sword, are proving more than sufficient,
thank you.
Yamaichi, incidentally, is evidently a typical brokerage house, with
a mentality very much akin to that of its American counterparts. Thus,
so an informed investor (he's short the stock) pointed out to Kate
Welling last week, Yamaichi's own frantic buying lifted its shares from
a low of 65 yen to 102 in the final two sessions. The sad and
predictable consequence of this little exercise in throwing good money
after bad will become painfully evident when -- or maybe it's if -- the
shares open for trading this week. Why do we have a feeling that
Yamaichi's creditors won't be too pleased?
Just to give you a little perspective on the amount of grief the
global financial system already has had to absorb, a shrewd
markets-watcher we know reckons that the total value of all the world's
stock markets is something like $21 trillion. To date, the damage
inflicted on Asian stocks and currencies -- excluding Japan -- tops $1
trillion -- and counting. Not exactly piddling stuff.
Paradoxically, every knock on the rest of the planet is being taken
by U.S. investors as a boost for us. For example, when the story of
Yamaichi's woes circulated in the Street Friday afternoon, the market,
after a little hesitancy, quietly celebrated the prospect of another
Nipponese financial disaster, just as it had earlier belly-up news from
Japan. Obviously, if the whole country were to declare bankruptcy on
Wednesday, the Dow would hit 10,000 on Thursday.
The reasoning may not be as perverse as it seems, but it's somewhat
shy of Kantian. To begin with, the argument runs, panicky investors in
beseiged foreign markets will seek a safe haven in the U.S., which means
a flood of new capital into our stocks and our bonds. At the same time,
just as every new crisis in Korea strengthens the likelihood of an IMF
bailout, so the failure of a large bank or brokerage firm in Japan
strengthens Tokyo's resolve to use the vast trove of public savings to
rescue the floundering survivors and otherwise take recuperative action.
There's some logic at work here -- but not a whole lot. And whatever
the short-term benefits to our markets, the long-term impact looks more
than a little malign.
Which, more or less, is what Mike Rouzee thinks as well. And Mike
happens to be one very bright, clear-eyed fellow, a consummate portfolio
pro, battle hardened by a bunch of years on the investment front lines.
He also has a grasp of markets beyond Wall Street and considerable
knowledge of the greater world. He's conceptual without being pedantic,
insightful without being dogmatic. Topdrawer, in other words.
Mike even has a title: president of Friends Vilas-Fischer Trust Co.,
which manages a couple of billion for European insurance companies and
rich folks here at home. Mom always told us never to trust a securities
outfit named "Friends," but in this case Friends refers to the big
British parent, Friends Provident, which came by its name honestly via
Quaker origins.
Mike owns up to having been worried for more than a day about the
ultimate impact of the so-called Japanese carry trade, which, as he
nicely puts it, allows any smart guy to borrow the second-largest
currency in the world at next to nothing. At the very least, it has
fueled the speculative flames around the globe.
He's also been bothered by the fact that every time the Japanese
banks, as banks of any nationality are wont to do, have gotten into
trouble someplace, Tokyo has obligingly reflated them with cheap money
and sent them out to finance some other speculative interest. He cites,
as only the latest instance of this determined mischief, all the dough
poured into Indonesia and Malaysia.
Mike believes the competitive devaluations that we're unhappy witness
to are part of a process that goes back to 1990; since then, he points
out, scores of countries, European and Latin American as well as Asian,
have devalued their currencies. And this process of
beggar-their-neighbor has a ways to go.
Nor will Hong Kong escape. Either the peg to the U.S. dollar will go
first or the Japanese yen will go to 150; when one happens, the other is
bound to follow. But both, in his view, are fairly sure things.
While he grants that the first effects of the downward spiral of
currencies are helpful to a massive importer like the U.S., the downside
for us is neither pretty nor small. He raises the possibility of erosion
in areas of growth in which we're now preeminent. Aircraft, for example.
Boeing, he notes, is having typical end-of-the-cycle problems working
off its backlog of big airplanes. Meanwhile, customers like United and
Continental are eyeing smaller planes for shorter domestic runs, planes
that are made in Canada and Brazil, where cheap currencies translate
into much lower costs.
In brief, we could eventually find ourselves losing significant share
in stuff like computers as well as aircraft, where we're now dominant.
More immediately, he espies a huge global overcapacity, thanks to a
long stretch of excessive capital investment in Asia and elsewhere, that
poses a serious threat to producers here. To compensate for their
sagging economies, the Koreans, Chinese, Japanese et al. have been
churning out goods by the carload, undercutting each other. In the
process, demand for all sorts of commodities, from antimony to zinc,
might rise and their prices along with it. U.S. manufacturers could face
a double whammy: downward pressure from imports on the price of the
stuff they make and upward pressure on the price of the stuff they buy.
Known, we believe, as margin squeeze.
The murkier outlook for margins is one of the reasons Mike is bearish
on the stock market. This is not, we should note, his perpetual
investment stance. He turned negative last year for the good and simple
reason that, a confirmed stockpicker, he found there was an alarming
paucity of stocks to pick, stocks at least whose price had some
connection with value. The last such group was the oil drillers when no
one wanted them, and he bought them hand over fist.
Earnings generally in '98, he feels, will exert a powerful investment
influence and not necessarily for the better. Not only does he suspect
we're in for a serious diminution of margin expansion, but companies are
going to have what he calls bad translation problems because their mix
of business includes vulnerability to bad currencies. And, there'll be
earnings surprises galore next year, Mike predicts, not a few of them
negative.
He also posits the possibility of external shocks in '98. One evident
potential trouble spot is the Middle East. And somehow he doesn't think
Saddam Hussein has been converted to the cause of universal brotherhood.
Mike's skeptical view of the market essentially springs from a
lifetime of investing according to some reasonable criteria of value. We
unfortunately don't have space enough to enumerate and do full justice
to the subtleties and reasons for his bearishness. But the bottom line
is that he thinks we're headed for a major crack next year. And, as a
rough gauge of how big a crack, we offer his assessment that the
market's P/E of 20-22 is perhaps twice as high as it should be, and even
at a multiple of 12, this market would not be irresistibly cheap.
He's particularly down on financial stocks. An old banker, he has
grave reservations about the bank stocks and thinks the banks are going
to take some very resounding hits from their foreign-exchange exposure.
The American Banker, he notes, periodically publishes salary numbers for
the banking industry. And, he relates, if you were to look back over the
last 15 years and see who were the highest paid generic vice presidents
in the banking system at any given time, you could identify the next
area where earnings problems were going to show up. The highest-paid
generic vice president in the banking system right now is . . . a
foreign-exchange trader.
He's especially appalled, we might add, at the eagerness with which
the banks are paying up to five times book for other banks. He sighs
that he worked in a bank long enough to know that after you draw a line
under the entire operation, the book value consists of the assets on the
balance sheet -- and in the case of most banks, those assets are loans.
Nothing more, nothing less.
And finally, he wonders what happens if one of the Japanese banks
that goes under is obligated to pay the other side of some derivative
that a major U.S. bank holds. "Who stands up and makes good on that
trade?"
I0607 * End of document. |
