Author: A.T.

Every so often in this space I’ve suggested putting a small speculative bet on Russia. For example, a little over a year ago, May 2, 1997, I noted that the entire Russian stock market, though way up, still seemed to be valued at only about one third the value the market was placing on Coca-Cola. And up it went further, and further – an eightfold increase since 1994 – until the start of this year.

If any of you follow this market, I thought I would share the thoughts of a bright young American in Moscow who does this for a living:

Every day for the past two weeks, I’ve been telling our traders the market will continue to fall. And it has. A lot. Nearly every day. The Russian Stock Index dropped another 5% yesterday and another 4% this morning. It is now down 49% since January 1, and our account is down 47%.

I think we’re about to bottom out. The IMF left on Saturday, very quietly. My sources close to the IMF tell me that [International Monetary Fund chief] Camdessus is ready to support Russia with a multi-billion dollar bailout package if need be. There is an overwhelming sense that the IMF will step in very soon. Today, the Russian government is implementing austerity measures (albeit vague) which they claim will cut expenditures and boost revenues amounting to 50 billion rubles ($8 billion). Dubinin is fully dedicated to supporting the ruble from devaluation. He continued today by ordering all commercial banks to retain at least 20% of their portfolios in long-term government debt (OFZs). They must comply by July 1. Investors generally feel the Russian government has been doing “the right thing” to the proper degree (in contrast to Indonesia this winter), and that the IMF loves Russia.

We have not seen these levels in the RTS in 17 months. These are the days that Soros and Berezovsky and their cronies have been waiting for (indeed, in my opinion, have helped to orchestrate). If you have some extra cash to risk, now is probably as good a time as ever to average down. If I had more cash, I’d do it now.

A.T.: Does this mean you should buy 100 shares of TRF, the Templeton Russia Fund? Possibly not. It sells at a premium to net asset value, which is a handicap, and there are those pesky annual expense charges dragging you down. But better to buy it here at $26 or so than a year ago at $53. Russia is clearly risky. But it’s a good place to invest a little money you can genuinely afford to lose – and may.

Meanwhile, events move quickly. A couple of days after getting the preceding, which is to say Wednesday, he sent the following:

Wait! It’s not quite time. Today, T-bill yields jumped from 50% to 80% and higher. (The gov’t is virtually the only bidder.) This afternoon, the central bank raised interest rates from 50% to 150%. (They were raised from 30% to 50% just 10 days ago.) Ruble futures contracts for March 1999 are being traded at RR 8.7 to the dollar, a 41% premium over today’s rate of 6.16 [meaning that people are betting the ruble will be worth a lot less in the future]. Furthermore, political uncertainty about the year 2000 elections has not been fully factored into the market yet. While this may take place in a separate downward movement in the future, it probably makes sense to wait just a bit longer. The RTS Index is now down another 9% from yesterday’s close, down 54% since January 1.

While there are low prices now, and perhaps better opportunities soon, it also remains clear to me that no big money will return to Russia until the return of political stability, which will likely take place in the year 2000 or later. As before, any investments made now should be devoted for 3-5 years in order to achieve significant growth. Comparing today’s cheap, battered RTS to the pricey Dow, I’d give Russia another chance for significant long-term growth.

A.T.: So there you have it: lots of smart people, lots of big money, and … no one knows. I do know this, though: Russia itself will not disappear, and the country has awesome natural resources and an educated work force. It really may be worth more than Coca-Cola.

Some market truisms seem positively antique they’re so deeply woven into the fabric of Wall Street. For example, “Don’t fight the tape.” They haven’t used actual tape for decades – the market ticker has long been a digital display. But everyone knows what “don’t fight the tape” means. (It means that if a stock or the market is going up, even if you think it “shouldn’t,” don’t bet against it. And, conversely, if it’s going down, steer clear.)

“Don’t fight the Fed” is only a bit more modern. (If the Fed is trying to damp down inflation or speculation, don’t bet against it by buying stocks or long-term bonds.)

Ah, but what do you do if the tape says one thing and the Fed another?

Once upon a time, when the Dow hit the incredible level of 6,000, it got Fed Chairman Alan Greenspan thinking – and talking – about “irrational exuberance.”

What must he be thinking now that, 18 months later, it’s 9,000?

