James Grant: Recovery's Surprising Strength Will "Jar" People

JAMES GRANT: What Peter was saying is what the ladies of Boston say with regard to their hats. We don’t buy our hats, we have them. Gold is a kind of a guilty pleasure of the value investor. Note, it yields nothing, it earns nothing. It has no book value, it has no conference call. It is a speculation on a set of outcomes, as Peter was saying. Peter wrote a very good book on gold. You can’t know the prices as we talk is over $1,000, you can’t know that that’s too high or too low. Right? There’s no e attached to it, no yield attached to it. It’s money of the mind. So it could be $800 tomorrow and the world might not have changed that much. So I have been buying it for years and like the Boston ladies I have it and I expect I won’t sell it because I don’t trust the central bankers as far as I could throw them. And many of them are a little bit overweight. One couldn’t throw them very far. But I think it is a speculation not on an extreme outcome, but on a reasonable outcome which outcome is that the central bankers will overdo it? They are overdoing it.

CONSUELO MACK: One of the things that you promise at Grant's Interest Rate Observer is that you’re a contrarian--

JAMES GRANT: We come out every two weeks, that's the only problem.

CONSUELO MACK: Every two weeks is that, you know, usually you'll have an extreme valuation idea on the high side, but a low side.

JAMES GRANT: We look for, as I used to call it before this word got rather debased, an edge. That was before it was criminalized by this guy. What you always want, I think, is an extreme price. To me, again, getting back to the nature of a good investment, it’s not so much that a stock is a good investment or a bond is. Somebody said there are no bad bonds, only bad prices. So we look for things that are mispriced. Either the high side or the low side. And sometimes that’s kind of easy. The past year or so we got kind of bullish on credit instruments because we thought the world was misinformed: when it was piling in, the Treasuries yield about nothing, when it was abandoning mortgages which were at 100 cents on the dollar, very poor investments. Indeed, there was speculations on, you know, utterly implausible outcomes, which is the world persisting in that state of delusion. But at 20 cents on the dollar, it’s okay.

CONSUELO MACK: Some of the mortgages actually were, dare I say, you know, investment grade.

JAMES GRANT: Oh, yeah. We called some of them, like colleague Dan Gertner did the work, we called them quadruple A, because they’re better than triple A, better than Treasury bills. That’s when we tried to find in some cycles of the market, and now we’re finding it difficult to find really compelling absolute values in equities. Stock markets had a fine run.

CONSUELO MACK: What are some that are--

JAMES GRANT: Well, I have two to mention that both are long ideas, both of these are undervalued. One is a company- the ticker of which is FNF, Fidelity National Financial, and this is a title insurer, it makes its living by transacting during home sales. It checks the titles to find who owns what, and Fidelity has grown nicely during this great recession of ours, by opportunistically making acquisitions. It believes curiously that one ought to buy into one stock when it is cheap and sell more when it gets expensive. That’s the eccentric management you’re talking about, yielding 4%, priced a little overbook value and we think it’s interesting.

Another is UTS Energy, which is traded in Toronto. This is-- widows and orphans should now put your fingers into their ears because this is a speculation on a higher crude price. Crude oil price. It has to do-- does UTS with options, option values on tar sands properties. It is in the way of developing these oil-from-sands projects in western Canada and we think that at the price that is very well situated to prosper in case the oil price goes back in the triple digits and stays there.
Cheap options, by the way, are the greatest thing. They are. You know, the way that people who really did well in them, the subprime mortgage trade got really, really rich was by buying options on a really likely outcome and then the house prices reverting to the mean to the trend line. So if you think that the trend line of oil is up, UTS Energy is a good speculation.