THURSDAY, DECEMBER 20, 2007

UP AND DOWN WALL STREET  

By ALAN ABELSON


The Alchemists

ALCHEMY IS ALIVE AND WELL...IN ETHIOPIA!

Who knew? Not us, for sure. Nor did just about anyone else on this aching planet until last week, when Fortune, a newspaper based in Addis Ababa, which happens to be the capital of Ethiopia, (and not to be confused with the small American business magazine of the same name) broke the story.

The alchemists, as it turns out, were in cahoots with the prestigious National Bank of Ethiopia and the Ministry of Mines and Energy (how could they be anything but prestigious with monickers like that?), and so they were obviously more than a little familiar with metallurgy and the glistering value of gold, the latter now fetching close to record prices on the global commodities exchanges.

The raw materials they transmuted into the ever more precious metal were common enough: steel and stone. And the magic ingredient they used to change such relatively humble stuff into gold was paint. That's right, paint. While we haven't been able to find out definitively which brand they used, theirs was undeniably a truly mind-boggling feat.

Between December '05 and last April, the country's central bank bought comfortably more than $10 million of the alchemically made bars. We can only assume the powers-that-be zealously kept secret the magical process that promised them riches beyond Haile Selassie's wildest dreams for fear it'd be stolen by evil ne'er-do-wells, who, of course, would soon have flooded the market with bullion, depriving the Ethiopians of the sumptuous fruit of their ingenuity.

Alas, for all the measures taken to prevent word from leaking out, it inevitably did. Our conjecture is the Ethiopian government, knowing that denials wouldn't be believed, cleverly declared the seeming alchemy a hoax and threw the supposed offenders, whom it pointedly refused to identify, into the hoosegow. It pains us to even speculate on the fate of the poor wretches, who achieved something that for lo, these many centuries, has eluded humanity's tireless search to turn dross into that most treasured of nuggets.

A bit of investment caution seems in order here: If you're a gold bug -- and who, in right mind, isn't, these days when our beloved nation is hell-bent on cruelly debasing its currency? -- you might keep one eye on the amount of steel and stone being imported by Addis Ababa and the other eye cocked for any sudden inexplicable volatility in gold futures.

At the risk of sounding chauvinistic and not to demean the extraordinary Ethiopian accomplishment, this proud nation of ours can lay claim to nurturing alchemy, as well. Our native brand of alchemists eschewed turning base metal into the precious variety in favor of something more practical (we are, first and foremost, a pragmatic people) and yet more idealistic: turning promises into castles (as in every man's home etc.).

Ethiopia, we've no doubt, covertly rewarded its alchemists with gold medals and unstinting praise (perhaps even tossed in a pot of birr, as the local currency is dubbed. So those inventive souls, our neighbors (provided we lived in Greenwich) whose magical labors in the canyons of capitalism known as Wall Street, enabled millions of their fellow citizens to taste the joys of home ownership, reaped renown and material reward.

As it happens, you don't have to venture off to far-away Africa to find evidence of society's ingratitude to its more creative members. A painful parallel to the harsh treatment being meted out to Ethiopia's alchemists is taking place right here at home. We're speaking, of course, of the brutal attacks on those once hailed and now reviled folk who conjured into being the sublime subprime.

In so doing, these astonishing innovators, blessed with extraordinary visionary power, provided the answer to the multitude's prayers for shelter. That the multitude may have lacked the wherewithal at the moment to purchase an abode, and their only hope of ever doing so rested on winning the lottery, posed no problem. At least, so ran the blithe assumption, no foreseeable problem.

And now that it is a pronouncedly seeable problem, and admittedly rather a large one, those very innovators, once celebrated as the new masters of the universe and fabulous facilitators of the vaunted ownership society, have become the objects of scorn and contumely, the designated villains Washington loves to hate and lawyers love to pursue.

Fortune (and we're not talking abut either the Ethiopian newspaper or the small American business magazine) is, indeed, fickle.