Back in February, 1997, I wrote in this space:

With Alan Greenspan leery of our overheating as the Japanese market did a decade ago (rich at 20,000 on the Nikkei Dow it nonetheless doubled – 40,000 – before dropping back to 14,000), I wouldn’t be surprised to hear him one of these days float the possibility of raising margin requirements from 50% to 55% or 60%. “The economy is sound,” he might say. “Stock market values reflect that. But one does worry whether some of the ‘irrational exuberance’ I speculated on a few months ago might not at some point warrant our considering the possibility of nudging the marginal market participant toward more prudence, perhaps by a small adjustment to the margin requirements.” Of course, it would be a much longer sentence than that, nestled into the middle of an answer to the New Delhi Times on the topic of agrarian reform. Never want to be too straightforward at the Fed.

Well, so far no such thing has happened. But if anything, with the market up another 50%, it makes even more sense.

Normally, one thinks of the Fed pulling the levers of interest rates and money supply, tightening or loosening credit. Those are its main tools. But tightening credit now to damp down an exuberant stock market would be a blunderbuss approach that could hurt our humming economy and very likely worsen today’s main economic problem: Asia.

But there’s this other little tool the Fed has, unused for decades, which is its control over margin levels.

Clearly, if the Fed announced today that, effective immediately, the margin requirement (the down payment required when you buy a stock) was being raised from 50% to 100%, it would be a disaster. The market would plunge, as huge volumes of stock owned on margin had to be sold. But merely to suggest that it might be raised in small increments if the market kept rising at an unsustainable pace might, all by itself, apply a useful damper. Then, later, if need be, those incremental notchings-up of the margin requirement could be applied – or not – as circumstances required.

In the meantime, may I offer my own margin guideline? It is this: If you’re buying stocks on margin, don’t. Or at least be very sure you appreciate the risks and know exactly what you’re doing.

Joey has given us permission to buy the tobacco stocks, which to him, at these prices and dividend yields (remember dividends?), represent the perfect hedge.

“Joey!” I cried in the same tone I imagine Caesar used when last he spoke with Brutus – “How could you be buying Philip Morris?!?!” Joey works harder against the tobacco companies than anyone else in the world. (That may literally be true. He has 100,000 names on his e-mailing list. He keys in address changes himself. He has accomplished amazing things. If you’re interested in the issue, visit his Web site at www.smokescreen.org.)

“It’s the perfect hedge,” he explained. “If they go broke, I’ll be thrilled, and if they don’t, I’ll be rich. [Pause for effect.] And believe me: They’re not going broke.”

The thing is, if you bought shares in a brand new tobacco company, or if you bought shares in a handgun company that needed occasionally to visit the capital markets to raise more money to build more factories, you would in some small way be aiding the tobacco or handgun industries. I can see why some people don’t want to do that – I among them.

But the last thing the tobacco companies need is cash; they are awash in cash. The chances of their having to tap the capital markets to sell more shares to build more factories are very slim. So by grabbing some shares at today’s tempting prices, you might – might – make out well. And if anyone ever peaks over your shoulder at your brokerage statement and challenges you for owning RJR Nabisco or Philip Morris, you can just say Joey gave you permission.

Feel free to donate your large dividends to a cause you believe in.

“A humble question: How many pennies should one be allowed to use from the penny jar at the local gas station? Recently I filled up my gas tank and was 6 cents over $15 and without a credit card. I went inside to the cashier — a surly woman of modest pretense — and set down my $20. Seeing a dish labeled PENNY DISH on the counter, I decided to save her from what I thought might be a potentially difficult calculation for her. So I picked 6 cents out of probably 20 there and placed them on the counter, whereupon this self-appointed queen of the penny dish protests loudly in front of a long line of people behind me, ‘Please take only one, Sir!’ Ashamed, I put them all back got my change and dumped all my coins into the dish and said, ‘There, that is for anyone who needs them.'” – L.B.

A.T.: The first thing to say is what my grandfather apparently said following some sort of embarrassing altercation with a subway token booth attendant early in this waning century. “And that’s why that man is a subway token attendant,” were the wise words that have been passed down through my family for generations.

If you ask me, this surly woman was a penny-pinching fool. Just one? Just one? And since when did the penny dish, that most voluntary and civil of institutions, become subject to oversight of any kind. The penny dish is one of the few entirely discretionary venues remaining in our commercial world. Taxes and prices and FICA and all those things are determined by others. Tipping is voluntary, but in truth we know what is expected of us. Ah, but the penny dish. It’s there for your convenience and for the free expression of your personality. There are those who put all their pennies in it and wouldn’t dream of lifting one out; there may be those who take but do not put, though I expect they would be so much in the minority as to leave a large penny surplus at almost all times, hence the 20 you found. The penny dish is such a good idea, and one of its best features is its lack of oversight.

