Wall Street West—Investors Hanker for Gold as Uncertainty Clouds Events

0

When news broke of another New York air tragedy Nov. 12, Kevin DeMeritt could detect an instant pick-up in the number of phone calls he was getting.

“We saw about a 60 percent spike. And calls are already way up from last year,” said DeMeritt, founder and president of Santa Monica-based Lear Financial Inc., a gold and precious-metals brokerage. Gold quickly rose as much as $3.65, to more than $281 an ounce on the news of the American Airlines crash, before settling back later in the day.

With Wall Street slogging down or sideways the past year, and with interest rates heading into negative territory (after inflation is taken into account), gold already was enjoying a mild renaissance.

But with terrorism added to the mix even the mere prospect of terrorism many investors run to the perceived security of gold.

Most investors who buy through 35-employee Lear Financial take physical possession of the gold. It is not stored for them in some central facility. “They buy it, and they probably put it into a safety deposit box,” DeMeritt said.

Lear promises to buy back any gold it sells, at whatever market price prevails. Lear keeps very little gold in stock, preferring to act as a brokerage, and take a commission on each sale.

Despite Wall Street woes and terrorism, gold this year is up 2 percent not a riveting performance, but better than Nasdaq’s 46 percent decline or the S & P; 500’s 22 percent slide.

What’s more, gold-stock indexes have risen 30 percent this year. “That generally predicts a rise in gold prices. Stocks look forward, and they are going up,” DeMeritt said.

At $277 an ounce, gold is selling for below its average cost of extraction of $317 an ounce, said DeMeritt, who started Lear Financial eight years ago. Investors with longer-term memories will recall that gold hit $850 an ounce in 1980, making it one of the worst performing investments of the last two decades.


Action

John Kelly, in the Century City office of proxy solicitation firm MacKenzie Partners, was in the hot seat again last week.

Kelly, a veteran of many a proxy war (he helped elect a dissident slate of directors at ICN Pharmaceuticals this summer), saw his firm retained by the family of Hewlett-Packard Co. co-founder William Hewlett in the brouhaha developing around the Palo Alto-based company’s proposed merger with Houston-based Compaq Computer Corp.

The Hewlett family one Hewlett-Packard board member is opposed to the merger and has retained MacKenzie to look at investor sentiment.

Kelly, who isn’t talking, is known for performing quick-but-accurate head-counts on where institutional investors stand. The inside word? The David and Lucile Packard Foundation, which controls about 10 percent of Hewlett-Packard’s stock, may call the final shot on the troubled merger.


Ready Money

Would-be buyers of businesses grouse loudly that financing isn’t there, or if it is, the terms just don’t pencil out. Money is tight and expensive.

But Fleet Capital, an arm of FleetBoston Financial Co. which operates out of Sherman Oaks, is doing more business than ever financing middle-market corporate acquisitions, said Michael Adler, managing director of about 60 professionals.

Why? Fleet Capital prefers to lend on a company’s assets, not its cash flow. “We have been seeing more than our fair share of business, especially in the last month,” said Adler. “Companies, even larger companies that have traditionally been able to get unsecured financing, now they are coming to us.”

In the sometimes-arcane realm of business acquisitions, most lenders extend money on earnings before interest, taxes, depreciation and amortization. In flush years, some lenders will extend four times EBITDA to finance an acquisition, Adler said. Now lenders will lend only 2.5 times EBITDA, if they will lend at all. Under this framework, borrowers must put down a much larger portion of equity to buy a company, sometimes 50 percent or more.

However, some manufacturing businesses may have so-so cash flow, but substantial assets, such as buildings and equipment. Using asset-based financing, Fleet Capital is often willing to lend for such industrial acquisitions.

“We will lend for just a couple of points above LIBOR (the London Inter-Bank Offered Rate),” said Adler. At prevailing rates, that translates into single-digit interest financing, a far better deal than the double-digit world of junk bonds. And as the loan is secured by assets, a lower down payment is required.


Strong Dollar

Crossing another milestone, the U.S. greenback rose to all-time record C$1.60 against the Canadian dollar last week, making the case for cross-border business acquisitions stronger yet, said R.M. “Dick” Torre, chairman of the West Los Angeles and Newport Beach-based Global Vantage Ltd.

Recently, Torre acquired a broker-dealer north of the border, and has formed one in the States.

Torre said he’s found that North Americans are leery of “pouring money into Indonesia.” Canada has natural resources, an educated population, and anti-Americanism is more testy than serious.

With the stock market down in Canada, the opportunities are in buying companies right off the public exchanges, in either “going private” transactions, or preferably, says Torre buying a large enough stake to gain board seats and influence, but keeping quality management intact. Torre said he is looking at four deals, but cannot discuss them, as they are public companies.


Done Deal

Hartford, Conn.-based Phoenix Investment Partners, an arm of insurer Phoenix Cos., announced last week it will acquire a 60 percent stake in the $7 billion-in-assets Kayne Anderson Rudnick Investment Management LLC, the Century City-based money management shop, with options to buy 15 percent more. A possible deal was reported in this column last week.

The money management and mutual fund industry has been consolidating, as fund operators seek to reduce overhead through economies of scale. “This alliance will allow us the opportunity to grow by leveraging Phoenix’s distribution and support resources,” Kayne Anderson Rudnick Chief Executive Richard A. Kayne said in a prepared statement.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].

No posts to display