May – July 2000
* WHAT NEXT? The best investments are made when markets are down. Learn how opportunities might arise in the months ahead.
* QUESTIONS ABOUT MARKETS & CURRENCIES. Page seven.
* ECUADOR UPDATE FROM OUR LAST VISIT. Page twenty.
Morning mists hang like sheets over fields where hummingbirds hang on spring blooms. Birds sing to announce the dawn, reflecting like precious jewels in the rising sun. The rushing creek sings of Spring's awakening, of never ending change and of new life from the old.
Dawn, Merrily Farms at Little Horse Creek. Spring comes late this high in the mountains. The blooms are just reaching their full glory, the trees emerald tipped. This is the season of the new, but also a repetition of so many seasons past. Economics are the same, our reflections and rationalizations of what nature is waves rising, falling, in seemingly endless turmoil but, underneath always the same. Excerpts below from reports I have been sending to our web readers during this period explains what I mean. Before the Big Crash
On April 9th, I sent the following message to International eClub members: Survive the June 21 Shift. A huge economic shift is about to descend (the first danger period begins May 5 and crests June 21, 2000). This force will change business and investing for all time yet the only way to see it seems so off the wall, I hate to explain.
But I will. First some background.
A few years ago Merri and I began to act strangely. We felt compelled to start selling pieces of our highly successful multimillion dollar business. Then we found ourselves travelling to really weird places, hidden valleys, deep in jungles, isolated islands and high up windswept mountains. We even moved out of our millon dollar house and lived in the Andes in a 10 by 10 tin roofed hut!
We started doing business with farmers who couldn't even speak English and riding around in a 40 year old Land Rover. We sold our Rolls Royce. We even bought a farm in the deepest part of the Blue Ridge Mountains called the Lost Province, a spot so remote and with such a reputation it is said that the sheriff wouldn't come in without three or four cars. And we actually began to dig in the dirt, whack brush and farm.
Just as years earlier when we had predicted investing in really seemingly strange places like Vienna, Finland and Turkey, I wondered, “What in the heck are we doing?”
Then while speaking at a Jyske Bank seminar, I listened to another of the speakers, Mr. Johan Peter Palludan, a futurist from the Copenhagen Institute for Future Studies (CIFS). CIFS is one of the most successful think-tanks in the world. 110 companies including Proctor & Gamble, Lego, Bang & Olufsen, three Danish ministries, the City of Copenhagen and the ad agency DDB Needham pay $10,000 a year to pick this institute's brains. Mr. Palludan spoke about the Dream Society, the economic society of the future and what investors would do and how to profit there. I was spellbound because what he described was what Merri and I were doing!
This is why the upcoming Jyske seminar where I will speak with Mr. Palludan and another highly successful futurist, Ian D. Pearson, is so important to attend. Ian is a high tech futurist who will speak about the future of telecommunications and technology. He works for huge firms such as British Telecom and billions of dollars in investments are at staked on what he says.
Here is even more background. To explain why this Copenhagen meeting is so providentially timed I have to go clear back to High School days when I worked as a busboy in Portland, Oregon at one of the city's busiest restaurants. Patrons often waited two hours in the lounge for a table. Consequently the bar business was brisk (the owners gave away the food and made their money on the booze). From this system emerged an occasional drunk, but generally everything remained civilized, until the full moon. Talk about wolves howling! This time of the month seemed to bring out every looney, hard drinker and mean person in town. The diners were so aggressive and rude. The waitresses complained that their income from their tips fell and there were many, many more drunks!
Even though only 16 years of age, I quickly gained respect for our relationship with the moon, planets and stars. This respect and fascination has remained with me.
Let's zoom back to modern times. Now. The stock market has been boiling over for years. Price earnings ratios are astronomical. Yields are way, way down. Owning shares makes no economic sense. Every time in the past hundred years that markets have been like this, the market has crashed. The higher has been the rise, the larger and more rapid the fall.
The market is acting dangerously now.
When exactly will the big correction come? I have learned over the past several years that watching P/E ratios, momentum and value analysis does not work for predicting exact days. All that mathmatical stuff gives an overall impression, but understanding crash points requires more depth. We have to look for events that makes the whole of society move and itch!
Back to the stars. Aristotle, Onassis, one of the world's most famous industrialists summed up this importance when he said, “You do not have to believe in astrology to become a millionaire. But to be a billionaire, you must understand the stars.” That quote always resonated with me because of my restaurant experience. So I took special note when I learned that beginning in May the planets move into a position where the earth is on one side of the sun, while Mercury, Mars, Venus, Jupiter, and Saturn will be on the other side in a tight configuration (all within 19.4 degrees of one another). This is a rare occasion that will create some very uncomfortable short term social consequences. If a full moon can turn diners bananas, imagine what this astrological lineup can do to investor psyche all over the world.
Yet there is more to worry about than the fear, nervousness and anger this planetary event may evoke. Added to this social agitation the sun is at its strongest Solar Maximum cycle. This means that the sun is likely to spew deadly bursts of radiation that could interrupt or even destroy satellites, global communciations, computers and electricity grids. Match any kind of meltdown in our electronics and global communications with a period of planetary induced social apprehension and the conditions are ripe for a market collapse. The experts, market pundits and economists will come up with monetary reasons after the fact, but by then it's too late if you are still in what's left of the market.
This period peaks June 21st, so if there is ever a time in the near future to watch out for non-anticipated, unexplained crashes of any sort, including financial markets, this will be the time.
This is why I am speaking at the June 14-18 in Copenhagen. The timing for this meeting is perfect. Most professionals already know that a market crash is coming. I saw this fact when reviewing the Copenhagen speakers' schedule. Along with the two futurists and me there are a handful of experienced investment managers and economic advisors speaking. Most have set the titles of their speeches on how to survive the market crash!
Then Later I wrote: “The goal at garyascott.com is to help you make, keep and enjoy wealth. I was especially reminded of the keeping aspect this last week as I learned new lessons about weather by living in the Blue Ridge Mountains. The winter was special, surrounded by deep snow, everything looking white and pure. But by the time spring arrived, I was ready! However this spring weather is so unpredictable. Several days ago it snowed. Yesterday we planted fruit and nut trees (peach, plum, pear, cherry, gooseberry, hazelnut and black walnut), in temperatures so high I had my shirt off. Today the ground is covered again with snow.
Perhaps the weather is like the U.S. stock market. First everything looks perfect, wonderful, you can't lose. Then there is so much turmoil, hot one day, cold the next.
That cold can be bitter, even deadly, both in mountain weather and stocks. You can understand this better by sharing a true story about a young executive, (just 25 years old), his business and his shares.
Young and earnest, he worked his heart out for four years. Almost sacrificed his family (ended up divorced) trying to build a financial future. But he thought it worth the stress. The stock market had been rising for decades. The bull market was all he knew, shares rising, IPOs were coming out every day-almost guaranteed success.
His industry was in a hot sector and his company, near the top, had gone public. His compensation was generous, including stock options, 50,000 shares at a dollar each. The shares were trading for $20. He was at 25 already a millionaire!
But he was troubled. His industry was so hot that competition had become fierce. Good employees were jumping job to job, grabbing larger salaries, bigger options, better compensation as they moved. His hapless company (and competitors too) were paying so much for talent there was no way they could be profitable.