So I’m really angry with this woman.

But six pennies? This does break the nickel barrier. To those who see the penny dish as nothing more than a means to avoid pennies in the first place — you leave ’em when you get ’em and you take ’em when you need ’em to avoid getting any more — I suppose the etiquette might be as follows: Take one or two to avoid getting three or four, but never take three or four to avoid getting one or two. And never take five to avoid getting silver, or 25 to avoid paying for a pack of gum.

Still, I’m with you. The surplus in the penny dish arises from people like you and me who usually leave and do not take. And if, on rare occasion, we choose to recoup from our cup of copper capital — even breaking the nickel barrier — no one should question our moral compass.

Here I stand.

From Ed Shoben: “I know you are interested in closed-end funds, and I share your view that there may sometimes be opportunities in this sector. Buying $1 worth of assets for 80 cents is always an interesting idea.”

A.T.: Seems Ed owns some First Australia Fund (IAF), which he says hasn’t done particularly well. He recently received a proxy statement and noticed that the fund directors (at least those up for election) owned none of the fund. He consequently voted against them and against management on all proposals except ratification of auditors.

“My paranoia did not start,” reports Ed, “until I got a phone call asking me if I had voted. I said yes and she said they hadn’t gotten it yet and thanked me for voting. About a week later, I got a phone message that I needed to call an 800 number and vote my shares. I called and was told that my [negative] vote had not been recorded and I would need to vote again. I said okay and the first question was, ‘Do you want to vote your shares the way the board recommends?’ I said no, and the gentleman said, okay do you want to vote for all directors? I said no. He said do you want to abstain from voting? I said I didn’t think he was phrasing the question very neutrally. He replied that he was just trying to find out what I wanted to do. I then remarked that my recollection was that the three choices for directors were For All, For All Except, and Withhold Approval For All. He said that was right and I asked him to phrase all the questions as they were on the original proxy. Given that one of the proposals was to make it harder to open-end the fund, it seems management here is more concerned with preserving the status quo than with shareholder value (and they ain’t shareholders). I also didn’t care for lobbying in the guise of collecting a vote. Things do get lost in the mail, I realize, but it’s pretty rare.”

A.T.: One way a closed-end fund selling at a discount can rise in value is simply by converting to an open-end fund. That means allowing investors to get out not by selling for whatever pittance they’re offered in the open market – $8, say, when the fund owns $10-a-share of stocks – but, rather, by “redeeming” their shares at full net asset value with the fund company, which sells enough of its holdings to pay you off. Fund managers aren’t thrilled to do that, because if a fund’s been doing poorly, it could mean lots of redemptions, which in turn means less money under management from which to take its sliver.

Good for you for sticking to your guns, Ed. Shareholders rarely win votes against the recommendations of management, in part because we shareholders tend to be lazy about reading proxy statements. But maybe we should try harder.

Yesterday, I made a case for considering placing a speculative bet or two in Asia. Does this make sense for a an investor with $25,000 in stocks and a 10% car loan? No. As I have argued before, that investor is effectively in the market on margin. He should first pay off the car loan. (Not having to pay 10% nondeductible interest on a car loan is as good as earning 10% risk-free, tax-free – an outstanding return.)

So, no. But what of the investor with $300,000 in stocks and all his debts paid off (other than a mortgage) – would it be crazy for him to move $50,000 of it into a long-term bet on Asia, spreading it among four or five closed-end country funds?

Maybe. Only with hindsight will we know for sure. (One might argue it wasn’t crazy even if it didn’t work out, but no one buys that kind of argument when they’ve just lost $50,000.)

If you do choose to explore these waters:

• Nerves – and patience – are required. If it would make you nervous to see this go very badly for a while … or hurt you if it went very badly permanently … then forget it.

