Comstock Partners, Inc.October 25, 2004
Barron's Magazine - By Alan Abelson
UP AND DOWN WALL STREET - True Confessions
NORMALLY, WE DON'T GIVE a hoot as to who wins when one bunch of 25 millionaires takes up glove and ball against another bunch of 25 millionaires. It's like rooting for Gates against Buffett, or visa versa, when they don their knickers and face off in a game of golf. We mean, why should we care?
But we confess our usual indifference is completely dissolved and, in its place, thrives a venomous passion when one of those groups of millionaires wears the famous pinstripes of the New York Yankees. It doesn't matter who the particular players are or, for that matter, who the other team is; we fervently pray the Yankees lose.
What's our problem? We suspect it may have something to do with an anti-Yankee gene. Our father, a rabid Brooklyn Dodgers fan, lived contentedly in a neighborhood filled with like-minded enthusiasts, had nothing but contempt for anyone so misguided as to identify with the Yankees and, indeed, once such a wretch was outed, he was barred from stepping across our threshold.
Naturally, we rebelled against our father in this as almost every other important matter -- but only to the extent of becoming a New York Giants fan. It never occurred to us to grace the Yankees with our favor -- that would have constituted not healthy youthful rebellion but renunciation of kith as well as kin, for one of the unyielding conditions of being a pal of ours was to harbor the same anti-Yankee virulence as we did.
For a time, we must admit, the passage of the years and the distractions of other worthy objects of disdain worked to temper our fierce aversion so that we were able to entertain the notion that the Yankees were a team that might be calmly ignored. But came then one George Steinbrenner, and the fires of hostility were instantly ignited and blazed brightly as ever.
All of this is by way of full disclosure in describing our reaction to the Yankees snatching of defeat from the jaws of victory in their loss of the American League championship series to the Boston Red Sox. What made the outcome all the sweeter was that the pouty, pampered Yankees were bested by the rough-and-tumble, hirsute, essence-of-uncool Sox.
Our glee was diminished only by the torrent of drivel that the ignominious collapse of the Yankees unloosed from the pens of the legions of paid hysterics who cover sports. ( Red Smith, where are you when we need you?) Baseball has always been a fertile source of myth, epitomized by its designation as our National Pastime (which everyone knows is eating).
For most of its history, professional baseball was the last station of servitude still extant on this continent. The players were bound for life at the whim of the owners by something in the standard player contract known as the reserve clause. One day a man named Marvin Miller actually read the reserve clause and discovered that what was purported to be holy writ was wholly fiction.
As day follows night, Miller's discovery was followed by emancipation of the players. Which, in turn, gave issue to free agency, massive and continuing annual change in lineups (you really do need a scorecard to tell who's who) and an accompanying loss in team identity, proving once again that no good deed goes unpunished.
Miller, the first head of the players' union, was really lucky in his opposition, as have been his successors. Ever since Abner Doubleday laid out the first diamond on the village green, the owners have distinguished themselves by their unrivaled klutziness and, perhaps because of similar backgrounds -- many came to baseball from car lots or real estate -- the only binding principle among them has been an unshakable distrust of each other (a sentiment, incidentally, that's proved fully justified).
If by chance you're suffering from the delusion that the Yankee-Red Sox series produced only thrilling baseball and riveting spectacle you obviously missed its great significance divined by the professional signifiers. Don't feel bad, we did, too.
Was it, as claimed by the philosophers who covered the action for the local gazettes of both cities, the end of the Yankees as we knew them? For gosh sakes, they lost to Boston in seven games in this year's playoffs, after beating them in seven games in last year's playoffs.
Did it really demonstrate that bucks can't buy a pennant? Boston's payroll was only slightly less obscene than the Yankees'.
Did the Yankees really blow it because of bad team chemistry? Chemistry, schemistry, they blew it because of bad pitching.
Can you believe that the Sox's rousing comeback has even been hailed, only half-facetiously, as a favorable omen for John Kerry, because the senator is also is in need of a minor miracle to win and, fortuitously, also hails from Massachusetts?
And we thought Wall Street had a lock on muddle-headed reasoning and unfettered flights of fancy.
THE BIG UNKNOWN QUESTION of the day is what will happen first: The Red Sox winning the baseball World Series for the first time since 1918, or the maniacs finally giving up overpaying for tech stocks?" That's the way Fred Hickey ended his latest edition of the High-Tech Strategist, written before Boston's dramatic victory in the playoffs.
Well, we can say with some assurance that the maniacs will still be in charge of the asylum when the last out has been made in the World Series. Fred has a tendency toward extravagance in expression that complements his acuity in analysis. But the essence of his description -- that this is a wild and irrational market and not only for tech, we might add -- is right on the money.
As the diligent Alan Newman points out in his latest CrossCurrents newsletter, now published under the aegis of Samex Capital, Bulletin Board volume continues to boom. While it has tapered off some from the incredible pace of earlier this year, it's still up a tidy 82.8%. Just to refresh your memory, Alan points out, as Rhonda Brammer did some weeks ago in her Small Caps feature, that the issues traded on the Bulletin Board are notably shy of filing or reporting requirements. Such frantic turnover in such junky stocks spells speculation in capital letters.