Yet the young man was one of the few who remained loyal, working hard despite his fears about the firm's lack of profit. He pushed down his common sense and relied on what everyone said. “In this industry profit doesn't have to be made right away,” he had been told again and again. So he just kept plunging away waiting for those shares to rise even more.
Then the market collapsed. A new experience for him. The sudden drop caused a run on his company shares and soon his and many other siimilar firms which were starved for operating cash collapsed. The entire industry tanked and his company went broke. He ended up not only unemployed but with no money and in debt. His stock options weren't worth the paper they were printed on.
Which dot.com did this guy work for you ask? Or was it a software firm? This has to be high tech. Right?
Wrong. The hottest industry in 1968 was the overseas mutual fund business led by three huge concerns (IOS, Gramco and USIS). I was that young man starting at age 21 with USIS when they had eight employees. Within four years they had over 2000 employees and at age 25 my stock options were worth one million dollars (which was a lot of money then). In 1969 the U.S. stock market (after nearly 20 bull years) collapsed along with the U.S. dollar. This brought down an entire industry. Within two years all three of the big firms (none of which were making a profit, all of which were throwing tons of cash at gaining market share) were bust.
Profits didn't matter it had been said. Just survive and grow through tight labor, job hopping employees, super inflated stock markets, small investor nervousness, etc.
Sound familiar? All these factors are the same now in the dot.com and high tech industry as they were in the overseas fund business then.
I am sharing this early history because though I lost my first fortune and a job, I have never lost the lesson. This is why I have held almost no equities in my portfolio for over a year. One hates to walk away from markets when they have not topped. But we can never tell when that shift will come. Human nature being what it is, when the drop does start there is a chance we won't know for sure if the bear really has set in or not. We'll wait just awhile to see if prices comes back. Too late! Overnight we can lose 40% – 50% – 60% or everything.
All the things happening in markets now happened to me over 30 years ago and they have happened before that again and again. None of this stuff is new! We can predict what is coming. Yet it is so easy to blind ourselves. Denial is the medical term used. So my job in the keeping wealth department is to offer the continual reminder. There are always ways to make money even in the toughest of times, but also forces that will rob you of every penny you have when times look the best. Reality? There is no such thing as good and bad times for genuine investors. They use principles that work when economic conditions or up and down. For gamblers, any time, all the time can be bad, even when markets seem good.
Many of you have asked what type of money management in such situations is best. The answer is complex…each person's risk, situation and personality is different. Because I've personally experienced the highs and lows of markets, I only have one portfolio manager with discretionary management powers, who holds shares for me today, Nigel Stephens Counsel, in Canada. You can learn more why I trust this firm to help me keep my wealth in turbulent times by clicking onto my www.garyascott.com website. There you will also see why they now have over half my portfolio in bonds.
After and During the Crash
Hopefully the warning above was in time for readers. However to make sure, on Saturday June 15, after both the Dow and NASDAQ had experienced huge drops, I shared the information below:
As June 21, 2000 Shift Intensifies – We Are Here For You. Two events (I have been waiting for) happened simultaneously. First, the steep and sudden decline of the Nasdaq and the Dow. Second, this is the first time I can use the power of the Internet to help you through such turmoil in real time. In 1987 on Black Friday, the best I could do was take a few phone calls. My phone lines were jammed, mail was too slow and I was frustrated. Now I can communicate with you as events unfold.
Now we'll be available with data and to answer questions over the entire weekend and have asked our webmaster from Europe, David Cross, to be available to get messages out to you today and tomorrow. He agreed and we owe him a vote of thanks. This report is written in North Carolina, but is transmitted via Sweden where David often works. While I might be updating and you perhaps reading at 6PM our time, David will be working at 1AM his time.
My messages last week warned of the need for conservatism at this time and the risks of a market collapse. Does this mean I knew that Nasdaq and the Dow were going to collapse on Friday? NO! The crucial point I've been trying to bring across in my writings is that we don't know the future. Investment managers, analysts and economists cannot predict markets any more than weather analysts can guarantee tomorrow's weather.
Yet we can know what's most likely to happen assuming the past repeats (as it normally does). We just can't pinpoint the exact moments. So every fiber of my 30 years experience has been screaming that a crash would come, soon. Yet I did not know exactly when. The May 6 to June 21 dates I have suggested seemed a likely spot. This is a time when the world population will be restless.
The crash now is not good news because this means we now have to pass through this uncomfortable May-June period carrying the specter of this collapse.
The bad, bad news is that yesterday's plunge at Nasdaq and in the Dow may not be the end. Worse could be in store as there are two areas which pose special risk.
First, equity markets themselves could slide further, especially in the U.S. because it's the greater fool theory that has kept most equity prices afloat. Investors bought or held shares at prices beyond any fundamental sense believing that someone else would buy them later for more. There has been no fundamental reason to buy most shares at Wall Street or Nasdaq for some time. Prices have been so high there was no semblance of yield or even hopes that companies could grow enough to create a reasonable yield.
High tech and Internet shares will lead the way. They are most inflated. Too many investors have been walking on untested waters investing in science fiction that they hoped would become real. Now as 30 years ago when Wall Street collapsed and 20 years ago when gold was 869 an ounce, many novice investors are feeling the impact of fear for the first time.
Many more may bail out on Monday. We could see another big drop. But I don't really know. Neither do the other experts. Half will say markets are headed back up. Half will say they are headed down. Only half will be correct, but all will be guessing (in an educated way-yes, but still guessing).
My second concern is the stability of the U.S. dollar. This is an area of risk too many investors have ignored. I'll send you more about this in a later message today.
Over this weekend I'll share how to react in equity and currency markets where the best we can do is make an educated guess. For more on this click to: www.garyascott.com/worldreports/ Please invite your friends to log on as well.
Now the good news. Stock markets never have problems, only humans who fail to respond with how markets act and react have the problems. This is something we can know and do something about! So whatever your position, this is not the end of the world. There is a way to react which can make your life better rather than worse.
When the market crashed in 1970, it left me with a $1,000,000 loss, wiped out my savings and job, left me stranded in Hong Kong (barely speaking Cantonese) thousands of miles from my family and friends. That crash left me deeply in debt with a high flying lifestyle with no income support and no understanding of what was going on.
This was the best thing that ever happened to me!
So stay posted to our site over the weekend and have good investing and business. You'll get enough spectrology elsewhere. Here you will gain information on how to deal with markets as they unfold regardless of your position.
Most of all enjoy all the sweetness in every day of this spring. Look again at the blooms and buds. Feel the fresh air and cleansing rains. Smell the gentle breeze. These are the things (not a rising economy and stock market) that are the precious gifts. Right now as I am writing this, Merri is happily picking handfuls of new dandelion greens and flowers for a dandelion spring omelette.
Be sure to send your questions to me at email@example.com. I'll post them and provide answers on the site.
Where Are Currencies Headed?
Later on April 15, I sent the following message: Earlier today I reviewed the concerns we should have about equity and U.S. dollar currency markets. I would like to share some more thoughts about the currency problem we could face now.
For years strong demand for the dollar and high interest rates have kept the dollar propped up while the U.S. has created record trade deficits month after month. This has created a negative demand overhang we should not ignore. Two more very negative facts affect the buck now.
