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RISK IN A CHEAP STOCK

    "I'll bet if I told you 32 months ago, when we announced the goal [to
double earnings per share in five years], that in the fourth quarter of 2001
Fannie Mae would report earnings per share of $1.40, up 59% from the first
quarter of 1999, you would have guessed that our stock would be up by at least
that amount." So said Tim Howard, CFO of Fannie Mae, on the fourth-quarter
conference call Monday.
    He went on in that vein: "I certainly would have. But it's not. At the
close of business on Friday, the stock was up just 15%, about a quarter of the
earnings growth. But if there is surprise or disappointment in that result,
there also is promise. Over the past decade, our stock price has grown faster
than our earnings per share. It just hasn't done so evenly. To the contrary,
there frequently have been periods when, for whatever reason, the price of
Fannie Mae stock has become uncoupled from its fundamentals. This appears to
be one of those times. Neither our performance nor our prospects seem to
justify our current valuation."
    By the sound of it, Howard was singing our song. . .


STOP THE PRESSES

    The Wall Street Journal has capitalized the phrase "New Economy" in its
news columns since at least Aug. 31, 1999, but it printed it small Tuesday. On
page one, column six, it referred to "the excesses of the new economy."
One of these excesses, so we proposed in the September 14 issue of Grant's,
was the Journal's use of capital letters for an economy that didn't really
exist (a dynamic economy is forever new and forever aging). And we proposed
that a return to lowercase "n" and "e" would "mark another milestone on the
road to investment sanity."
    Regrettably, The Wall Street Journal Indicator did not flash an
unambiguous "buy" signal Tuesday. On page A4, the jump of the Enron story
referred for a second time to "New Economy." This time it was in capitals. . .
.


MONTH OF TUESDAYS

    The bear market and an unplanned recession have discredited the nostrums
of the boom. However, faith in a homegrown American productivity miracle is
largely intact, recent downward revisions in the data notwithstanding. On
January 7, The Wall Street Journal reported new findings by a pair of
authorities in the field, Dale Jorgenson of Harvard University and Kevin
Stiroh of the Federal Reserve Bank of New York: "[T]he likely scenario for
productivity growth over the next decade remains a robust 2.24% annually,"
concludes their analysis. "That's just a tad lower than the average 2.36% that
helped the economy surge from 1995 to 2000."
    . . .Following is a new chapter in the Grant's revisionist history of the
millennial productivity bulge. . . .


RESTING PLACE

    "Worst case" may, for once, actually describe a commercial experience. The
market expects that revenue per available room (RevPAR) for the U.S. lodging
industry fell by 6.5% in 2001. In 1991, the latest prior recession year
without a terrorist attack, RevPAR declined by only 2.6%. . . .


RISK IN A CHEAP STOCK

    By refusing to surrender to thrift, the American consumer may be helping
to perpetuate the kind of economy in which the funds rate hovers below 2% for
a long time. . . .



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PLEASE NOTE:
Grant's Interest Rate Observer
is taking its winter vacation
and will resume publication
with the issue dated January 18.

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copyright 2001, all rights reserved.