There are other striking signs that mania is an apt noun that nicely encompasses the various and many anomalies and absurdities in this market, a market, we might say, that on the surface seems pretty unexceptional. The airlines, no secret, are on their tails, dragged down by, of course, runaway oil prices but beset by other woes, as well, competition from cut-rate carriers and the burdens of security prominent among them. Airline stocks have fully reflected the parlous state of the industry and then some.
The melancholy result is that the combined capitalizations of American Airlines (officially AMR), Delta, Northwest and Continental is now a meager $2.7 billion. Again, in combination, they have racked up trailing 12-month revenues of $53.8 billion. Earnings? Don't ask. And, of course, as United sadly proved, bankruptcy is scarcely unimaginable for even the biggest carrier.
Yet we really can't envisage all of them going belly-up. And if they don't, with the downright terrible unrelenting headwinds they've had to buck, and the bad news writ large in investor consciousness, our own inclination is that they're intriguing speculations, especially as a package.
Our point is less whether they're buys or not than that they illustrate how ridiculous this market is in assaying value. That quartet of major airlines, as noted, with a total of $53.8 billion of revenues is being valued by the stock market at $2.7 billion. By contrast, two of the most problematic stocks to come down the pike in quite a while -- our old friend Taser International, and TravelZoo, which colleague Eric Savitz has turned a skeptical eye on -- have combined trailing 12-month sales of $87.6 million (million, keep in mind) and a combined market capitalization of $2 billion.
No doubt, these rheumy eyes can't appreciate the brilliant prospects of Taser and TravelZoo; we admit it. But after making all due allowance for our manifest lack of vision, the comparative valuations between that pair and the four airlines still looks like sheer lunacy to us.
ALONG WITH $55 A BARREL OIL, investors have had to cope with the Spitzer factor. That's Eliot Spitzer, of course, the Attorney General of New York, who has been hot on the trail of mischief-makers, nefarious ne'er-do-wells and assorted lowlifes and high-livers who inhabit the financial world. Need we say that he's not held in universal high esteem on Wall Street, still another reason we feel he can't be all bad.
Mr. Spitzer's latest well-publicized sally has been against insurers like AIG. The suspicion -- and it has received early confirmation in the form of plea bargains -- is that in cahoots with brokers like Marsh & McLennan, they've been rigging bids and committing sundry other unnice acts. Already heads are beginning to roll and stocks have been creamed, prompting a colleague of ours to wonder whether insurers (not necessarily the ones under attack) have thought of offering "Spitzer catastrophe policies." We don't know about the pricing of such coverage, but, regardless, the demand would sure be off the charts.
Even with oil, Iraq, the election, the scandals and all the other goblins out there spooking investors or poised to do so, a certain odd serenity and obdurate optimism prevails among a number of professionals. The latest survey of advisory opinion, for example, conducted by trusty Investors Intelligence, reveals that a formidable 58.9% of the market letter writers are bullish, the highest percentage since way back in February. Only 22% are bears, the smallest count since July.
What not a few of such positive thinkers are hanging their hopes on, as Charles Minter of Comstock Partners points out, is the supposed similarity between this market and that of 1994, when the indexes backed and filled within a narrow range for nine months before breaking out into what proved to be a long and mighty bull market. Charlie's advice to them, if they're banking on a 'Nineties redux, is -- don't. Any resemblance between then and now is superficial at best.
In '94, for example, sentiment was negative: That same Investors Intelligence survey showed 32% bullish, 50% bearish. Mutual funds had 8% of their assets in cash, compared with half that much now.
Valuations were cheap then, are anything but today. Thus, the S&P 500 was selling in '94 at 15 times what Charlie calls "trendline reported earnings," against 21 times currently. Ten years ago, he points out, we were in a secular bull market and the high end of the S&P 500 range was an all-time high. In sorry contrast, he contends, we're in a secular bear market with this year's high a full 24% below the bubble peak in 2000.
The fundamentals are sharply different as well. In the 12 months through this September, the economy added 1.7 million jobs. Back in '94, the comparable span saw the addition of 3.8 million jobs, and on a smaller base, at that. The savings rate then was 8%, compared with 0.9% now. Household debt as a percentage of GDP is 86%, versus 64% 10 years ago.
And, Charlie observes, not often noted is that 1994 witnessed the introduction of the Netscape browser. That made the Internet accessible to hundreds of millions around the globe, to businesses as well as individuals, touching off the great tech boom of the 'Nineties. We trust the folks at Google won't take offense, but nothing remotely akin is on the horizon today.
All of which explains why Charlie is convinced the breakout from the current trading range this time around "will be on the downside."
THAT WONDERFUL TAKE-DOWN of Larry Kudlow that we described in loving detail last week was written not by Paul Kasriel, as we fecklessly reported, but by his fellow economist at the Northern Trust Co., the highly accomplished Asha Bangalore. Our apologies and compliments to Asha. We might add that Paul was as impressed as we were by the pith and wit of her analysis of Kudlow's errant economics and heartily seconds the sentiments.