First, two government reports just came out suggesting the beginnings of inflation. Secondly, Congress just passed a highly inflationary One Trillion+ budget that reduces tax and increases government spending. This budget is based on huge anticipated surplus. Unthinking government planners and Congressmen have projected our economy as if it will always rise at stellar rates. In their fear to be seen as doomsayers during boom times, they ignore historical fact and act just like novice investors. Furthermore, dollarization by other countries such as Panama, Ecuador and Argentina have put an additional strain on the U.S. monetary policy.
All this means a wave of selling could hit the dollar as wise investors hedge their bets and foreign investors get out of the U.S. market and convert back to their own currency.
How low can the dollar fall? No one knows this, but we can look at history to give us clues. When the market crashed in the 70s, the greenback fell from 400 to 150 yen and from four German marks and Swiss francs to less than two marks and francs. This time round fundamentals are different, but we can see in recent history that the dollar can fall as low as 80 yen per dollar, in which case the greenback could drop 20%.
This increases danger we have everywhere. There has been a positive symbiotic cycle in the relationship between Wall Street's (and Nasdaq) health, inflation, interest rates and the buck.
Low inflation has kept U.S. dollar interest rates down. Low interest rates have helped U.S. share values rise. Rising share values have created demand for dollars and the strong dollar has kept inflation low. Now the cycle has been broken in three places at once (a rise in inflation-rising interest rates and crashing markets). Who knows where this will go?
At my website I am happy to share my course “International Currencies Made EZ” that explains how to react in volatile currency markets. For more on what to do about a falling U.S. dollar. To get this course free click to: https://www.garyascott.com/news/currez/
After the Crash
Fortunately the April 14 drop did not lead to a total collapse and we have gained some time. Here are my comments after U.S. equity markets opened and rose: Market Recovery? The markets have looked better after last week's crash which may give many of you more heart. Reality is that whether it rose or fell, reaction should have been the same. Investors, except the few true, day time traders who make this a profession, should not be investing in ways that short term market fluctuations affect.
My answer to the questions from the reader below confirms this fact. QUESTION: Gary, What do you know of the shares of suite 101.com BOWG. Heard on the Grapevine, it's a good one to have but with the recent Nasdaq problems it is a poor risk. Note that the Nasdaq is up 1.65% at the present time. Share price of above is 2. Wait to hear from you. Mike C.
ANSWER: Mike, In talking with thousands of investors over the past thirty years all I have ever heard they got from the grapevine is sour grapes. Investors should not invest in shares! They should invest in businesses that they know and understand and have thoroughly studied. They should invest in management teams they have researched and are willing to back for the long term. They should invest in businesses with growth prospects that have some type of unique competitive advantage. Investors should buy shares only after they have inspected enough to know the industry, the management, current and future potential of the business. Price only matters when it comes to buying shares of such businesses at a reasonable price. The grapevine rarely yields any of this data.
Furthermore a recent study unveils the fact that almost none of the millionaires in the U.S. created their original wealth by investing in stocks. Even after they become rich they hold an average of only 25% of their wealth in publicly traded stocks. The richer they are, the lower the percentage of public shares held.
The key to success is not from getting rich off outside tips. The real strength I find that most investors forget they possess is within them- selves. Each of us has some unique knowledge, information and experience that makes us interested and expert in some segment of the marketplace. This is where we should focus our attention. If we are bankers, look for opportunities in banking. If we collect garbage, don't forget that waste management has created some immense fortunes. We don't have to just look at Wall Street and NASDAQ to make these investments either.
In fact this new research shows that having your own business is the easiest way in the world to become rich.
Best selling author, Dr. Thomas Stanley, in his new book “The Millionaire Mind” recently confirmed this fact when he interviewed millionaires across the U.S. and found that the highest percentage (32%) are private business owners. No other group or profession even came close (senior corporate executives ranked a distant second with 16% of the nation's millionaires with attorneys third at 10%, MDs at 9%). These millionaires stated that they stuck to their businesses because this was something they could control in bad times. They dislike the stock market because it was beyond their control. Most of them accumulated their wealth in ways you would never imagine. For more details on this click to my website at https://www.garyascott.com/courses/ Gary
These messages brought a frenzy of questions and replies from the eClub's many advisors around the world. Here are samples.
QUESTION: Although I live and work in London I also have business ties in Australia and will shortly be selling a piece of property in Sydney which will hopefully net me about A$ 350,000. With recent turmoil in the markets I am at a loss as to how to invest this money. I am reluctant to transfer this money back into GBP as the Australian dollar is at an all time low at the moment and has been for some time particularly against the pound. Are there any banks that you know of in Sydney that would entertain the idea of your Borrow Low-Deposit High technique? I have to say that most of my investments are in property which always does well for me but I am unsure this time. Will the Australian dollar recover against the pound, as I think it will or am I fooling myself? I do use offshore banks and so am familiar with some of the major ones-perhaps it would be best to invest via some of the good European banks, but keep the asset in Australian $$?
MY ANSWER: Two of the E-Club advisors Jyske Bank and Anglo Irish Vienna can offer you Borrow Low – Deposit High services based on a Australian dollar account. I still hold some Australian dollars and share with you this dilemma. Yet I feel that the pound has been closely linked to the U.S. dollar during this last five year's of great dollar strength. This strength (despite the huge trading deficits in the U.S.) is linked in part to great demand for the dollar created by foreign investment into Wall Street. If the Dow and Nasdaq correct (every fiber of my experience tells me they will), then the dollar is likely to fall. I'm betting that pounds will slide with the greenback. I'm also betting the pound must eventually join the euro and will slide somewhat before going in. Thus I still hold my Aussies and Euros despite their lower return and current reduced parities. Rarely do currencies of this ilk fall and just stay down forever. However my goal as a writer is to give you more than just investment advice on what type of investment to currently buy. I aim to provide you with credible, usable information and contacts. Gaining information about when to hold or sell is as important as knowing when and what to buy. Therefore I'll pass your question along to our board of advisors. These advisors are valuable contacts I have worked with for many years. I hope they can not only answer your question and fill your current needs now, but be able to provide a follow up service that keeps you current on how your decision fits your future needs.
ANSWER: Teddy Christiansen-Jyske Bank: I do not think that any Sydney Banks are doing the investments like borrow low, deposit high, you might have to use an overseas bank like Jyske Bank. This is not really a problem, as we are using ON-LINE system in order for our clients to have access to the accounts/investments 24 hours every day. The GBP is very strong and might depreciate against the EURO as UK is a EU member country – if so the Australian Dollar will be stronger – which is likely, as the AUD is weak itself within the USD block. Teddy Christiansen.
QUESTION: What about markets like H.K.,China and India which were down so much?
ANSWER: Richard Radcliffe-Anglo Irish Bank-Isle of Man: Australia like everywhere else saw the telecoms, media and .coms race ahead as momentum investors drove them higher. Rising interest rates, which increase the discount factor applied to the projected, but (very) uncertain future earnings of most of these companies, have caused a retreat. All stocks will come under pressure from rising rates, but those with good earnings, strong cash flow and decent yields will outperform as more air is forced out of the internet related bubble.
