Strike Up the Band

The prophetic pair of scholar who, when the Dow last flew into the wild blue yonder, predicted that it would hit 36,000 are now only 24,000 points away from being right.

DOW 12,OOO

How important is it, really, that the Dow Jones Industrial Average, the granddaddy of all stock . indexes - it's 110 years old and remarkably spry, a heck of alotmore so, in fact, than some ofthosewhippersnap­ per averages a quarter of its age-closed above that nice, round number last Thursday for the first time ever?

To the blase blokes of whom Wall Street has more than its quota (they think feigning perpetual indiffer­ ence makes them appear ultra sophisticated), nothing shy of a 9.6 earthquake on the Richter scale is worth so much as batting an eye. And to the bruised, battered, beleaguered and badly bereft bears, consumed by grief at failing to take early hibernation, Dow 12,000 is merely fm"ther evidence of the madness of crowds, particularly crowds of well-heeled, gain-gaga investors.

The world at large, moreover, paid little heed. Congress, whose energies these days are totally directed to avoiding further disclosure of its crimes, did not even propose a sim­ plegesture of recognition that Dow 12,000 doesn't happen ev~ ery day, like the minting of a commemorative gold coin, with a picture of Messrs. Dow and Jones on its face and a button­ wood tree on the tails side, that would be officially valued at $12,000.

Mayor Michael Bloomberg, who owes his ample for­ tune and present eminence to. Wall Street, somehow did not see fit to order up a. ticker-tape parade, something he has no hesitation doing when one of the Big Apple's major-league sports teams wins a championship. (Al­ though perhaps' his honor has no hesitation in doing so because the teams, whichever their sport, of late have thoughtfully saved the city the trouble and expense of a ticker-tape parade by scrupulously avoiding involvement in a championship, much less winning one.)

Outside these blessed shores as well, the response to the Dow's extraordinary performance has been similarly muted. Did, for example, the North Koreans on hearing the news pause for even a second in their evil pursuit of more nuclear bombs? Quite the opposite. Indeed, it's not inconceivable that hostile as heis toward this country, Kim Jong II, North Korea's Great Leader (which President Bush, apparently flu­ ent in Korean, translates into English as Mighty Midget), was short the market and freshly enraged, rather than en­ thralled, by the Dow's historic achievement.

Now, to be sure, the Dmv's splendid ascent did get a lot of ink and air time, but no more, say, than if some­ body had snapped a photo of a pig flying. And, in any case, the coverage was largely devoted to the event itself-the doughty old average reaching 12,000-while its significance was unfortlmately scanted. Yet, in truth, Dow 12,000 is chock full of import.

Not the least of which is that the prophetic pair of scholars who, when the Dow last ventured into the wild blue yonder back at the turn of the centm"y, predicted that it would reach 36000, are now only 24,000 points away from being right. Since we must confess to having been among the doubters of that forecast from Day One, we feel 5 :nk seven years later to atone for our initial skepticism. For, to judge by the pace of its progress since that fateful forecast, it should take, om" trusty researcher Teresa Vozzo calculates, only 168 years to reach 36,000. Barring, needless to say, any unforeseen extended bear markets.

Dow 12,000 hasn't set investors to dancing in the Street not only because the traffic is simply awful in Lower Manhat­ tan these days, but also because, as intimated, the market as a whole has palpably lagged behind the Dow. The Nasdaq, which as even a casual observer of the investment scene is likely aware, bore the brunt of the vicious selling that started in 2000 and went on for several dark years, has yet to recover even half the ground lost in its dizzying descent from the top. The Wilshire 5000, as its name implies the most inclusive of the stock indexes, last we looked was still some 7%, or roughly $1.2 trillion, below its March 24. 2000, peak.

Which explains, too, why, apart from the Investors Intelli­ gence sm'Veys of advisers, "'hich haw been increasingly bull­ ish, other sentiment measures haw displayed at least a trace of caution. But, even as we scribbled that last sentence, those measures began to change as the hubbub occasioned by Dow 12,000 was, inevitably, starting to prove infectious. Whether that's for the better or worse depends on how you size up the prospects for the market beyond the next few weeks or months. We have a sneaking suspicion we needn't tell you where we come down.

What especially bothers us is that, to no mean extent, the Dow's run has been powered by herd instinct. Mutual funds and their more adventurous, far more addicted to debt and often more feckless younger kin, hedge funds, have piled into the big caps because the con­ sensus has opined that the big caps arethe place to be. This has proved rather a self-fulfilling analysis since their very piling in has been very much one of the reasons. the big caps have been the place to be.

In the process, opinion has rapidly become investment writ, further enriching big~cap performance. How long this ring­ around-the-rosy, Wall Street-style, can go on before it all falls down is anybody's guess; Ours is: not very long.

For one thing, the very unanimity about big caps, as una­ nimity on Wall Street about almost anything, is more than a trifle disturbing, since it's invariably wrong. Nor do the ratio­ nalizations offered by their new best friends as to why the big caps are destined to do well hold up under even modest scrutiny. Rationalizations that smack of whatever - has-be en­ will-be such as: expectations of another big year for COl"PO­ rate earnings (doubtful); a buoyant economy ( more doubt­ ful); consumers will spend with their customary abandon thanks to the windfall created by the drop in gasoline prices.

