thestreet.com
The TSC Streetside Chat: Bearish John Mesrobian of
Constantinople Advisors
By Eric Gillin
Staff Reporter
Originally posted at 8:00 AM ET 6/30/01 on RealMoney.com
John H. Mesrobian is a bear.
He's also an analyst with Constantinople Advisors, which advises
institutions, corporations and private investors on currencies, commodities,
bonds, monetary policy and, of course, stocks.
But more than that, he is an unmistakable, unrepentant bear who does not
like this stock market one iota. He is a bear in the classic mode, suspicious
that the major influences on this market are dead wrong, leading investors on
a primrose path that runs parallel to the highway to hell. He dislikes sell-side
analysts and thinks numbers on the gross domestic product are a sham. He
sneeringly refers to some tech companies as "New Era Junk." To him, rallies
are nothing more than bear traps.
As we enter the second-quarter earnings season, the much-anticipated
second-half recovery seems a lot less likely than anyone, except maybe
people like Mesrobian, thought at the beginning of 2001. TheStreet.com
recently caught up with this mega bear to find out how black his crystal ball
looks. (The interview has been edited for length and clarity.)
TheStreet.com: We've got some bad news out there with tech, but the
market went up before easing lower. What does a bear make of this?
John Mesrobian: It doesn't make any difference. Bad news, they buy. Good
news, they buy. Sideways news, they buy. I guess you almost have to say it
has to be the bubble of all bubbles.
TheStreet.com: You went bearish two years ago -- in, what, 1999?
John Mesrobian: Oh, yes. Actually, we say it's two years, but it's been more
than that. We see the endgame and we say there are problems, and this is
the endgame. And the problem is sometimes it takes a while for it to come
about.
TheStreet.com: Why did you go bearish, though? Did you see something in
the water?
John Mesrobian: Fundamentals. And then some of the old John Templeton
approach -- kick the tires, you listen to people, and when people in the stores
-- no matter where you go -- are all experts on the stock market and have their
eyes glued to the screens, you get a little nervous.
TheStreet.com: That said, in going bearish, you did miss a big run-up. I
suppose it depends on how you look at it, since stocks have coughed up so
much value since then, but you did miss a pretty good investment opportunity
at some point.
John Mesrobian: There's nothing wrong if you miss. I guess I'd say we're like
the tortoise and hare. If you operate as the tortoise, you consistently had a
nice return. For example, let's say if you had a 15% return consistently, from
say three years ago to today. What is your return after the drop?
If you had been in a money market fund since 1999 to today and [compare
that] to if you were in the stock market, guess what? You could have a better
return today in a money market fund than you would have had you stayed
invested in stocks, where I think the drop was like 25% or 30%.
"I guess you almost have to say it has to be the bubble of all bubbles."
TheStreet.com: Is it tough being a bear in this market?
John Mesrobian: Is it tough being a bear? No, because you know what?
We're not afraid of being bears, or afraid of being bulls, because we're
independent. We have no ties to lean one way or the other, unlike the
"analysts." I use that term very loosely.
TheStreet.com: I take it that you're not a big fan of what analysts do. Tell me
a little bit about how you view them, especially the sell-side analysts?
John Mesrobian: The sell-side analysts. [Laughs]
There are true sell-side analysts and then those who seem to flip, depending
on which way the wind is blowing. Some of the true sell-side analysts I agree
with. We may be more bearish than they are, but they have to be careful of
their firm's reputation.
Look at Morgan Stanley Dean Witter. They've probably got the two or three
bigger bears on the Street but, you know, they have to be careful. People
don't like to hear negative things.
Think of John Q. Public. You're selling a story to them. They don't want to
hear negative things. They want to hear good things. Any bad news is
automatically discounted. They dismiss it.
Earnings? Forget about it. It's already priced in. Sales? Don't worry about it.
It's already priced in. Forget about it. You're buying it for down the line. You
could have 100 items, and 98 could be negative and two could be positive,
and the two positives win the day.
TheStreet.com: Do you see the same thing occurring with the economic
outlook? Last year, people were saying we're going to have a second-quarter
recovery and then it was a second-half recovery and now we're hearing an
end-of-the-year recovery.
John Mesrobian: Oh, yeah, they keep pushing it back. They're just
dreaming. When the second half comes -- well -- I've already started seeing
some people hedging that. Now they're talking maybe 2002. I've seen people,
even smarter people, say 2003.
But those are probably the smarter of the analysts -- if you want to call them
that. But you know, let's face it. The economic numbers are terrible. They get
worse by the day. Like productivity. [Alan] Greenspan and the Fed have been
hiding behind productivity as their ace in the hole. And guess what?
TheStreet.com: It came in at negative 1.2 for the first quarter, right?
John Mesrobian: Yes, negative 1.2. And the day before, Greenspan was
telling the International Monetary Conference, don't worry about inflation.
And then the next day, the numbers came out. Productivity was worse than
anybody expected, worse than the "poll" they took amongst economists.
Labor costs jumped more than they expected.