Australia is not a market I spend a lot of time on as it is so small in global terms. If I had to put a small portfolio together I would use ANZ Bank, National Australia Bank, QBE Insurance, John Fairfax, Woolworths, Amcor and Brambles (on a pull-back). For investors looking to buy a spread of Australian assets, the London traded Australian Opportunities Investment Trust, which can be purchased at discount of 16% to net asset value, should be considered.
Sterling is expected to remain strong against the euro in the near-term as U.K. growth is stronger than that in Europe, the budget was expansionary, this will lead to U.K. rates having to rise more than those in Europe. Against the dollar sterling will stay within its long-term trading range of 1.54 to 1.70. I expect it to make a slow recovery towards the 1.62 level by the year end. If sterling rose above that level I would consider hedging at least half of my exposure.
If I had funds to gamble in the currency markets, I would short the yen against the euro. This has a positive carry, the Japanese government wants to weaken the yen to aid its exporters and the euro is oversold. Additionally the net outflow of investment capital which hurt the euro last year is beginning to reverse this year. Once everyone is short the euro there is only one way it can go, the snap back will probably see it move to the 1.10 level, before weakening again.
At present I am avoiding India and China. I am underweight Hong Kong which will suffer from rising rates due the composition of its market, which is composed mainly of rate sensitive financial and property stocks, with a measure of technology. Additionally the friction between Taiwan and China encourages a cautious approach.
ANSWER: Teddy Christiansen-Jyske Bank: The Asian markets, like the U.S., had started to experience performance that was limited to a very small segment of the market, specifically the new economy stocks. This has now largely corrected itself. Performance will broaden out to the more traditional stocks. specifically, look to companies that are reporting and are likely to report better than expected earnings. The Asian recovery is likely intact.
ANSWER: Anglo Irish Bank-Vienna: YES – but we would stick to investments in well established, (strong profit history) companies.
ANSWER: Larry Grossman-Sovereign Intl. Asset Management: What I have to say may seem radical or even unpopular but needs to be said none the less. My take on the market will probably be quite different than other advisors.
First of all, no one should really be surprised that the markets have been extremely volatile or have declined this year. Historically markets have not done well in a period of Fed tightening. One only has to go as far back as 1994 to see what kind of a market we experience when the Fed raises rates several times in succession.
Secondly, markets do not like uncertainty or times of transition and for several reasons this is one of those periods. The current uncertainty comes from several different things. Are we at or near the end of a business cycle? Is inflation appearing and likely to increase? How high will the Fed have to raise rates to try and stop this potential inflation? These are all questions the market is wrestling with and most of us have heard before.
What you may not have heard before though is that there is another question that has been voiced by only a select few. You may have heard it like this, “Is it really different this time?”, or you may have heard it as a statement, “it is different this time”. Most traditionalists do not like to hear statements like this. The reason is that there can be a huge risk in thinking that the old rules do not apply or that a new set of rules are now in play. Let's face it, there is a huge risk in thinking that things are different. But, sometimes they really are.
I recently read the comments of Portfolio Manager, Robert Loest, Ph.D., CFA. Dr. Loest has done an incredible job as a portfolio manager even this year, which has been a very difficult year. He used a very interesting analogy I would like to borrow with all credit to Dr. Loest. However, it is an excellent example of what we are experiencing currently.
Originally we were a society called “Hunter-Gatherer”. The only important measurement of value was the ability of a person to hunt or gather. Next we became an “Agricultural Society” and the basis for value changed to the ownership of land and what it could produce. For example, the yield of grain per acre. Suddenly value was measured in a whole new way.
The next period was the “Industrial Society”. The basis for value was no longer the yield of an acre. Can you imagine the shock someone experienced when they found out the ridiculous multiple that was paid for a factory. Why it was many times greater then the potential yield per acre of the land. People must have thought that these things made no sense and that people were paying crazy prices for land.
And now we have entered the “Information Age”. Once again you have people who are saying it really is different this time and you have people who are saying that we have to play by the old rules and that talk of it being different is crazy talk.”
Yet, if you are reading this by email or on the web, then maybe you know it really is different this time. So, let me bring you back to reality. Should you pay a price that is a multiple of hundreds of times the revenue stream of companies who have never earned a dime? Probably not. Visit our Web site www.siam.com and read the article I wrote last August about internet stocks. It is called, “The Internet Bubble Goes Pop”. I called for a break in the market a year ago and looked pretty stupid for awhile. With that said, I also talked about the probability that we were entering a new era when we would find new ways to evaluate companies. And I said that there would be winners and losers. I suggested sticking with the real companies who had a strong possibility of making money.
Where are we now? I think the cycle in the U.S. is much farther along. I have been suggesting to clients that valuations looked much more attractive outside the U.S. I believe the Internet and the revolution it is creating is here to stay. I would be buying blue chip European, and small to mid cap global stocks. These dips will present us a strong buying opportunity. The economies of most of the world markets are strong and likely to stay strong. The U.S. as I have said is late in the cycle and I would underweight my exposure to the U.S. However, I would not avoid the U.S. There have been some very strong earnings from good companies recently that have surprised people on the upside.
ANSWER: Michael Keppler-Keppler Asset Management: Our April Major Markets Country Selection Strategy Update shows tremendous rebounds in our value portfolios. As an example, Berkshire Hathaway, the largest holding in the Global Advantage Major Markets High Value Fund is up 42 percent from its March low and still very attractively priced. I believe, now is a good time to invest in good old global value portfolios, like the Global Advantage Major Markets High Value Fund, a global equity fund managed by State Street Global Advisors and advised by Keppler Asset Management.
The Global Advantage Major Markets High Value Fund was up 60.1% last year and should continue to do well over the next 3-5 years. The latest net asset value per share was Euro 1,417.42 as of April 12, down 2.5 % from its all-time high reached on March 29. The fund trades every Wed. and the last trading day of each month. For more information, Stephen Marx at State Street Bank Luxembourg Tel.011352 4640 10379, fax. 011352 2643 1325.
Here are the arguments (from our April Strategy-Update) why our Top Value Strategy is expected to do well over the next 3-5 years. About 2/3 of the Global Advantage Major Markets High Value Fund assets are invested according to the Top Value Strategy, the rest is in exceptional companies. (The largest holding is a 10% investment in Warren Buffett's Super Value Stock “Berkshire Hathaway”). 5% is in cash.
There are some indications that a shift from “New Economy” stocks into “Old Economy” stocks may have started. Should this trend persist – and I strongly believe that it ultimately will – it should give the Top Value Strategy plenty of room for superior performance in the future. Based on our analyses, the Top Value Model Portfolio is now about 24% undervalued, while the cap-weighted MSCI World Index is about 18% overvalued. Our valuation work is based on current valuation, current relative valuation, historic valuation and historic relative valuation. But not only are our top ranked markets attractively priced compared to the MSCI World Index, the actual annual growth rates of earnings, cash flow, book value and dividends compare very favorably with Europe, the United States and with the MSCI World Index:
Annual Growth Rates (%) Earnings Cash Flow Book Value Dividends
(as of March 31, 2000)
Top Value Model Portfolio 21.3 14.1 4.2 10.1
Europe 15.8 4.6 5.0 8.9
USA 14.8 6.3 9.2 -1.6
MSCI World Index 10.9 3.6 5.7 5.4
There is no change in our performance ratings this month. The Top Value Model Portfolio contains Australia, Austria, Belgium, Germany, Hong Kong, and Norway at equal weights. Our current ratings suggest that these markets offer the highest expectation of superior performance.
