* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Tangible Assets That Sweat
The Daily Reckoning
Ouzilly, France
Thursday, October 28, 2004
---------------------
*** Candidates, start your engines... it's a wacky world...
*** Worry-free Americans... foreigners are getting
nervous... the debt spectacle...
*** Get richer by doing more damage... we've dug a deep
hole... no dignity in death... and more!
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The Dow popped up again yesterday - more than 100 points -
and the race is on!
We were wondering how George W. Bush could win with the Dow
dropping, economic indicators falling, the dollar sinking
and the bond market signaling an economic slump. The polls
show the two candidates neck and neck; Bush could not
afford more slippage. He needed a rally. And here it is...
at least for now.
Our guess is that a good rally will push the neocon
candidate over the top. Our guess is also that if the
election were held a week or two later, nothing could save
Bush. Each passing day brings more evidence that the chief
executive has no idea what he is doing.
Each day, the U.S. government goes $1.3 billion further
into debt. Our friend Gregor points out that in just three
years, the new debt will come to more than the value of
every ounce of gold ever pulled out of the earth since
mining began more than 3,000 years ago. Each dollar of debt
represents a claim on resources. One dollar's worth of
resources, to be exact. But there is no way of knowing
whether you will get the same amount of resources for your
dollar's worth of debt next year as you would now. Heck, in
a couple years, you might even get more. But if so, the
world would have to be even wackier than we think it is.
People in the United States tend not to worry about it. And
why should they? Their bills are in dollars, as well as
their assets. But the foreigners have more to lose. They
hold trillions of dollars worth of U.S. Treasurys and other
dollar-based assets. If the dollar should go down - they'll
be out of luck.
And yet, the dollar already has gone down nearly 50%
against the euro. On Tuesday, it hit its lowest point -
against a basket of foreign currencies - in nine years.
Yesterday, the dollar rose slightly against the euro. But
foreigners are increasingly edgy about the buck... and
foreign purchases of U.S. government securities are
slowing. When they will stop buying altogether - or even
sell - is anyone's guess. But when they do, the dollar will
collapse. Gold... oil... everything that is currently
quoted in dollars... will go up in price. America's
consumer economy will be ruined.
Of course, that will not be the end of the story. There
will still be Iraq... and all the thousands of terrorists
freshly minted by the Bush administration...
And there will be Bush's expensive new medical benefits...
and all the many expensive new programs and agencies... and
all the expensive old ones, too. And of course, consumers
would still have their home loan and credit card bills to
pay. The U.S. government... and its citizens... will still
have huge debts.
And the Treasury department would still have, as Fed
Governor Ben Bernanke might say, "a technology... a
printing press... " with which to pay them.
You do what you want, dear reader, but under the
circumstances, we would much rather hold one of those
ounces of gold than 425 dollar bills from the U.S. Bureau
of Engraving and Printing. [Ed. Note: Interested in
learning more about the dollar's demise? Check out what
our currency counselor, Chuck Butler has to say in today's
Daily Pfennig.
http://www.dailyreckoning.com/body_headline.cfm?id=4218
More news, from our team at The Rude Awakening:
---------------------
Eric Fry, reporting from Manhattan...
Waif-like inflation data... nothing is what it seems...
Americans indulge in more delightful illusions. See
today's Rude Awakening for the whole story...
A Statistical Supermodel
http://www.dailyreckoning.com/body_headline.cfm?id=4219
---------------------
And back at Ouzilly... .
*** People in the housing industry provide places for
others to live. People in the airline industry take others
where they want to go. Plumbers plumb. Painters paint.
Bakers kneed their sour dough.
But what about people in "finance"? Does their dough never
go sour?
What doth the man in "finance" actually do?
We don't know, but people seem to like it. Word comes from
Bloomberg columnist Graef Crystal that the CEO of
Countrywide Financial Corp. is paid handsomely for whatever
it is he does.
"The 65-year-old [Angelo] Mozilo's pay packages have been
breathtaking, considering the size of his company. From
2001-2003, his total pay was, respectively, $21.2 million,
$15.6 million and $31.8 million."
Never before was shuffling money such a big part of the
economy... or so highly appreciated. GM makes its money not
by making cars, but by lending money so people can buy them
- and houses, too. In 1973, the financial industry provided
less than 10% of the entire stock market's profits. Today,
it is more than three times that much.
