NEW Reality of Wall Street
by Donald Coxe
288 pages, McGraw-Hill; 1st edition (May 19, 2003)
List: $27.95; $19.01 at Amazon.com
The technology boom and Nasdaq bubble created the largest transfer of wealth in history according to Donald Coxe, author of �The New Reality of Wall Street�, as technology executives with the assistance of Wall Street utilized options to enhance their net worth in a manner that would have made �Robber Barons� of the last century proud.
The Morgans, Rockefellers, and even Warren Buffett needed decades to amass their fortunes, while technology executives made their fortunes in a matter of years � or less - as they exercised options during the Nasdaq frenzy and boom of the late 1990's.
Coxe notes that this wealth was transferred from millions of shareholders, many of whom had substantial losses in the subsequent market crash in the technology sector, and his book attempts to counsel investors as to what they should do now.
The technology boom and subsequent bust is referred to as a �triple waterfall� by technical analysts, and constitute extraordinary events that occur very infrequently.
When the boom and bust pattern appears it constitutes a financial pandemic that takes decades to correct according to Coxe. We have only seen six previous triple waterfalls in the U.S. � including the boom and crashes in the gold, oil, and silver markets in the 1970s and early 1980s.
Due to the misallocation of capital during the recent technology boom Coxe notes that it will take decades for the technology and telecommunication sectors to recover from the triple waterfall, and while many advisors expect a quick recovery in those sectors history suggests otherwise.
War & Market Valuation
Coxe also uses history to note that in times of conflict the markets generally sell at a discount to periods of peace. With the war on terrorism, and wars in Iraq and Afghanistan ongoing, he argues equities will be valued less today than they were in the peaceful 1990s.
The war discount for equities is appropriate since conflicts disrupt established trade patterns, interrupt free trade, reduce productivity due to security concerns, misallocate capital, create uncertainty, increase business risks, and since wars are generally inflationary the price of commodities generally increases.
As a result of these factors stock markets generally support a lower price/earnings ratio during periods of conflict. Corporate profits are generally lower during these periods also which also limits valuations.
Eurodollar & TED Spread
One of the most interesting discussions in the book focuses on the value of the dollar, Eurodollar deposits, and the �TED spread� (difference in interest rates between a risk free instrument and Eurodollar deposits). Coxe claims that when the TED spread widens it reflects risks in the financial system, and is a warning sign for equity investors.
While bearish on the dollar due to long term financial trends, Coxe sees few attractive alternative currencies for global investors at the present which could fill the role of the dollar.
Coxe notes that the savings rate in the U.S. has fallen to historically low levels, and the U.S. has grown faster than the world by serially using and abusing the savings of the rest of the world. Historically such situations are inherently unstable.
Commodity Sector Attractive
If the technology sector will not deliver attractive returns for investors, what sectors look attractive to Coxe? Historically the best market opportunities arise in asset classes that have been ignored for years or decades, and where capital has not been misallocated in a recent market boom or frenzy. Right now he claims commodities are very attractive.
�We are in the early stages of the biggest commodity boom in history, driven by China and India� according to Coxe, and the worldwide demand for natural resources and food will be �monumental�. Investors would do well to expect minimal returns in the market over the next decade, save for firms in the energy, natural resources, food, and financial sectors.
An Excellent Read
We were somewhat skeptical when ordering the book due to the fact that Coxe is an advisor to a public mutual fund family and is highly visible with institutional investors. We expected the standard marketing spin of the mutual fund industry, with little discussion of recent market difficulties and conflicts of interest.
Not only did Coxe deliver an interesting and well written book, but he explores a number of issues investors will not see discussed in detail elsewhere and pulls no punches. And his use of historical data and comparisons is excellent. The New Reality of Wall Street is one of the best investment books we have read in some time.
Donald Coxe was interviewed by Jim Puplava on January 31, 2004 and this interview is available for replay [See Expert Interview Page]
Mr. Coxe also holds a weekly conference call with institutional investors on
Friday's to discuss economic and investment developments. Replays of
this call can be accessed at the following link:
© 2004 Joseph Dancy
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