MY ANSWER: After Asian equity markets collapsed in 1998 and looked like real losers, they staged a strong rebound so they once again currently looked strong. From a market timing point of view the time to buy was a year ago. Now these markets are at best in a neutral position from a momentum point of view. In other words, they do not offer any special opportunity from a bounce. Asia lags behind the U.S. in ecommerce, etc. and some opportunity is in these by getting into fledgling Asian information era business that have proven their worth in the U.S. Asia reserves a position in most global equity portfolios, but look for Asian businesses that you understand and believe have a competitive edge in their industry that will be successful long term.
QUESTION: The Australian Share Market crashed by about 6% today, wiping off some $40 billion dollars. It was mostly the .com shares. The blue chip stock fell only marginally. Probably a good time to pick up a few more good solid blue chips here maybe.
ANSWER: Andi Kaegi-BPCS: The Australian market also looks attractive on a long term basis and I would use the same approach as described in the answer regarding Asian shares.
ANSWER: Anglo Irish Bank-Vienna: YES, probably. Anyway we think that blue chips are always a good choice for a solid, long term investment.
ANSWER: Teddy Christiansen-Jyske Bank: You must not take a short term approach to the markets. Remember that the odds of having a bad experience or experiencing a loss drop to almost zero if you are willing to remain invested for a 5 year time frame.
QUESTION: It has been pointed out by Adrian Van Eck that the fed has pumped 78 billion dollars into the money supply the last three weeks and yet nobody has even commented on this. Was this a cushion to save the markets and economy when “they” decided to drop the markets? Also, why is gold not reacting to all of this in a dramatic fashion?
ANSWER: Teddy Christiansen-Jyske Bank: Gold has been an under performing asset class for quite sometime now and is likely to remain so for the foreseeable future. There is too much gold being sold by foreign governments and other entities to allow for a prolonged rally. Additionally, there is heavy selling of gold by y2k investors who bought the metal expecting the worst. Europeans and Americans buy gold for completely different reasons. Europeans buy it as an insurance hedge against the future, put it away and never think about the price. Americans buy it for an investment like they would any other stock. It is a lousy investment but a great insurance blanket. Buy it for the right reasons and you won't be disappointed.
QUESTION: Can you advise me of the likely strength/weakness of Sterling against the U.S. dollar, euro? I am currently in cash (sterling) and property (Jersey, Channel Islands & UK). In the present circumstances what would your advice be for investments?
ANSWER: Andi Kaegi-BPCS: Is the British Pound your home currency? If not, why invest in a rather overvalued currency that has lower interest rates than US$.
ANSWER: Teddy Christiansen-Jyske Bank: In Europe we are surprised that the USD and JPY has become so strong as today. The reason is probably, that due to the very strong economy in Europe many investors from Europe sell Euro and invest in USD – because of the very low interest in Europe. Now when the Euro is weak, the European economy will probably be even stronger – good for export out of the EU – bad for import. This situation is only temporary, the USD/JPY are much overvalued and out of proportion in relation to the inflation. Keep your CHF or convert to Euro – but do not buy any expensive USD. The dollar is likely to continue to do well as long as the economy is perceived to be healthy. If interest rates rise but not too dramatically, it will only make the dollar more attractive. Short term I like the dollar. Eventually it will probably become weak but not at this point. However, you should always take a multi-currency approach to the markets. The question becomes what is the best way to achieve currency diversification, is it through owning stocks or bonds of non-US companies or by speculating directly in currencies. If people like George Soros and Julian Roberts can lose millions of dollars by speculating on currencies, so can you and I. Better to diversify for the sake of diversification and protection, not speculation.
ANSWER: Colin Bowen-Isle of Man Assurance: It is my personal view that the œ will in the medium term i.e. 6 months remain strong. However, you will need to watch carefully for a possible General election in 2001. Also should the UK Government start to make more positive comments about joining the EU, then the UK interest rates will decline to allow membership. With the results that the œ will weaken, therefore I would feel comfortable remaining in œ for the next 6 months.
ANSWER: Anglo Irish Bank-Vienna: The UK Government would like the Sterling to go down, but the fundamentals are more likely for the USD to fall. Probably the Sterling will be broadly neutral against the USD and negative against the Euro.
QUESTION: I visit your web sites and am basically confused. I have most everything in Nasdaq stocks and they have dropped precipitously, as you know. My tendency is to wait it out knowing it may take months or longer. I am still ahead of where I started, overall, so there are a number of stocks I could sell without taking a loss. Do I sit or do I sell and if I sell, where do I put the money? I need something simple to follow. Your website is long and arduous for me to consider and I get lost with all the variables. Help.
ANSWER: Teddy Christiansen-Jyske Bank: The Nasdaq is likely to test the lows of recent weeks again. it will punish the stocks with bad or no earnings but will reward those with good earnings. I would not be a seller of the quality companies in here.
QUESTION: My company has been successfully involved in Pacific Rim imports for the last 16 years. I would like to investigate the legal tax advantages of having an offshore bank account, but have been unable to locate a good international tax attorney/CPA in the Kansas City area. Any suggestions? Would any of your courses or publications address this issue?
ANSWER: Andi Kaegi-BPCS: As a US person subject to US taxation on world wide income you do not get any legal tax advantages by just having an offshore bank account as such. Manufacturing and importing from abroad you may consider using different foreign companies for manufacturing and trading as your business partners and leave these interests abroad under foreign control maybe event using a Trust.
QUESTION: I love the leveraged scenario that Gary talks about when investing in currencies. Can this be done with limited funds to get started? Some banks require a minimum of 10K or more the open an account. Maybe in the $2,500 range just to test the waters. Which banks?
ANSWER: Andi Kaegi-BPCS:: I am afraid you will not find a bank handling leveraged currency transactions for this amount and costs would be sky high.
QUESTION: I am planning to place US$ 40,000 with Jyske Bank in a very near future. I am 61 years old and would like to invest with low to medium risk. Also what is your opinion about Polish Zloty which offers 16% for fixed 3 mo term deposits?
ANSWER-Andi Kaegi-BPCS: An investment in Polish Zloty is above low to medium risk. Just be aware that daily currency swings are larger than interest earned and you get the 16 % for 3 months only (i.e. if the currency loses more than 4% you lose out and 4% movement against the US $ is not much). Alternatively you may look at 5 year bonds in South African Rands where you lock in 12 to 13% yields over a much longer period in a more established but also troubled currency.
QUESTION: I have a Swiss Franc annuity and have seen the value fall. Should I keep or sell?
Answer: Larry Grossman-Sovereign Intl. Asset Management: First we need to have a frank discussion about the status of Swiss Fixed Annuities. The IRS made a ruling some time ago that dramatically affected Swiss fixed annuities. If they were issued before April of 1995, they remain tax deferred. If they were issued after April of 1995 they became taxable retro-active to that date. Many clients are holding Swiss annuities that are ticking tax time bombs and they are unaware of this fact. One other item of note is the government repealed the 1% excise tax on Swiss annuities and many clients are entitled to a refund of this amount.