TheStreet.com: The biggest increase since the fourth quarter of 1990,
correct?
John Mesrobian: Yes, either 1990 or 1992, I forget which one. Everyone's
saying that inventories are correcting, but they're not. They're not correcting.
The Commerce Department, in a report, said factory orders fell at the
fastest pace since January. Also, a measure of the inventory-to-sales jumped
sharply, showing that despite their efforts to control it, inventory may in fact
continue to bloat and stockpile.
"The news would be out, and they're afraid the consumer will stop
spending."
TheStreet.com: On the flip side of your overall argument, the bearish one,
people would point to the April employment report, which came in flat at
4.4%. And then you've got the fact that year-over-year average hourly earnings
are at a three-year high.
John Mesrobian: Yes, but then the jobless claims number jumped up higher
than they expected.
TheStreet.com: So overall, you would say the trend with unemployment is
going to go to where?
John Mesrobian: I see it going over 5%. But what about these fictitious job
numbers that were added in? What do they call the numbers that they throw
into the CPI [ Consumer Price Index] and other things -- these "special
adjustments?" Or then maybe not counting others, so they artificially create
some numbers for things they think they're missing.
That's the problem, the numbers are a guide, but I think they're not really
painting the true picture. But then again, I'm a bear.
TheStreet.com: Why don't they paint the true picture? If you look at the
numbers, you have unemployment swinging from somewhere in the 3's in
October to over 4.4%. You've got PMI [ Purchasing Managers' Index] that
hasn't been above 50 since July of 2000, July of last year. You've got labor
increases going way, way up. There's a drop in productivity from the fourth
quarter to the first quarter, the biggest drop since the first quarter of 1993.
You've got the NAPM at a record low. You've got GDP growth trailing off, and
yet people are saying that we're not in a recession.
John Mesrobian: They're all afraid to say the word. Psychologically, if
someone of prominence were to stand up and say, "We're in a recession," I
mean, let's face it, you know what would happen. The news would be out, and
they're afraid the consumer will stop spending.
And that's the other thing, too. The consumer has negative savings, if they're
invested in tech stocks and everything else in their portfolio. They're
underwater, and they've lost a lot of money and they're hoping and praying.
TheStreet.com: Given that hope, is it possible that consumer spending can
stay at a very high level even though they're unemployed or jobs are down?
John Mesrobian: No. It eventually catches up. It does. It eventually catches
up, and I wouldn't be surprised if we started seeing that.
"It's going to be a very rude awakening."
TheStreet.com: Credit card companies and banks have extended large lines
of credit to people. Before, money liquidity for the individual wasn't this great.
Do you think this has a masking effect?
John Mesrobian: Yes, it does. Look, they're printing money. I mean, what's
the monetary growth -- 14%, 15%? They're printing money. People think
maybe we're a little crazy on this, but we think we can see Greenspan
dropping the interest rates down to 3%, easily ... and depending on the
situation, even further.
TheStreet.com: Then again, there are people who would look at your
arguments and say, "All right, you're looking at it at its worst, but things are
going to get better. We haven't had two quarters of negative GDP growth so,
statistically, we're not in a recession. GDP is still growing, the economy is
just growing slower. Get over it."
John Mesrobian: Well, I dispute that GDP number. They had to revise it
down to 1.3 and they may even have to revise it again. I think GDP is either
zero or a minus, especially if you adjust it for inflation. [Editor's note: On
Friday, first-quarter GDP was revised to 1.2%.]
And yes, we do have inflation, even though people think we don't have
inflation. I mean, you see it every day. If you don't breathe and don't eat and
don't drink, don't drive, you don't use anything, I guess then you don't have
any inflation.
TheStreet.com: Where are you seeing this? Relatively speaking, a can of
Coke is the same price it was last year.
John Mesrobian: [Laughs] Well, first of all, you see it if you go to the
supermarket. If you watch the prices closely, they've cut back on the
discounting. In fact, I've quizzed some of the store managers and said,
"You've really cut back on some of your discounting. You used to give X off
and now you don't want to give Y off." So, actually, the price is going up.
TheStreet.com: Then again, you have pricing going down. If you look at
computers, those prices are going way, way down.
John Mesrobian: Yes, but what's the value of a computer? As soon as it
goes out the door it's worthless. It drops in value. If you paid $1,000, within a
few months it's probably worth less. And I think -- I forget how the government
gauges that -- I think they give it a better gauge than that. But the cost of
labor is going up. The cost of living is going up. Naturally, energy is going up.
It's not something that's not going to go down. Energy's up and it's going to be
up for a while.
"We think we're headed down to retest the lows and blow
through the lows."
TheStreet.com: But you still have to get back to this whole definition of what
a recession technically is, which is two quarters of negative GDP growth, and
we haven't had that.
John Mesrobian: We haven't had that yet.
TheStreet.com: Are we going to?
John Mesrobian: I think we are. Now I see people pointing to the fourth
quarter as a turnaround quarter. I don't see that. I don't see anybody showing
me any real earnings numbers and telling me we're only a quarter or two
quarters away.