What a great business to be in! You make money by lending
money to other people. And so much of it! The more you
lend... the more you make. At least, that is how it
appears. As the amount of debt soared, so did the profits
of financial companies... and the pay of the Mr. Mozilos of
this world. What a spectacle! The more damage Mr. Mozilo
does to the balance sheets of American households, the
richer he gets.
Well, God bless them all. God bless all of us. And all our
debts... wherever they may be. [Ed. Note: The home loan
-lending business is collapsing in front of our eyes... it
may become the largest financial catastrophe we have ever
seen! You must act now to find out what you can do to
protect yourself and your family...
Bye-Bye, ReFi
http://www.agora-inc.com/reports/DRI/WDRIE704
*** And the debts just get larger... and larger... and
larger. Thanks to the bond market. Bonds have been going
up... signaling, we think, a weaker economy. But the effect
has been to lower home loan rates. A year ago, you could
borrow for 30 years at 6.05%. Today, it is 5.69%. No wonder
house prices are still going up. No wonder people are still
borrowing. No wonder the ships are lined up outside of Long
Beach... full of new stuff for us to buy at everyday low
prices.
The whole thing reminds us of a post hole digger we used to
own. You would put it in the ground. The thing would turn
and turn and slowly grind its way into the ground. Then,
all of a sudden, it would cut into softer clay. The incline
of the bit would pull the auger down so quickly it would
screw itself all the way down into the dirt, so deep it was
impossible to pull it out.
*** A July 13, 1915, letter from a French soldier in World
War I tells how they dealt with shirkers:
"If I had known what was coming... I would have pretended
to be sick. I would have gotten eight days of prison, but
at least I wouldn't have had to take part in a murder. They
told us we would have reveille at 2 a.m... .they said
vaguely we were to attend a punishment. But I never
imagined that we were to execute someone.
"We left camp about 3 a.m.; we were conducted to a park of
some sort. There, they formed us into a rectangle, and
seeing the post we understood, too late, what kind of thing
we were supposed to do. It was to shoot a poor fellow who
in a moment of madness left his trench and refused to come
back.
"About 4 a.m., two cars arrived, one carrying the
unfortunate soldier, the other a bunch of officers who read
out a report condemning the man to death. The man came up
between two policemen. He looked at the post. Then they put
a blindfold over his eyes. Then, after they had read out
the condemnation, they led him to the post and tied his
hands to it, with him on his knees. He made no gesture, nor
any remark.
"We presented arms and heard the sad commands - ready, aim,
fire. Then, this poor man twisted up... and a sergeant went
over and delivered the coup de grace, with a pistol to the
head. The crime was done...
"We then filed past the man... who just five minutes
earlier was full of life... "
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---------------------
The Daily Reckoning PRESENTS: With so many things working
against us in today's volatile U.S. market, it's easy to
feel wary of putting your money into anything... Not to
worry, Chris Mayer has the key to smart and profitable
investing...
TANGIBLE ASSETS THAT SWEAT
by Chris Mayer
"Lightning seems to have lost its menace. Compared to what
is going on on earth today, heaven's firebrands are penny
fireworks with wet fuses." - E.B. White
What is an investor to do? The investor today is buffeted
by news of a weakening dollar, worried about increasing
piles of debt and mounting fiscal deficits, faced with
historic trade deficits, bombarded with deadening election
year rhetoric - a veritable potpourri of nasty stuff. Is
there anything an investor can do?
I think there is. Invest in tangible assets that sweat.
The concepts behind this idea are simple on the surface but
profound in their application. They are culled from the
thinking of some of the greatest investment minds in the
pantheon of great investors, but also grow out of my
experience lending money to businesses and the experiences
of old American money.
But what are tangible assets that sweat?
Tangible assets are simply things we can touch and feel,
things we can see and count. These investments include
things like buildings, timber, cash, certain machinery,
land, vineyards and other unique assets. Industries that
are not going away and that are in no danger of the next
generation of competitors making them obsolete.
Contrast this with the most exciting and best-loved
investments of the boom years. Companies like AOL, Lucent,
JDS Uniphase and a host of others that carried billions of
dollars in intangible assets on their books - such as
"capitalized software development costs" or "goodwill,"
among others.
