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GP10Sep: Investment Outlook: Infrastructure Our Track Record. Hubris being what it is, we are probably headed for a fall. On March 19, 2003 (see Investment Digest: Investment Outlook), we correctly said you should put 15% of your monies in a short fund, 60% in high-quality small-cap stocks with very low valuations, and 25% in new asset classes. As of 8/29/03, the NASDAQ composite was up a whopping 39.14% for the year. You could have even done better in some of the small-cap stocks we were talking about. These are good companies that are low-priced because major institutions cannot be bothered with them, and because they’re often boring manufacturing companies that don’t excite the young turks of investing. In fact, we would say you could continue to pursue exactly the same strategy for a while longer and do pretty well. Watch Out for the Bubbles. But, at a minimum, we must throw up all sorts of warning flags here. The august chairman of the Federal Reserve, having poured on interest rate cuts numbering in the double digits and counting, has not really re-ignited the economy but has reflated a lot of bubbles (e.g., financial services, technology, the stock market, etc) that can pop all too easily. Monetary manipulations will not bring this particular economy back to life. Some professionals think we will see slaughter in the financial services sector equal to that we’ve witnessed in telecommunications. We expect the tech puff ups to implode faster than the electricity network did on August 14 in the Northeast. You need to keep your eye on the unemployment rate, a number we will be watching in the weeks to come. The nation lost 93,000 jobs in August, the worst showing since March and the seventh consecutive month of losses. Pretty bright computer graduates in Boston still cannot get decent jobs. Maybe you have to go to China to see the economy for what it is. “The average person doesn’t want to be smuggled into America anymore,” said Ms. Zhou, who works at a bedding store. “The economy is so terrible there.” (See New York Times, September 7, 2003, p.4). We gather Chinese citizens with big expectations are voting with their feet, no longer viewing America the Beautiful as the land of opportunity. The over-all market has not hit bottom. Stocks carry valuations all out of proportion to their net worth or growth prospects. Even companies that carry a low P/E may be overpriced because managers have stripped out a lot of their muscle over the last 20 years in pursuit of short-term return on equity. For this reason, many stocks are twice-overvalued. Prudent investors now focus on under-priced merchandise where they’re sure they’re getting a deal. Junkyard Dogs. In our Annual Report on Annual Reports 2003, we mentioned a few tangents the professionals are pursuing. Jim Rogers is on to commodities. Warren Buffett has cadged away a big wad of junk bonds. George Soros, it is reported, is moving into investments in riskier companies, having slated as much as $l billion from his hedge fund for a new start-up called SFM Capital. “Lately, so-called distressed-debt investing, or investing in the stocks and bonds of beaten-up companies with low credit ratings and often under bankruptcy-court protection, is on fire.” See Wall Street Journal, September 3, 2003, p.C5. For many sizable investors, this is the only arena now where the rewards and risks are commensurate. Our thesis would be that the only question is whether you pursue discounted merchandise (undiscovered small-caps) or distressed merchandise (over-extended big caps). A “Snow Day” in Mid-August. Ray DeVoe, the best of the Wall Street newsletter writers, devoted the whole of his August 22, 2003 report by this name to the crash of the power grid on August 14 and to the absurd vulnerability of our national power grid to design malfunction, terrorist attacks, etc. We think, as importantly, that the August black-out illuminates where we should be investing henceforth. If you are an investor, and not a trader willing to deal with today’s horrible volatility, then this is the part of our investment update that you should really be reading. All Our Grids in Trouble. As we suggested in our Global Province letter of August 20, 2003, most of our national grids are in trouble, not only because we have not put enough money into them, but because, let there be no mistake, they’re just not designed right. They’ve been patched together on the run, and the pieces don’t work together. Microsoft is the backbone of our personal computer networks, and its software has proven fragile and insecure. Expenditures for national health literally threaten to consume all our national income, but wellness is not around the corner. Name any “system” of consequence, and you’ll probably find that it’s not up to its task. System degradation is surely the biggest contributor to the declining standard of living in these United States. For more on all this, kindly look at our Global Province Letter entitled “Systems on the Edge of a Nervous Breakdown,” October 2, 2002. Infra-Plays. If you want to invest, instead of trading, look for companies that not only build infrastructure, but propose to get it right by doing things differently. GE, for instance, has said that it is going to make more bets on infrastructure. Moreover, it is now advertising its foray into windpower, suggesting that there are other ways to keep the lights on that are not dependent on those coal-burning plants in the Midwest. Two or three companies are racing to market with less expensive, small jets that can ferry air commuters around small airfields, avoiding the huge hubs that are making a mess of air transportation today. SuperPower, and a couple of other superconducting companies, are hoping to produce much cheaper superconducting cables which can move 3 times the electric power of their copper equivalents. Now, we suspect, is the time to begin looking for 5 and 10 year investments in companies that are truly re-wiring our future. And doing it much better than we did it yesterday. If one picks correctly here, one will do very well even in a market that’s predicted to go sideways for some time to come. With infrastructure, you are putting your dollars into something that is sorely needed, rather than throwing dollars into companies producing products than are in abundant oversupply. Picking correct infrastructure investments is the biggest challenge facing America and Americans today. Warning. As before, we warn readers that this is not professional investment advice, and it should be taken with several grains of salt. Moreover, our good track record only suggests we will go off the rails in the future—probably sooner rather than later. |
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