JML has recently begun to offer a Swiss Variable Annuity that IS tax qualified. Many people have made the decision to switch to this annuity as it has many more investment options and will in all likelihood allow clients to grow their account faster than if they remain in the fixed account and speculate purely on currencies. In the variable program there can be in many different currencies or mutual funds. This means you can be in stocks, bonds, fixed investments etc.
If the client wants to remain in the annuity they are in, I would suggest they switch to the dollar for now as it is most likely to remain the strongest currency. They have announced they are going to allow and support a lower Euro so that would not be a good choice.
We have all of the information about JML's new program on our site if someone is interested.
QUESTION: How does an offshore company set up an investment bank account with international banks such as Jyske Bank for example?
ANSWER: Larry Grossman-Sovereign Int. Asset Management: At Sovereign International Asset Management we clear through and use Fidelity for custody of all of our clients accounts. Fidelity has the offshore company supply articles of incorporation or articles of memorandum and the list of authorized signers. Any of these signers can complete the Fidelity new account paperwork. The client only needs to tell us where and to whom. All new account paperwork can also be downloaded from our web site.
ANSWER: Teddy Christiansen-Jyske Bank: Fill out an opening form with signatures and power of attorney, passport copies of the persons involved and the mandate copy of registration of the corporation, wire the funds and one is in business.
Answer: Andi Kaegi-BPCS: In general it is advisable to have a personal word with a representative of the bank first. For identification the offshore company will have to provide verified documentation of newest date such as Certificate of Incorporation, Memorandum and Articles of Association, Board Resolutions and disclosure of beneficial ownership. The exact list of documents required depend on the country where the offshore company is registered. Basically the bank must ensure that the company really exists and have exact proof of who can legally bind the company and have verified signatures of these persons. They also must know and have proof of the identity of the beneficial owner and they want proof to the origin of the funds that the company wants to invest.
QUESTION: When you make your FINAL decision on an investment, I have wondered if the investment decision should be made with your “gut” feeling or, using all available research and information to make the decision.
ANSWER: Teddy Christiansen-Jyske Bank: Do not ignore the specialists' recommendations, but I agree that you should follow your “gut” or instinct. Never make an investment that you do not believe or trust – diversify as much as possible – buy what is cheap and sell what is expensive. If we are talking about a 30 year investment – save up 50% in bonds/accounts and 50% in stocks/mutual funds. But listen to the voice of the world market before you make your own investment.
ANSWER: Larry Grossman-Sovereign Int. Asset Management: This is an interesting question as it should be clear to everyone with exposure to stock markets that investor psychology does play a role in determining the level of a stock, at least in the short-run. My experience over 13 years of managing money is that the “gut” is usually wrong and that it is almost impossible not to get caught up in the emotions or psychology of the majority of investors. This is why there can be such massive swings in the values of speculative stocks as the “herd” swings between fear and greed. To invest is to be patient and to own companies with strong, defensible franchises and good long-term growth prospects. The best way to guard against overpaying in the short-run is to buy stocks patiently and slowly. As you gain conviction in the fundamentals of the company, you buy more. Conversely, be ready and willing to sell if your initial thesis for why you thought the company is great proves to be incorrect. One of the best lessons any young investor can learn is to hang onto your winners and to sell those companies in your portfolio which fail to live up to their promise. I don't think there is any doubt that our “gut” or intuition is an important tool. But I don't agree that it should always have the final say. Many people have followed their “gut” over the edge of a cliff. I would say it is wise to use your “gut” where you have done a lot of research and the research supports more than one choice. In this case you are allowing your “gut” to assist you with an informed decision.
ANSWER: Andi Kaegi-BPCS: Just listening to the experts can be as wrong as just listening to the “gut” feelings. As mature markets are very efficient nowadays, all the experts opinions are reflected in today's stock price anyway and further news and experts' reassessments will come out in random fashion. Today's stock prices not only reflect all the experts wisdom but also all present psychological feelings of all market participants including the many followers of greater fools. One absolutely can use gut feeling to judge the stability or nervousness of the market or an individual stock but instead of a final decision it is much more important to stick to the following rules at any and all times: 1. Always ensure that your investments are diversified but not overdiversified; at least ten different stocks of different industries (industry news will come out in random fashion too). The market does not pay extra yields for risks that can be eliminated by diversifying. 2. Only invest in areas that you know; here you can use your guts, you must be 100% convinced of the company you buy, their products and their services. 3. Never fall in love with a stock 4. Buy your stocks as an investment for long term holding.
ANSWER: Steve Rosberg-Argentina: In my opinion, young and old investors alike should always listen to their gut feelings, not to take an “invest” decision, but to take an “abstain” decision. When the gut rumbles telling you “It's all very nice but” STEER CLEAR. Other investment opportunities will appear. The gut does good service in sifting out the kinds of businesses you like or don't like – for example, it will tell you whether you like buying into weapons related industries or not. But don't count on the gut taking a good investment decision unless you are at the roulette table, where you know what the odds are.
QUESTION: Are there mutual funds or other avenues for investing in the business areas of Ecuador? Do you have particular funds that may invest in several areas of the economy as we have in the U.S.?
ANSWER: Steve Rosberg-Former Ecuadorian banker now living in Argentina: I have mentioned earlier some of the problems affecting Ecuadorian funds. Aside from the real estate and direct investment, there may be another alternative to investment in Ecuador if you consider that their crisis is bottoming out: it is to purchase some of their Brady debt, i. e. restructured government debt structured as bonds. The PDI Bradys are the class of Bradys that best reflects clean Ecuadorian risk and which could have an interesting return. Although Ecuadorian public debt is presently in default, there is little doubt in my mind that it will have to be renegotiated soon for the country to move ahead. I am attaching a comment received from a broker friend who is an expert in the field. If you find this interesting, please let me know, I'll be pleased to help you get more information or purchase a position:
QUOTE: “The Noboa government apparently wants to open talks with Paris club and private sector creditors by the end of April. But neither group wants to concede. For its part, the government wants a reduction of principal for all outstanding obligations, whereas the creditors are not so willing (considering that any concessions might affect their negotiations with Russia). Supervising this seeming impasse are the multilateral lending agencies who will combine to provide a $2 billion financial support package (including the $300 million IMF standby loan) to help dollarize the currency and reform the economy. At the recent IDB meeting in New Orleans, it seemed that the government refused to discuss the restructuring, instead focusing on the dollarization plan (still supported by the U.S.). On top of this, legislative matters are murky at best. We believe that if creditors are not so strict (given the recent decline in oil) and the government is less aggressive in seeking a sizable debt reduction, some type of a compromise for restucturing or limited reduction is gradually possible-but for now, purchase of PDI at 26-28 is attractive as the process unfolds.”
QUESTION: I might be setting up a Spanish school in Manta and get a contract with the U.S. military for Spanish lessons! I have seen many opportunities here already, but will take your advice and “taste” the culture first! I have seen opportunities in real estate development, sales, both commercial and residential, insurance company for commercial properties, tour boats and fishing fleet as well as coffee houses and American style pubs & grills like Hard Rock Cafe. What do you think of the potential in these areas?
