Newsletter Q4 2003
October
16, 2003
Currency
Talk and Double-Talk
A
written statement was issued by the Group of Seven (G-7) finance ministers after
their September 20 meeting in
Dubai
.
They announced that “…more flexibility in exchange rates is desirable
for major countries or economic areas to promote smooth and widespread
adjustments in the international financial system, based on market
mechanisms.” While it seems to be
a statement of the obvious, the implied message is that it is now time to begin
a devaluation of the U.S. dollar and a revaluation of the currencies of
countries with large trade surpluses. Stephen
Roach, an economist at Morgan Stanley, calls it a thinly veiled message to
Japan
,
China
and other nations that
have been pegging their exchange rates to “cease and desist from their
campaign of currency manipulation.”
Wim
Duisenberg, President of the European Central Bank, recognizes the difficulty of
managing a gradual currency devaluation. “We
hope and pray that this adjustment, which is unavoidable, will be slow and
gradual. We will do everything in
our power to make it slow and gradual.”
Britain
’s Daily Telegraph
reported that there was an agreement between Russian President Vladimir Putin
and the German Government to switch the pricing of oil from dollars to euros.
Neither government has confirmed the report.
Duisenberg, however, commented on the potential switch to euros by saying
that a switch in oil pricing from dollars to euros could particularly suit the
nations currently lining up to join the common currency bloc.
Other oil exporters such as
Iran
and
Saudi Arabia
are openly considering
a switch to euro pricing for oil.
David
Hale, an economist who follows a wide range of countries, was in
Tucson
at the end of
September. He believes that the
Bush Administration is becoming increasingly sensitive about the job loss issue
and will attempt to engineer a devaluation of the dollar.
Given current levels of accommodation by the Federal Reserve Bank and the
Federal Government’s budget deficit, it’s the only policy lever that the
U.S. Government has left to stimulate the economy.
President
Bush is on his way to
Japan
for a meeting with
Prime Minister Junichiro Koizumi. He
also intends to meet with Chinese President Hu Jintao at the Asia-Pacific
Economic Cooperation summit to be held October 20-21 in
Bangkok
.
Prior to the meetings, President Bush told reporters that he intended to
press
China
and
Japan
to loosen up their
currency policies as a way to lower trade barriers.
While
both President Bush and Treasury Secretary John Snow said they wanted currencies
determined by flexible markets (meaning U.S. dollar devaluation), both also
stated that the “strong dollar policy” of the
United States
has not changed.
Most market participants, however, know that the “strong dollar
policy” is history.
Additions
Government
bonds of
Australia
,
New Zealand
and
Norway
were purchased during
the quarter. In contrast to the
U.S.
, all three countries
have fiscal budget surpluses and lower public debt/GDP ratios.
I expect their currencies to appreciate against the dollar.
The
John Hancock Investors Trust (JHI) was purchased for selected accounts.
JHI is a closed-end fund that invests primarily in
U.S.
corporate bonds.
It currently sells at a discount of 10% to net asset value and has a
dividend yield of 7.1%.
Equity
Inns preferred B 8.75% was purchased for selected accounts.
This replaces the preferred A 9.50% issue that was called in August.
A
corporate bond issued by Sea Containers Ltd. (12.5% due
12/1/09
) was purchased at par for selected accounts.
The bond is not rated by credit rating agencies.
The company has two main activities: passenger and freight transport and
marine container leasing. Sea
Containers has a high debt/equity ratio of 3.2, but it has been profitable for
the last ten years and the balance sheet is improving.
The company recently sold the Isle of Man Steam Packet Company for a $100
million gain and will use the proceeds to reduce debt in the third quarter.
Deletions
The
Insured Municipal Income Fund (PIF) and the Seligman Quality Municipal Fund (SQF)
were sold in some accounts as the discount to net asset value has narrowed since
they were purchased.
Aegon
N.V. (AEG) was sold at a profit as the price reached a level that offered less
upside potential.
American
Real Estate Partners, L.P. depositary units (ACP) were sold at the end of the
quarter for a profit. The company
continues to sell at a large discount to book value but earnings have declined
and return on capital remains low. In
addition, ACP agreed to purchase debt and common stock of National Energy Group,
Inc. from entities related to Carl Icahn, who is Chairman of ACP, for $148
million. Preferred stock of ACP is
still held for many accounts as the partnership continues to have a strong
balance sheet and the preferred units have a higher priority in the capital
structure.
IRSA
Inversiones y Representaciones S.A. (IRSA) was sold.
Based upon e-mail correspondence with the company, it appears as though
future rent increases will be more modest than I had anticipated.
Sears,
Roebuck and Co. (S) was sold for a profit in July after the company announced
that it would sell its credit and financial products business to Citigroup.
In August and September, Sears had positive same store sales comparisons
after 23 consecutive months of negative comparisons.
Updates
Sirius
Satellite Radio Inc. (SIRI) has risen in price during the last year.
My own estimates of revenue and earnings are higher than those of the
brokerage firm analysts. SIRI filed
a shelf registration in September that covers the issuance of $500 million of
debt, common stock, preferred stock and/or warrants.
The company believes that they currently have enough cash to reach the
cash flow breakeven point. The
purpose of the shelf registration is to allow SIRI to “opportunistically enter
the debt and equity markets in the future for transactions that enhance
stockholder value, such as acquisitions, debt issuances to fund stock buyback
programs and other expansions of our business plan.”
I decided to reduce the size of some larger positions in accounts as a
precaution.
Positions
in MFC Bancorp (MXBIF) were reduced in most accounts during the quarter.
MXBIF continues to sell at a low price/earnings ratio and close to book
value. The company will most likely
continue to sell at a low valuation as management has not provided additional
financial disclosure requested by myself and others.
Holly
Corp. (HOC) announced that it had terminated the merger agreement with Frontier
Oil due to a breach of representations and warranties regarding the absence of
litigation or other circumstances which could have a material adverse effect on
shareholders. HOC believes that
recently filed toxic substance lawsuits by over 400 plaintiffs, mostly former
Beverly Hills
High School
students, raise
substantial risks and uncertainties for Frontier shareholders.
Fresh
Del Monte Produce (FDP) increased its quarterly dividend rate from $0.10 to
$0.20. The price of FDP declined
recently after a Wall Street Journal story raised concerns about more
competition in the pineapple business, which represents about 20% of FDP’s
revenues. Merrill Lynch analyst
Leonard Teitelbaum acknowledges that competition is inevitable but maintains a
buy rating on the stock based upon optimism for the company’s “Fresh Cut”
operations, which includes packaged, cut fruit.
Stillwater
Mining Company (SWC) completed the sale of 51% of the company to Norilsk Nickel
for $100 million of cash and 877,000 ounces of palladium.
Norilsk Nickel bought an additional 4.35 million shares in a tender offer
at a price of $7.50 per share. I
tendered all shares and 12.8% were accepted on a pro rata basis.
According to CEO Frank McAllister, the automobile industry is in the
process of switching back to palladium from platinum for use in catalytic
converters. The price differential
is substantial with platinum at $728/ounce and palladium at $194/ounce.
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.