• Avoid buying funds at a premium to their net asset value. Once closed-end funds (also known as “publicly traded funds”) are sold to the public, they’re closed to further investment. You can only buy their shares from someone else, not by sending your money to the mutual fund company. So they trade like stocks. And, like stocks, they often trade irrationally. If a closed-end fund owns Japanese stocks worth $1 billion (say) and the fund is divided into 100 million shares, then the “net asset value” of each of those shares is $10. But that doesn’t mean the shares will sell for $10. They might sell for $7.50 or for $15. One reason they actually should sell for less than $10 is the fat annual expense charge the fund management takes – so owning those Japanese stocks through the fund isn’t really like owning $10 of them directly. Reasons an investor might buy a fund for more than its net asset value (NAV): He believes the fund managers can pick the right stocks and outperform the Japanese market … he can’t find some other way to invest in Japan … he expects the premium will widen even further (the greater fool theory, which often works, at least for a while) … or (and this is the most likely) he doesn’t even realize that he is paying $1.20 to buy $1 worth of assets.

Recently, you could have bought some closed-end Korea Funds at large premiums to their net asset values … certainly easier than boarding a plane for Seoul and establishing a brokerage account over there and chatting up the managements of a bunch of Korean companies trying to decide what to invest in … or you could have invested in a more obscure one at a large discount. It’s called the Korea Asia Fund, and you can find out at least a little about it at www.trustnet.co.uk/charts/1201.html. Last I checked, it was selling at approximately a 20% discount to net asset value. If – and it’s a BIG if, which I have NOT researched – this fund is as well managed as the others, with annual expense charges no greater, then clearly, over the long run, it’s more advantageous to buy $1 worth of Korean stocks for 80 cents than for $1.20. Then again, even if this turns out to be an accurate description of the situation … and I repeat that I have NOT researched it … it’s a pain to understand and buy this obscure British/Hong Kong-managed fund that doesn’t trade on the New York Stock Exchange like the others, so most people don’t.

Full disclosure: I did buy some of this and so learned that for U.S. investors, it trades in 500-share ADRs (American Depository Receipts). The $1.30 price per share you may see on its Web site translates into $650. If it’s down to $1.10, that’s $550; if it climbs to $2, that’s $1,000 per ADR.

The point of this is not to get you to buy this closed-end fund but to show you the variability of what’s out there and suggest the value of doing some research. I was too busy and lazy to research it myself. I have such a widely diversified (ragtag?) portfolio, no single folly can do much harm. But just because I’m (prudently) reckless doesn’t mean you should be.

Finally:

• I often argue the merits of index funds, Spiders and WEBS (World Equity Benchmark Shares, if memory serves). Their expense charges and taxable gains are kept to a bare minimum, which gives you an edge. But it’s probably true that in some of the less developed markets, a smart manager may be worth paying for. Take, for example, Japanese WEBS. They trade just like stocks, symbol EWJ. Yet I sold mine when a friend who knows Japan made a good point. He said he thought this was a good time to buy into Japan for the long-term but that some of the big companies were still being artificially propped up by the old-boy cozy network over there … they hadn’t yet bitten the bullet … and so if you just bought the index, you’d be weighted pretty heavily with potential clunkers. Better to pay a fund manager who can tell the good from the bad, the truly competitive firms from the old guard still in the process of face-saving measures on the road to further write-downs. This made sense to me, so I took my tiny profit in EWJ (always easier to change one’s mind with a gain than a loss) and am casting about for the smartest way to put some chips in Japan. (One way, of course: just buy some stocks like Sony and Hitachi directly, here on the New York Stock Exchange.) All suggestions welcome.

So there you have it. The only part I’m really sure of: pay off your car loan.*

*Unless it’s one of those 1.9% deals, in which case it would have been advisable to take the “$1,500 cash back” instead.

Perhaps the saddest-but-true Wall Street maxim is to buy "when there’s blood in the streets." Under this rule, the drop in the U.S. crime rate, especially in New York, could be seen as an ominous sign. Not enough blood. More to the point, the scary goings-on in Indonesia suggest it could be time for large, sophisticated investors to begin thinking about how to place a small bet in that country.

"Stay away!" was the knee-jerk response from a very smart f/x trader I know. (F/x is short for foreign exchange, which means that on a moment’s notice, he may sell a billion ringgits or arbitrage the yen against the baht. Ah, finally words I know that my spell checker does not.) "You don’t want to be anywhere near that region — not Indonesia, not Malaysia, not the Philippines, not Singapore, not Hong Kong. …"

Which could mean he’s right, or which could prove the point: When everyone’s terrified and the end has surely arrived — when there’s blood in the streets — it’s time to consider taking a gamble.