MY ANSWER: The best way most of us can have the most fun, highest income greatest wealth, top tax savings and ultimate safety is through our own business. Ecuador as a risky market and economy offers greater risk, but reduces competition and increases profit potential. However, especially in a new place the opportunity can be bewildering. Don't bite off more than you can chew! Take one business at a time and make it successful and profitable first. Safety
I have recently been informed by Barry Geldzahler of “Taking Stock LLC” that the latest issue of the “Taking Stock of Mexico” is now available at the website: http://www.takingstockllc.com under the Members Area. Copies of recent articles on investing in Latin America are available at the site under Articles menu. Copies of transcripts of interviews on WCIU-TV on investing in Latin America are available at the site under Mediascripts menu.
Since I am not familiar with the firm I questioned whether to pass on this news and recommend that you proceed with caution. But the data on the newsletter seemed to make sense. Because I receive more data than I can review, I sometimes miss sending on good information that crosses my desk or screen. To reduce this waste, I have set up a bulletin board where International eClub members can ask other members if they have any experience with a particular firm or investment. I would like to extend this service to you as well by listing safety questions from readers or eClub members here.
SAFETY QUESTION: I have been reviewing material from the National Association of Investors Corporation (NAIC). Are you familiar with this group? If so do you have an opinion of their methods?
SAFETY QUESTION: What do you know of the shares of suite 101.com BOWG.
Gain Full Profits from a Half Glass. Is the glass half full or half empty? We have all heard this argument. Optimists vigorously proclaim the importance of focusing on fullness. The rest of the world only sees what is missing and despairs. This controversy, sometimes heated, has been debated for years. The funny thing? Both sides are wrong. Though deliriously optimistic myself, I have pointed out on numerous occasion that both sides of this beef miss the point. Quality, not quantity is what counts. While most of the world fusses and bothers about amounts, the real winners zero in on value and condition instead. Those most content don't worry about whether a glass of water is part empty or full, they question whether the water they have is clear, vital pure and relevant in their life.
I have pointed out this fact for years. The Inspired Investing section at my web site shows how knowing this fact can help us better enjoy our wealth. Inspired Investing means “don't work and invest just for the cash. Do what you love in life. Focus on quality and then figure out how to make the arithmetic work”. View quality of life as the most important line in your balance sheet. This does not mean we can or should ignore laws of natural order, service, give and take, economics or finance, but does mean we should get our priorities straight.
The importance of this quality financial advice has now been confirmed by multimillionaires all over the U.S. To research his newest book, “The Millionaire Mind” Thomas J. Stanley PhD. interviewed 733 millionaires and asked them to rate the most important factors in their success. Loving their career was among the top seven reasons. Learn more about Inspired Investing at: https://www.garyascott.com/inspired/
Have Your Own Business
One of the best ways to be an Inspired Investor is to have your own business. This is also the best way for most people to accumulate wealth. Yet one obstacle I find again and again is that many readers cannot figure out how to attain finance. Here is some news from a long time WR reader on a new way to solve this problem. Here is what the reader wrote.
Dear Gary and Merri, “My name is Monte Ray, and I consult businesses on how to raise money. Though I am an attorney, I do not “represent' businesses in my legal capacity. I consult them-I am a teacher. What I teach is a revolutionary and unique formula for structuring, capitalizing and operating a business. I call the formula, Business Without Debt. When this formula is properly implemented, the business owner will have:
1. No debt-personal or business. 2. No liability-judgment proof. 3. Total control of his business-even after raising money. 4. Minimal taxation-no dividend or capital gains taxes; virtually no corporate tax; no double taxation. 5. Greatly enhanced profits, largely due to the absence of interest payments and reduction of taxes.
“I teach the client how to raise money for his company in a new way. The traditional ways of financing a business are through debt (loans) or equity (shared ownership). The problem with loans is that one usually has to pay much more in interest than one borrows. Also, the payments are fixed and must be paid regularly regardless of unforeseen events or market conditions, putting tremendous pressure on the business. The problem with the other financing method (shared ownership) can be a loss of control.
“I teach a revolutionary financing method in which the business owner gives up no equity and pays no interest or fixed monthly payments. Instead, the investor is paid a percentage of the company's sales. If there is a slump in sales, payments to investors will be correspondingly smaller until market conditions improve. Thus, a lender cannot force an owner out of business, and there are no struggles with minority owners. The businessman is in complete control. I teach you how to raise money. Specifically, you will learn about securities rules and regulations, preparation of securities documents, and filing requirements. You will acquire knowledge and skills which often cost in excess of $150,000 if you were to hire a securities attorney to structure your offering.
“The personal profits of a business utilizing this revolutionary formula are dramatically increased. There are three reasons for this. First, the business is making no interest payments, no mortgage payments, and no lease payments. Second, taxation is dramatically decreased. Certainly there are personal income taxes due from the owners and investors on profits taken, but these profits are not diminished by dividend and capital gains taxes, and there is virtually no corporate tax. Third, there are enormous tax benefits. The owner and investors are able to take as personal deductions the depreciation of major business assets.
“This is the real genius of Business Without Debt-more profits-a bigger pie for both the owner and investor. By eliminating debt and virtually elimina- ting business taxes, the personal net income stream becomes a river.
“Business Without Debt is more than just a financing formula. It is also a way of structuring and operating a business so that the owners and the business assets are virtually judgment proof. Most business assets are owned by the business and therefore exposed to lawsuits. Our structure requires a separation of the ownership of major assets from the business itself, thus providing a safe harbor for the assets.
“So, what is it worth to you (in money) as the owner of a business to have: a fully financed company, no individual or business debt, no personal liability, minimum taxation, maximum profits, and complete control?”
As I have known Monte for many years I am passing this data on to you while I still investigating. I will keep yu up to date on what I learn. If you want to pursue this, see Monte's details in the contact section.
A small boy rode by on his bike over a broad, uninhabited beach. The red bucket hanging over his handle bars is empty. I wondered how to explain why things are so cheap. “Where's he going?” we asked. “Maybe to get some red roses.” Long stems now sell at 20 cents for two dozen!
Giant Pacific breakers whomp as they crest and crash on the sand. A damp ocean breeze tickles the palms that sway over this beach front restaurant where I was enjoying a .72 cent cheese omelet and .38 cent cafe con leche. A tabby cat was parked on my right foot as I inspected the charming wood carved table setting. The boy rode back by, his bucket loaded with wriggling fresh fish.
This was as good as it gets for those who enjoy the beach, waking directly from an ocean cooled room and straight to a table sitting on the sand. We normally don't drink coffee but Merri and I had needed the stimulant. We had pushed ourselves hard on this inspection trip, often driving Ecuador's bumpy, potholed roads for 16 hours a day. We had finished the longest day the night before, yet had not slept well. Last night we had slept on the sea in the only hotel we have found in Ecuador with rock hard beds. But what else can we expect from a beach front hotel that charged twenty five bucks a night?
We had wanted to stay at this hotel because it is situated in the center of the Casa Blanca Beach Resort, perhaps the best in Ecuador, featuring a Jack Nicholas golf course, tennis courts (clay and composite), numerous swimming pools. There is a marina to be developed. Everything is owned by Chileans. The resort is in Same, a short distance of Esmeraldas. There is charm everywhere ranging from the colorful markets to three wheel “ecological taxis” (cycled pedicabs).