These assets were on the books because accounting
conventions required it, not because they represented value
that could be sold or accessed in any direct way. Most of
these assets were subsequently written down, leading to
billions of dollars in losses for those companies and their
shareholders as well.
Tangible assets seldom lose value like that. Most of the
time an asset like timber or unique real estate only become
more valuable as time goes on. That's the general idea - I
like to be involved in companies where time works in my
favor and where the principal assets of the company are
things I can touch and feel, that I can count and see.
Cash flow is the sweat, the streams of actual cash that a
company generates. Cash flow is not earnings, although many
investors are probably surprised to learn that fact.
Earnings can be very deceptive, which is why a company like
Enron was producing favorable earnings reports even while
it stood on the precipice of bankruptcy. Enron was very
good at manufacturing earnings. But the goal is not to make
earnings; it's to make money. Cash flow analysis follows
the money.
There are many large items that go on outside of reported
earnings and that can't be captured in a single number like
earnings per share. Businesses are complex and have many
moving parts. It is a wonder that so many investors spend
so much time worrying about one number on a
quarter-to-quarter basis. I take a longer-term view and a
more realistic view.
Cash flow gives companies options to pursue
wealth-generating strategies, to reinvest in the business
for future growth, to pay dividends or buy back stock, or
to make smart acquisitions. Cash flow means that a company
has options.
In addition to tangible assets and cash flow, I want to
stay with businesses that I can understand. This sounds
like a simple point, but so many investors buy companies in
highly technical or complex businesses, with inadequate
disclosures, and it winds up costing them a lot of money.
Warren Buffett has many famous sayings, among them, "Invest
in your circle of competence." Buffett has made fortunes
investing in very simple businesses, like See's Candies,
Nebraska Furniture Mart and The Washington Post. Candies,
furniture and newspapers - we can all understand these
businesses as opposed to, say, the next biotech drug
research or semiconductor test instruments.
Peter Lynch is another famous investor who advised
investors to buy what they know. Lynch made a fortune
investing in companies like Pep Boys, Dunkin Donuts and
Taco Bell. Again, no need to get fancy. Great businesses
often lie right under our noses.
This idea also extends to the disclosures the company makes
about its business. If you read the 10-K for Enron during
its bubble days, as I did, you couldn't help but come away
thinking that this was one complex business. There are
plenty of fish in the sea, so goes the old saying. We don't
need to waste a lot of analytical effort fighting with a
company to get at the truth.
The final leg of the stool, if you will, is the idea of
buying these businesses on the cheap. Many businesses would
meet our first three hurdles of owning tangible assets,
generating cash flow and being in simple and transparent
business - but would fail to meet this fourth crucial
hurdle.
It is an old adage on Wall Street to buy cheap and sell
dear. But it is often overlooked, as investors continually
overpay for businesses that they have fallen in love with.
Peter Bernstein, famed economist and author, noted in an
interview that, "the double-digit returns stocks were able
to generate over the last century were due to equities
starting cheap and getting richer over time... a part of
those realized returns was unexpected windfalls from rising
equity valuation multiples."
Or as he likes to say, "Starting price matters." You cannot
expect to produce strong results in investing if you are
continually overpaying for your investments. Special care
must be taken to be sure that your "starting price" or your
purchase price is at a low enough level to ensure a good
profit even if things don't go exactly as you hoped. There
is another old saying on Wall Street, "Well bought is half
sold," which I believe captures this sentiment.
That is it. The four criteria of sound investing: tangible
assets, cash flow, simple and transparent businesses and
cheap prices. There are other nuances to be sure, but that
is the framework.
This investment philosophy, too, is timely. Investment
returns move in cycles. The great legacy of the 1990s
bubble and bust may be the rise of these enduring tangible
assets at the expense of fleeting and bloated intangible
assets, a reversion to the tradition of wealth that has
created lasting fortunes for generations.
Regards,
Chris Mayer
for The Daily Reckoning
Editor's Note: Christopher W. Mayer is a veteran of the
banking industry, specifically in the area of corporate
lending. A financial writer since 1998, Christopher's
essays have appeared in a wide variety of publications,
from the Mises.org Daily Article series to here in The
Daily Reckoning. He is also the editor of Fleet Street
Letter.
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wealthiest travelers. It's cheap, trading for a 33%
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