Thursday, June 26, 2008 9 comments ++[ CLICK TO COMMENT ]++

Jean-Marie Eveillard Very Bearish

I have only been following Jean-Marie Eveillard for a few years but, boy, does he seem bearish. Nothing really new in this article but let me pick off some of his thoughts.

Fed policies under Greenspan, Eveillard says, precipitated "one bubble after another" -- from the implosion of technology stocks in the late 1990s to the recent real-estate price collapse and the related financial-services industry meltdown.

"In the last two or three years, the financial acrobatics were extraordinary," Eveillard said. "You could get a mortgage without having to document your income, your assets, or whether you had a job.

Why do gold bulls always take a dim view of the Federal Reserve (not that Jean-Marie is necessarily one)? Or is that a pre-condition for being accepted into the fraternity of the brotherhood of the elite exclusive group for the shiny yellow element of Aurum? ;)

I personally am not as critical of central banks as many others. I think Alan Greenspan is overrated (what people took for wisdom from him is really obsfucation) but like Ben Bernake so far. It's extremely difficult to run a central bank and always easy to say things in hindsight. Although Alan Greenspan may be responsible to a minor degree for some things, I feel that the individual is ultimately responsible for their actions. In the case of the housing bubble, was it not the homebuyers and the lenders/investors who were fully responsible? I find it puzzling that some who claim to be libertarian (or libertarian-leaning) end up blaming the central bank for most of the problems instead of blaming the individual. (anyway, what I say here has nothing to do with Jean-Marie Eveillard.)

"Banks and brokerages are disguised hedge funds," the fund manager said, disparagingly. "There is no transparency; nobody knows what's there. Some of them may already be quite bargains. The problem I have is that if I bought them, I would be buying blind."

That said, he hasn't completely ignored financial services. "The financial sector is more than just banks and brokerage firms," Eveillard pointed out. "So we bought some American Express."

I have commented on Eveillard and American Express (AXP) before. American Express is getting whacked because it has credit risk. It actually issues cards, whereas Visa and Mastercard are simply credit card processors.

Still, North American firms in general don't really attract Eveillard, who is a native of France and is based in New York. Nowadays he's more interested in putting money into Japanese stocks, which make up 30% of his fund, and Western Europe, where another 30% of assets are committed.

He's also looking closely at the emerging markets of Asia. "The future lies in Asia," he said. "We have to adjust to the fact that that's where the action is going to be."

Asia is going to go through a whole bunch of crises so investors will likely have plenty of time to invest there.

A cash-rich balance sheet and an underappreciated business is, for him, a winning combination.

"Many analysts and portfolio managers seem to ignore the cash on the balance sheet" in valuing a company, Eveillard said.

Japanese small-cap companies in particular, he explained, have a tremendous amount of excess cash on hand. Said Eveillard: "Cash and securities, net of liabilities, are in excess of market capitalization," which he added is like getting the business for free.

Half of Japanese stocks (last time I checked a few months ago) is trading below book value! And quite a few are trading below cash (as Jean-Marie here alludes to). Unfortunately for small investors, many of these are small-caps and English information is hard to find. If any reader is following Benjamin Graham's strategies, Japan is pretty much where you should be focusing your efforts.

Another opportunity lies with Japanese industrial companies, Eveillard said. As examples, he points to SMC Corp. (JP:6273: news, chart, profile) , which makes pneumatic machinery, robot manufacturer Fanuc Ltd. (JP:6954: news, chart, profile) , and Keyence Corp. (JP:6861: news, chart, profile) , a maker of automated products.
"All of them are multinational, have very large global market share, and are extremely profitable," he noted. Yet their share prices, he said, are "extremely modest."

No new information here. I have touched on these before. Fanuc made me look into Yaskawa, an industrial robots concern. I have narrowed down my decision to Toyota Industries, a Martin Whitman pick, but haven't invested yet.