This resort sits in a gently rising green bowl facing a clear deep blue ocean. Properties range from those on the waterfront to units with breathtaking views higher up the bowl. Yet prices are so low it is difficult to believe. We looked at property for sale by the developer (there are many more for sale privately). The new units are called Alqueria Del Golf built up on the hill overlooking the sea in three blocks of seventeen units, each block overlooking its own pool. These units come in four sizes, one bedroom and two baths, two bedrooms, two baths and three-four bedrooms at 1,600 square feet. The “asking prices” range from $45,500 to $112,000. But there is a catch. If you buy pre- construction, the price drops $76,800 for the biggest condo, the smaller only $31,200. There is one more catch. Almost no one pays the asking price.
For example I had written in the October-November WORLD REPORTS about a condo, overlooking the sea, in Manta listed for $15,000. We've just met with broker Gus Hernandez and he told us that one of our readers bought it through him for $11,000. Around a 30% drop in price seems to be standard.
Resales at Casa Blanca are even less than the new units. We inspected a totally furnished very attractive one bedroom unit with balcony overlooking lush, grassed gardens, a broad expanse of the Pacific and the marina. The gardens overflow with hibiscus, bougainvillea, multicolored crotons, shampoo ginger, flamboyan and an abundance of palms. You enter by a swimming pool and flocks of birds serenade your every step. At the porch the high cathedral ceiling gives a feeling of space. There's lots of wood and white tile, many closets and a compact bedroom, kitchenette and sleep sofa in the living room. A skylight brightens and wood louvered doors invite the ocean breeze. The asking price is $35,000, but one would expect to pay less.
Look at the benefits. Ecuador is less than four hours from the U.S. and a North American presence is growing with the new military base in Manta. Law and order are good. Leaving the coast you run into undulating green hills as the ocean view fades into a white haze. Further on, huge green valleys ripe with young bananas flow through craggy mountain scenes. Much land is good for farming four seasons a year, Brahman calves stroll along the road and teak plantations bloom and grow and grow. Broad trout streams wind through lush valleys. Ecuador is full of colors and contrasts, small faded chapels fighting green walls of vegetation. Plantations of every sort-palm, yucca, corn, coffee and chocolate. People smile and wave despite their impoverished state. This is true even in the cities, where everyone seems to be working harder though there is still no hassle, no hard sell. The Ecuadorian style is still sweet. Here we found prices ridiculous as well. Huge old colonial houses (8,000 square feet) in the old city sell for as little as $20,000 and will make huge returns if this area becomes popular (as I think it will). Plus we found perhaps the best house bargain in the world. Gus Hernandez told us he is doing a development with a WORLD REPORT reader and that the prefab houses there will cost $800 each. Merri and I nodded knowingly, (like oh yeah!). But he begged us to take a look at the model. We did and were amazed. These are quite attractive, very functional, two bedroom, 600 square foot houses that had a good feel…even with high ceilings, wood floors in the bedrooms and ceramic tile throughout. True it costs more if you want hot water. True they need some decoration for charm, but at $800?
The land at the development will go for $1,600 for a 4,000 square foot lot so the total cost for a truly functional and comfortable house will be $2,400. Larger four bedroom houses of the same design on a double lot still only cost $6,200. The development is intended to be near Otavalo so for a really inexpensive vacation cabin in the tourist area with a near perfect climate in the Guallabamba valley, this makes incredible sense.
I have heard reports that two other readers bought two story, two bedroom houses near Quito for $20,000 that were stunning. Of course there is a reason for these low prices. A cash crunch and uncertainty. What will the future bring? Nobody can tell. I've asked many of my friends and some of the eClub advisors in the know what their thoughts were. EClub advisor Dr. Andres Cordova is sure everything will get better. He feels property is the buy of the universe.
Another eClub advisor (Steve Rosberg in Argentina – formerly a banker in Guayaquil) is not so sure. He wrote: “about Ecuador, some things have taken a turn for the worse, in case we thought it could no longer go that way: the Emelec debacle is very bad because 1: it sets a horrible precedent for political expediency being more important than even keeping a facade of legality and 2: there is a conflict of judiciary and executive brewing. The bottom line, in my opinion, is the military are playing politics under the table which does not bode well Ecuador's turnaround. Our friend Taita Yatchak, one of the leaders of the Indigenous people says that there will be more change so transformation can take place.
So Ecuador is risky. The future is always unknown and here, even more so. However price matters with risk. So what does make sense, buying shares that have shown they can drop as much as 50%-60% even 80% in a few days? Or is it better to buy property at pennies on the dollar? If you love exotic locations and can take risk in real estate, Ecuador makes sense.
For us, we had a lovely time, enjoyed the gorgeous weather, the charming people and the unbelievable food. Some of our well known acquaintances we found sad and fearful, but everywhere there was a good feeling and a genuine welcome. As Dr. Cordova reminded us right up front in the constitution of Ecuador, foreigners are given equality in all matters with Ecuadorians.
www.bolsadebienes.com.ec A new place to find investment bargains in Ecuador on the Spanish language website. There's liquidated property, real estate, cars and art that defunct Banco del Pacifico is offering for sale.
Kjetil Haugan's email is firstname.lastname@example.org. The contact for the Casa Blanca resort mentioned above.
Ecuadorian real estate broker Gustavo Hernandez new fax: 011-593-2-568-676 Tel: 011-593-2-540-702. It is almost impossible for Ecuadorians to return your phone call. Call Gus at 7-7:30 p.m. EST or around 9-9:30 a.m.
Montfort S. Ray, 1200 Abernathy Road Suite 1700, Atlanta, GA 30328. Tel: 770-551-8190 Fax: 770-234-6200. email:email@example.com
Larry Grossman, Sovereign Asset Management, 2706 Alt 19, Suite 114, Palm Harbor, Florida 34683. Tel: 800-983-1779, 727-784-4841. Fax: 1-727- 784-6181. Email: firstname.lastname@example.org Larry works with discount broker Fidelity specializing in overseas shares & IRAs abroad.
Teddy Christiansen, Jyske Bank, PO Box 133, DK-1780, Copenhagen V. Denmark. Tel: 011-45-33-78-7800. Fax: 011-45-33-78-7633. EMail: Teddy@Jyskebank.DK. Jyske offers a complete private banking services and multi-currency loans.
Richard Radcliffe, Anglo Irish Bank, 69 Athol Street, Douglas, Isle of Man, 1MI 1JE, Isle of Man. Tel: 011-44-1624-611-590. Fax: 011-44-1624- 625-497. This branch specializes in managing private portfolios.
Anglo-Irish Bank contact: P. Zipper, Box 306, A-1011, Vienna, Austria, Europe. Tel: 011-43-1-406-61-61, Fax: 011-43-1-405-81-42. AIB offers a complete private banking service.
Ian Dalrymple, Nigel Stephens Counsel Inc., 1200 Sheppard Ave. East, Suite 402, Willowdale, Ontario, M2K 2S5, Canada. Tel: 800-383-3981, 416-502-9393. Fax: 1-416-502-9394.
Michael Keppler, 350 West 5th Street, NY NY 100919. Tel: 1-212-245-4304. Fax: 1-212-262-8150. email: KAMNewyork@aol.com
Don't forget the upcoming seminar in Copenhagen. I hope to see you there. Until then good investing!
Gary A. Scott