Wednesday, June 01, 2005

Even Armageddonists Need An Office



Now that Steve Roach, Morgan Stanley’s Chief Economist, has jumped on the collapsing-long-bond-yield train, I feel safe in highlighting an investment idea whose success depends, in part, on Roach being wrong.

According to my Bloomberg, “the likelihood of a China-led slowing of Asia” has caused Roach to join PIMCO bond ace Bill Gross in looking for a 3% ten-year bond yield sometime in the future.

Only six months ago Roach was arguing for higher-than-expected rates—the non-intuitive result of an economic “Armageddon” caused by our unsustainable trade deficit leading to a Dollar collapse, forcing the Fed to raise interest rates more than Greenspan would like.

I’m not making up that “Armageddon” quote, by the way. A Boston Herald reporter got a copy of Roach’s presentation to Boston money managers last November, which was a lot more bearish than Roach’s public research: Roach told the group he saw a 60% “muddle through for a while and delay the eventual Armageddon” scenario, and a 30% chance at recession.

Roach gave it only 10% odds that we get through the trade-deficit, budget-deficit, consumer-savings-deficit, and listenable-new-music-deficit without either a recession or an eventual “Armageddon.”

So, if Roach is right, you probably don’t want to buy shares of Steelcase, the world’s largest office furniture manufacturer, based in the office furniture capital of the world, Grand Rapids, Michigan.

Indeed, if Roach is right, Steelcase—founded in 1912, IPO’d in 1998—is not going to be selling a whole lot of anything, because what it sells is the cubicles made fun of in Dilbert as well as the desks, chairs and fancy-shmancy conference tables from which Chief Economists like Roach make their morning calls to brokers around the world, warning of economic Armageddon.

(The brokers, of course, have been too busy flipping real estate on the Upper West Side and St. John’s Island to pay much attention to Roach.)

If Roach is right, in fact, you probably want to join the crowd of inside owners of Steelcase—all those Grand Rapids heirs to the company fortune—selling their stock in six-figure blocks every time it hits $14.

But, on the other hand, if Roach is wrong, Steelcase could be a nice, low-risk investment in a muddle-through world. We will explore its merits later this week.

For the record, I started in this business working at one of the big wire houses—not Morgan Stanley, but pretty much the same idea.

In addition to our equity research department, where shlubs like me toiled over the nitty-gritty of the actual companies which, to paraphrase Jimmy Stewart in It’s A Wonderful Life, did most of the building and growing and hiring and firing in this world, we had Big Picture Guys who thought Great Thoughts About The World without paying much attention to what it was all our companies were actually doing.

Those Big Picture Guys included a Chief Economist and a Chief Strategist and their staffs. They never agreed about much, and their forecasts didn’t particularly make a difference as far as I could tell.

But they put out a lot of interesting statistics.

On the other hand, I have immense respect for Bill Gross. Unlike Big Picture Guys, who get paid for making forecasts that don’t particularly matter, Gross manages money, which makes all the difference in the world.

Not only does Gross manage money, but he manages billions, successfully. And not only has he been doing it for decades, he tells you exactly what he’s doing and why.

And most of the time, as far as I can tell, he’s proven right.

Which is why the totally contrarian 3% bond yield call by Bill Gross is so appealing. But now that one of the Big Picture Guys has joined him, I have to admit, I feel a little better buying a muddle-through company like Steelcase.

Details to come.


Jeff Matthews
I Am Not Making This Up


The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

1 comment:

Ed said...

In fairness, it's not just roach playing piggy back:

http://ddo.typepad.com/ddo/2005/05/stephen_roach_b.html