That last notion in particular has gained enormous cm"­ rency. Yet it strikes us as anything but a lead-pipe cinch. For openers, we're not convinced gasoline prices won't go back up once the elections are out of the way. Or that OPE Gwon't manage to reduce production; yes, we realize that many of its members truly excel at cheating and production limits give them plenty of opportunity to show their devious skill. But we also suspect that with the Saudis on board, output will be curbed, even if not as much as advertised, and the effect at the pump will be quite noticeable.

And, even if gasoline prices don't re­ bound, with the collapse in housing, an in­ creasingly limp job market and a negative savings rate, will consumers have the wherewithal, even if they summon up the will, to splm'ge? Put us down as just plain dubious.

There's an old Wall Street aphorism that our pal, great investor and valued Roundtable member, Archie MacAllaster, likes to quote. It goes something like:

"When the paddy wagon comes, they take the good girls with the bad." We might paraphrase that to this effect: When the paddy wagon comes, they'll take the big caps with the small.

Over the years, as we trod through this vale of tears, we've had plenty of epi­ thets thrown v.t us. No one, though, has ever accused us of be­ ing a gold bug. And with good reason­ we've never been one. In truth, we've

always had a wary attitude toward gold, which as an economic indicator struck us as kind of the Dow Jones Inde~ of Misery. And, frankly, it didn't help that not a few of the gold bugs we've run into have been a bit bugs about the metal.

We guess we've mellowed some or, per­ haps, the gold bugs aren't flapping as vigor­ ously as they did, say, in the early 'Eighties,· when gold fever was rampant and the end of the world seemed at hand (owning gold was guaranteed to secure you a privileged seat for that grand event). Anyway, for any number of reasons-not least among them the peril to the dollar from our humongous trade deficit and wildly spendthrift fiscal policies and a world generally that ReemR to get ever more unhinged with every passing day-we've g~ined a better, if still re­ strained, appreciation ofthe metal's invest­ ment virtues.

Obviously, no matter how precious, gold, we're very much aware, is a commod­ ity, more durable than pOl~k bellies, but a commodity nonetheless, with all the invest­ ment risk that noun connotes. And we're also cognizant there's a cost-of-carry to owning bullion: ingots are inconvenient to lug around and have to be stored in a safe place at your expense, and they pay no divi­ dends like a stock or interest like a bond to help defray that cost.

All of which may seem like a grudging prologue to saying some nice things about Newmont Mining, but those reRf~rval:iom\ are rooted in our abiding Kaflmesque fear of being mistaken for a gold bug.

Newmont is certainly not unknown to Barron's readers: Rhonda Brammer has written acouple of stylish and penetrating features on the company the past few years. The latest, in the July 3 issue, de­ scribed the remarkable awakening of gold

after its 20-year slumber and, in some de­ tail, recounted the noteworthy strides Newmont has been making in turning it­ self into the planet's premier producer of the yellow metal and, for that matter, a first-rate company by any standard.

She pointed out that Newmont was the only pure-play gold stock in the S&P 500. With a market cap of $23 billion, it enjoys admirable size and liquidity, has a global portfolio of first-rate properties and has been steadily discovering more gold than it mines. That's no small consideration for a market where supply Reems deRtined to be tight.

Without blinking sonw unexpected headaches-a dt"llllght. in Ghana that forced Newnwllt to shm'ply reduce its min­ ing I:hl'l'(', I'xpl"opriation in Uzbekistan (gc'.t.ting I,ieked out of that loony country strikl's liS as a badge of honor)-that provl'd a drag on this year's performance as w('11 as on the stock, Rhonda's piece was a highly persuasive argument for New­ IllOIlt'S shares as an investment.

What prompts us to take a quick look at N I'Wlllont is that gold, down from a peak of $71[, an ounce in May, is hanging in there a few bucks below $600 but is distinctly not a hot topic these days in Wall Street. Fur­ ther, Newmont's stock, which has ranged in the past 12 months from slightly under 40 to a hair under 63, has been mired for a fair stretch in the low 40s.

Yet the company boasts, among its vari­ ous and sundry attributes, an exception­ ally sturdy balance sheet, buttressed by an investment portfolio that's a true thing of

beauty and generates oodles of lovely cash, and a classy management, which, inci­ dentally, promises that any future sur­ prises will be on the upside.

As it happens, while in the midst of working up this note on Newmont, we re­ ceived an e-mail from Darren Pollock, who's with a West Coast investment advi­ sory dubbed Cheviot Value Management. Mr. Pollock obviously knows his way around a financial statement and has a sea­ soned investment eye. And, this won't sur­ prise you, we imagine, he's high on New­ mont.

Not the least of the attractions he cites is that the stock is selling a good piece be­ low what its business is worth. More specif­ ically, he reckons the company's true net as­ set value is 20% to 50% greater than its share price. He also points out that the stock is now selling where it sold back in 2003. Yet the price of gold has risen since then by a full 50%.

In her July article, when Newmont was changing hands around 50, Rhonda ven­ tured that the stock in the fullness of time might well climb to 75-80. Despite its re­ cent laggardly action, that still seem to us quite reasonable. The breakout year for the company's mine production shapes up as 2008. But sometime before that year rolls around, we have a hunch the stock will discount Newmont's improving prospects· in earnest.

And, as Mr. Pollock points out, also much in its favor is that a majority of the an­ alysts who follow Newmont rate it as a Hold or Sell. What more can you ask? .