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9 Response to Jean-Marie Eveillard Very Bearish

June 26, 2008 at 10:57 PM

Greenspan underrated?
Your kidding right. Are you basing your comment on the recent real estate and financial crisis? It is because of Greenspan that America has without a doubt the most dynamic economy in the world. Despite a financial crisis and housing slowdown, revised GDP growth was 1%. Think about that for a moment. We have the worst financial crisis since the great depression. Monthly home sales are declining at records rates, and the U.S. continues to grow. Not to mention, how many countries are able to take a 9/11 ? Very few, if any. Maybe you need to rethink your comment ;0

June 26, 2008 at 11:23 PM

underated should be overrated...^^

June 27, 2008 at 8:06 AM

According to Jim Grant's Interest rate observer, here is your hero's Ben Graham's fund performance during the Depression era:

Graham-Newman joint account:
1929 -20%
1930 -50%
1931 -16%
1932 -3%
Entire period: -70%

S&P 500:
1929 -7%
1930 -25%
1931 -44%
1932 -8%
Entire period: -64%

Contrarians of the world, Unite! -- against reality.

June 27, 2008 at 8:47 AM

"Why do gold bulls always take a dim view of the Federal Reserve?"

It is based on facts. I am gold neutral, and have a dim view of central banks. Google a "government approved" CPI calculator, put in 1914 to the most current year and see how much a U.S. dollar will purchase today. How would you like your portfolio to produce that kind of return?

If you wouldn't hire the Fed to manage your portfolio, why should they be trusted with the nation's money?

What is so funny is that so many people think we need a central bank to prevent a crisis when we lurch along to one busted bubble after another which has its origins in the very policies of the central bank.

June 27, 2008 at 12:55 PM


Benjamin Graham basically went bankrupt during the Depression. But he formulated many of his famous investment strategies after after the Depression.

So I suspect that Graham wouldn't have done as poorly if he re-lived that time period using his new strategies.

June 27, 2008 at 12:57 PM

Alex I'm not sure if you are being sarcastic or not... You need to evaluate people through the full cycle. So even though things have been good for the last decade or so, some of Greenspan's actions are still unfolding so we need to wait another 5 years or so.

For what it's worth, I'm not as critical of Greenspan as many others. I just don't place him on a pedestal but I don't think he is too terrible either...

June 27, 2008 at 1:03 PM


IANAE (I'm not an economist) but the current economic theories being followed call for money to be printed close to the GDP rate or someting like that. If the economy is thought to grow at 3% without inflation then I think they print moneyh at that rate. So, 30 years times 3% results in a 90% loss in the value of the US$.

All the economists who support the current consensus, as well as all the investors know that the currency is declining. This isn't anything revealing. In fact, I will say that the US$ is going to decline 60% in the next 20 years (20 years at rougly 3%).

So the real question for you is why this is considered bad? If you have a hard currency, it won't drop perpetually but we will end up with nasty deflationary crashes.

I don't know. As far as I'm concerned, I don't care much about the currency. As long as the currency appreciates or declines within a small amount, it's fine with me. There are advantages and disadvantages to everything. A strong currency means asset values stay strong but the economy is not as flexible.

June 28, 2008 at 1:52 PM

If anyone cares, the Wisdom Tree Japan SmallCap Dividend ETF (DFJ) goes for P/B of .95, P/S of .39, P/CF of 6.67.

Looks like an easy way to invest in undervalued Japanese small caps for those, like me, who have difficulty researching them.

June 28, 2008 at 10:01 PM

Thanks for mentioning the Japan small-cap ETF Dennis. I think there are a few others. Another one is the Japan Small Capitalization Fund (JOF). I'm not sure if JOF is an ETF or a closed-end fund...

I agree with you that these small cap ETFs may be the easiest way to play Japan. I'm leaning more towards the the well-recognized large-caps these days, given that they have sold off quite a bit; but the small caps are still the cheapest by a mile...

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