In this postmodern era of creative nonfiction and fictional memoir, we offer the above as a real-live modern parable. And in the spirit of the season we implore those smarting at having their houses sold out from under them to beware of casting the first stone. Or better yet, before you do, send it to a friend in Addis Ababa to find out how much it's worth.

AS THE LAST FULL TRADING WEEK of this fast-fading year came to a close, the stock market, taking to heart the ubiquitous admonition to be merry, shook off its wobbles and showed some signs of life. And that's the trouble.

So laments an old buddy of ours who has spent more years than he cares to count following the markets, fearlessly and -- more to the point -- more often than not accurately predicting where they're headed. On that score, he has been awfully good in anticipating this year's serious swings, both up and down.

What he thinks we need most of all if stocks are going to stage a run-up that lasts longer it takes to read these scribblings is an honest-to-goodness washout. And gosh knows, any number of times this hairy year, stocks have threatened to indulge in just such a thoroughgoing decline. But in virtually every instance, bargain-hunters couldn't restrain themselves and unwittingly postponed the necessary inevitable.

In other words, investors now have taken to buying the drops instead of the dips. And that just isn't the kind of behavior that usually precedes a decent dash higher, much less a real bear-market rally.

Although by nature a cheerful type, kind to little children and not in any case -- to use that pejorative cliché -- a perma bear, keeping his enthusiasm in check is the miserable performance of the financial stocks. His concern is one we've had occasion to voice, as well: The sector, no secret, was a key element in both the great bull market of the '90s and the strong advance that started in the early years of the new century, extending well into this year. It's no secret, either, the financials are beset by all manner of plague and pestilence.

The long surge in the financial stocks started in 1990, when they were universally shunned and greatly unloved by investors amid the fallout from the S&L debacle. In the fall of that sere year, the Standard & Poor's Financials Index sank to a low of 47.56.

OK, let's hear a flourish of the trumpets and a roll of the drums: From that ignominious nadir, the index resolutely climbed with only relatively few pauses to a shining peak above 500 this past June. Since then -- stow the trumpets and the drums -- the vicious credit crunch and subprime fiasco have trimmed the financials by more than 20%. And, of course, the worst isn't over.

What's more, far from the madding crowd, out in the real world, the financials have been contributing as much as 27% of the total operating earnings of the more or less illustrious companies that make up the S&P 500 index. So they are manifestly a critical force in the economy as a whole, and their current profound and many woes are not the least of the reasons we envisage the onset of recession.

Just as their earnings and net worth of the banks, brokerage houses and their corporate kin are destined to bear the scars from their present travails for some years to come, our friend suggests it will likely take years, too, for their shares to regain a semblance of their former investment popularity. Look at what happened to the vast majority of dot-coms after that sector blew up, he says, and don't expect any quick or miraculous recovery of the financials.

FURNISHING SOME JOLLIES TO THE market were the enormous wads of dough being tossed about by the central banks, conspicuously including the Fed, and monster infusions into the likes of Bear Stearns and Merrill Lynch from so-called sovereign funds. As that generic name strongly suggests, these are investment entities, created by the governments of various Asian and sundry Middle Eastern countries.

Perhaps we were born with an overly dominant cynical gene, but the rescue rush being put on by the central banks (the money is officially short-term borrowings that presumably will have to be repaid by somebody, hopefully the borrowing bank, but who knows?) strikes us as an indication that they think things are worse in the tangled global credit markets than they're letting on publicly.

As for the sovereign funds, no question they're loaded, but there is some question, certainly, as to their investment acumen.You may recall that when Blackstone Group went public in June, the Chinese bought a 10% stake, for which they shelled out $3 billion. For about 24 hours they looked like investing whizzes, but that image faded with Blackstone's stock. And their investment now is down some half a billion, which is a lot of smackers in any language.

Obviously, one bad play doesn't mean the end of the game. Nor is it necessarily an indication of how other commitments by the Chinese and other sovereign funds will fare. The conventional Street wisdom is that they're in for the long haul. But, as intimated, investing in the financials, as they're doing with some gusto, may turn out to be a considerably longer haul than they're bargaining for.


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