Newsletter Q3 2003
July 15, 2003
Borrowing
Our Way to Prosperity
U.S.
monetary and fiscal
policy could hardly be more stimulative at this point.
The Federal Reserve has cut the fed funds rate 13 consecutive times to
1%. The President signed the Jobs
and Growth Tax Relief Reconciliation Act (JGTRRA), which will lower dividend and
capital gains taxes to 15%. Billed
as a tax cut, virtually all economists seem to view it as a tax deferral and
increased their forecasts of the Federal budget deficit.
The Office of Management and Budget is now forecasting deficits of $455
and $475 billion for fiscal years 2003 and 2004, respectively.
Fed
Chairman Alan Greenspan, Fed Governor Ben Bernanke, and other inflationists
continue to promote money creation as the source of economic rejuvenation.
Milton Friedman, the founder of modern-day monetarism, recently disavowed
the central premise of monetarism in an interview: “The use of quantity of
money as a target has not been a success. I’m
not sure I would push it as hard as I once did.”
The Bank of Japan tried the monetarist prescription.
From 1997 to 2002, the Japanese monetary base increased 84%, only to see
nominal GDP decline by 6%.
Household
borrowing has continued in spite of a decline in net worth.
For the twelve months ending March 31, 2003, the net worth of households
and nonprofit organizations declined by 4.8%, primarily due to a decline of 7.6%
in the value of financial assets. This
was offset to some extent by an 8.4% increase in the value of household real
estate. Home mortgage debt,
including home equity loans and junior liens, increased 12.9% for the same
period. Because mortgage debt
increased at a faster rate than real estate values, homeowners’ equity as a
percentage of household real estate declined to 55.2%, the lowest level since
1993. Household debt as a percentage
of GDP has now increased from 48.5% in 1982 to 80.8% at year-end 2002,
diminishing the capacity of families to save and spend.
The
U.S.
current account deficit for the twelve months
ending March 31 was $510 billion, nearly 5% of nominal GDP. Foreign
purchases of
U.S.
securities offset the
current account deficit to some extent. Asian
central banks have been among the largest buyers of
U.S.
securities in order to
peg their currencies to the dollar and support their export industries.
According to the Federal Reserve Flow of Funds report, during the last
eight quarters, net purchases by foreigners of U.S. Treasury, agency and
corporate debt securities amounted to $730 billion.
The
U.S.
net indebtedness to
the rest of the world is now about $3 trillion or 30% of GDP and is increasing
at a rate of 5% per year.
Richard
Duncan, author of The Dollar Crisis contends that there are two possible
outcomes to the global economic imbalance: 1) a sharp fall in the value of the
dollar against the currencies of all its major trading partners reduces the
current account deficit, or 2) the United States becomes so heavily indebted to
the rest of the world that it becomes incapable of servicing the interest on its
debt. Herb Stein, Chairman of the
President’s Council of Economic Advisers during the Nixon Administration, may
have been sharing thoughts with Yogi Berra when he commented on the current
account deficit of the early 1980s: “If something cannot go on forever, it
will stop.”
Additions
Fresh
Del Monte Produce (FDP) is a leading integrated producer and worldwide marketer
of fresh and fresh-cut produce, with revenue in excess of $2 billion.
Products include bananas, pineapples, melons, grapes, and other fruit and
vegetables. FDP sells for 7X
estimated earnings and has a dividend yield of 1.4%.
Given the strength of its balance sheet, I believe the company should be
able to increase dividends in future years.
Stillwater
Mining Company (SWC) produces palladium and platinum, metals used for automotive
catalysts, jewelry, electronic and dental applications.
The price of palladium has declined considerably from its 2001 high of
$1,090 per ounce to a current price of $189 per ounce, as manufacturers
substituted lower-priced platinum. In
November 2002, SWC signed an agreement with Norimet, a wholly owned subsidiary
of Norilsk Nickel, whereby SWC will issue 45.5 million additional shares in
exchange for $100 million cash and 877,000 ounces of palladium.
The transaction has now been approved by shareholders and regulators.
Norimet is also obligated to make a cash tender offer to acquire up to
4.35 million shares at $7.50 per share.
Telefonos de Mexico
,
S.A.
(TMX) provides
domestic and international telephone services in
Mexico
.
TMX has a more favorable regulatory environment than
U.S.
providers, as the
Mexican government is reluctant to open the telecom market to foreign companies.
TMX currently sells for 9X the current year’s consensus estimate and
has a dividend yield of 3.8%.
The
Oppenheimer Multi-Sector Fund (OMS) is a closed-end bond fund that invests most
of its assets in three major fixed income sectors:
U.S.
Treasury/agencies,
corporate high yield, and foreign government bonds.
The fund has an average credit quality of A and an average maturity of
3.8 years. OMS sells at a 10%
discount to net asset value and has a dividend yield of 5.9%.
Deletions
D&K
Healthcare Resources (DKHR) was sold at a profit.
The price of the stock has moved up considerably since the purchase date,
while earnings estimates have remained about the same.
Profits
were taken on the Mirant convertible bond. The
company was in the process of a debt restructuring that was likely to offer bank
creditors additional security that would have reduced the priority of
bondholders amongst the various claimholders.
Profits
were taken on the Blackrock Broad Investment Grade 2009 Term Trust (BCT) and the
Van Kampen Trust for Investment Grade Florida Municipals (VTF).
The discount to net asset value on both closed-end funds had narrowed to
3-4%.
General
Motors Acceptance Corporation notes were sold at a small profit, based upon
concerns about the deterioration of the General Motors pension and other
post-retirement benefit plans. Although
General Motors shows shareholders’ equity of $6.8 billion on its balance
sheet, the footnotes reveal an additional liability of $49 billion for pensions
and post-retirement benefits that has not been recognized.
Updates
Sirius
Satellite Radio (SIRI) raised $175 million from a 3.5% convertible note issue
and another $146 million from a common stock offering during the second quarter.
The additional cash should be adequate to fund the company’s operations
until it reaches breakeven on a cash flow basis.
Guillermo
Nielsen, finance secretary and chief debt negotiator of
Argentina
, announced that his
country plans to offer a “credible and definitive restructuring” proposal at
the September meeting of the International Monetary Fund.
He said that
Argentina
also plans to set up
“creditor consultative groups” in advance of the meeting to facilitate
negotiations and discourage legal action.
If
you have any questions regarding your accounts, please do not hesitate to call
me.
Sincerely,
Robert
G. Kahl
CFA, CPA, MBA
Sabino
Investment Management, L.L.C.