I see these pro forma numbers. [Laughs] I can take the pro forma number and
give it to my 11-year-old and she can come up with the same set of numbers.
TheStreet.com: So what happens? You clearly think we're headed for a
recession. When do you see this thing actually changing?
John Mesrobian: It's going to be a very rude awakening.
First of all, if you look, we had the Nasdaq go down and then it came back up,
and then you had the Dow do the same thing. Then you see the Wall Street
hype crowd, the used car salesmen out there yelling, "You better get in!
Better get in! Better get in! You're going to miss a real bull run!"
And now you see the numbers headed the other way. And then people say,
"Well, we had to go down a little, but not a lot."
We think we're headed down to retest the lows and blow through the lows.
And this time, I think it's going to be a very nasty fall. That's when the wakeup
call hits. When the market goes down this time, it's going to scare a lot of
people.
TheStreet.com: What's going to change and shock everyone? What's going
to end the optimism?
John Mesrobian: That's a good question. I keep saying, "People, pay
attention to the economic numbers and earnings." But you know what? They
don't pay attention. They don't care. Because they've got something on the
other side saying don't worry about it. And they gravitate to the good side, the
good story.
What's it going to take? I don't know. But it's going to be a rude awakening. I
think it's going to be something happens to the stock market and all of a
sudden -- that's the wakeup call.
If you go back to 1929 to 1933, you had something similar happening. There
are people who'll say it's not the same. But in 1929 we had the drop, and then
we had a rebuilding of the speculative bubble, a re-inflation, and then from
1930 around the summertime to 1933, it was just a wind-down of stock values
for the next two years, where they dropped, like, 90%. And we may be in that
scenario. I've seen people make that case.
Do I accept that case? I can see it.
And there are people who say the Fed will do a lot of things on the monetary
end. But then I say look at Japan. They're at zero interest rates.
TheStreet.com: Yet the Dow was about 700 points away from a record high
a few weeks back.
John Mesrobian: But what's really going up? I asked somebody what's really
going up. If you just invest in stocks and maybe a handful of the Dow stocks,
what's really going up?
I think there's a lot of churning going on. Think about it. If you listen to these
analysts, they're recommending different groups on a daily basis. "You gotta
get into this." And then, "You gotta get outta this and back into this." People
are running from one item to another item to another item. And then these
stocks reach a point and shrink and they go down, and then they go back up.
It's a churning process.
At some point in time, that doesn't work any more.
"Then you see the Wall Street hype crowd, the used car
salesmen out there yelling, 'You better get in! Better get in!
Better get in! You're going to miss a real bull run!' "
TheStreet.com: At that point, it would mean there's nothing to buy. You've
already bought it once. Right?
John Mesrobian: You've bought it once, maybe you've bought it three times
and sold it. But in the end, Nortel (NT:NYSE - news - commentary) is still
trading where it has been trading for a long time. Lucent's (LU:NYSE - news -
commentary) way down. How would you like to be a sucker and have bought
Lucent when it came out? And Nortel. Look at Nortel. It's a significant crash
down. Motorola (MOT:NYSE - news - commentary), same thing.
TheStreet.com: But some of these people that own companies, like at JDS
Uniphase (JDSU:Nasdaq - news - commentary), they'll point to the fact that
they've come down. Cisco's (CSCO:Nasdaq - news - commentary) come
down. Especially Lucent, a lot of the people who own the stock tell me,
"We've come down. We've paid our penance. Things are bad now, but they're
flat. They're as bad as they can get, so why don't you just be quiet."
John Mesrobian: The question is whether these stocks are still overvalued. I
think somebody ran the numbers for the price-to-earnings ratio. I think the PE
today is higher than what the PE was when the Nasdaq was at 5000. The
earnings numbers continue to get worse, so actually the PE gets worse.
TheStreet.com: Because the "E" in the price-to-earnings equation is
dropping.
John Mesrobian: The "E!" At some of these companies, there [are] no
earnings. Was it Alan Abelson who said, "Will Amazon ever earn a real
dollar?" No. I mean, Amazon said they're going to go into the PC business.
That's got real big margins these days. That's a joke.
Listen. The tech stuff is nice, but there's too much of it, we've been
over-invested in it. I mean, how many chip plants are you going to build? How
many computers are you going to buy? Think about this. How many
computers is a person going to buy? How many cell phones are you going to
buy?
TheStreet.com: One.
John Mesrobian: And how often are you going to change it?
TheStreet.com: Maybe once every three years.
John Mesrobian: If it works, great. Why do you need this fancy device? How
many TV sets are you going to buy? If you start thinking about it, all this stuff
they're pushing, does it really have a purpose?
TheStreet.com: So, I take it you're a bear, John.
John Mesrobian: I see unemployment past 5%. I do see a recession. I do
see the stock market testing the lows and going through the lows. But then
again, I'm a bear.
I'm a real bear. I'm very proud of that.
KJC |