Had you observed the blood in the streets of St. Petersburg in October 1917, you would have done very poorly following this folk wisdom.

Had you taken it a little less literally and invested in U.S. stocks after the crash of 1987, or when OPEC in 1973 had thrown the economy into a tailspin, you would have done Okay.

A friend who runs a company based in New Jersey and Malaysia thinks the bottom has more or less been reached. His company’s most important customers are disk-drive makers. Of these, Seagate has been the biggest. Well, at the beginning of the year, given the turmoil in Asia, the bad news came: Seagate wouldn’t be ordering anything from my friend’s little company for a year. They planned to resume ordering in 1999. Now that’s a pretty hefty setback for a little company — what do you do? Lay off all the Malaysians for a year? No, he found other things for them to do and just carried the plant for a while and, guess what? A few weeks ago, Seagate called to place a $3 million order. And IBM has been going gangbusters with its manufacturing in this region. So my friend won’t have to lay off any Malaysians, and at least his little corner of the Asian economy may have seen the worst.

Of course, this is hardly a macroeconomic view. One anecdote from one guy with one plant in one country in Asia. (His favorite country in the region from an investment perspective: the Philippines.) But even with a macroeconomic view, no one knows for sure what will happen.

But I’m looking into how to place a small bet on the Philippines.

Tomorrow: a few related words on closed-end country funds.

Yesterday I told you what my full-service broker says he first learned when he came to Wall Street. “I can’t use that,” I protested. “It’s too ethnic.” (I used it anyway.)

An hour passed.

My phone rings.

I am screening my calls, so he gets the machine.

It is obvious he has now put some thought into this.

“Buy when you most feel like selling,” he tells my machine (no need to identify himself or anything — we’ve been doing this for 25 years), “sell when you most feel like buying.”

This is not a prescription for happiness. You’re always either terrified … maybe this time the world, or at least your stock, really will end … or heartsick … over ditching a stock you’ve come to love, over watching it rise some more after you sell it, and over paying the tax on your gain. (It is from just this experience that comes the expression “eat your heart out.”)

Nor is this a guarantee of success.

But the fact is, the market in effect pays you for your distress.

Sometimes.

“Perhaps you could explain to me something that sounds like a mystery to me (I am sure there are many more) but which may not be at all. I have owned a few Sony Corp shares (SNE) for the last couple of months. Yesterday, Friday 05/08, I receive a newswire saying that Sony hit record consolidated sales, pretax profits, and net profits, listing a plethora of highest-of-all-time double-digit etc. etc. What is the result of all this? I’ll tell you … During a strong day on NYSE like yesterday, the stock fell 0.62%. I was quite stunned! Should I be so? Is this normal?” – Fabrizio Manopulo

The first thing they used to teach new hires on Wall Street was “buy on the rumor, sell on the news.” (“The first thing I remember hearing,” says my full-service broker, “is buy on Rosh Hashanah, sell on Yom Kippur” — reason enough to pay $245 for a trade you could do for $8 here, don’t you think?) The point is: Since everyone wants to get a jump on everyone else, the time to buy something is when you think there will be good news, and the time to sell it is when the news is announced and folks new to the market, who assume good news is good news, rush in to buy the stock.

It doesn’t always work this way, especially if the good news is even better than expected, but that’s basically the key, at least to short-term price movements. It’s not how good or bad the news is that counts but how that news compares with how good or bad people expected it to be.

Of course, if you are buying SNE to hold for the next 20 years, because it’s a great company and you believe in its future, then how the market reacts to any given quarter won’t make much difference. (And I’m not sure they even celebrate Yom Kippur in Japan.)

“I’m starting to see a trend in the products and services mentioned in your column. They all have the same initials. ATCall, Auto-by-Tel, AmeriTrade, Andy Tobias. Have you noticed this? Do you own all of these companies?” – Joe Robinson

I had the same thought about Mobil when it acquired Marcor and Montgomery Ward a billion years ago (or I imagined they did, for a story about conglomeration I wrote in 1976) — that maybe their strategy was to stick to the “M’s” — until out of the blue they went and acquired Belgium. (“Why not? The Belgians are a practical people …”). And I milked the IBM AT for all it was worth, if any of you can remember back to 1984 or so, when it was first introduced. But no, as of yet I don’t even own AT&T, and my plans to acquire it must remain secret until I’ve saved up $125 billion.