Even GE's Results Are Now Suspect
flash.net
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U.S. government is unrivaled champion at cooking the books
By MARTIN CRUTSINGER
biz.yahoo.com
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Critical Levels on the Vix
schaeffersresearch.com
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Global: House of Mirrors
Stephen Roach (New York)
morganstanley.com
===================================
Credit Bubble
prudentbear.com
==================================
Seth Glickenhaus comments that a depression is around the corner
Message 17732075
See details below
===========================
From Barron's -
July 15th, 2002
Still Trading
We're in a consolidation period, says an 88-year-old
contrarian, and a depression lies ahead
An Interview With Seth Glickenhaus -- Not since the 'Thirties
has the proprietor of Glickenhaus & Co., a Manhattan
investment firm with more than a billion dollars under
management, seen a bear market like the current one and, at age
88, Glickenhaus has just about seen it all. Many years of
discerning the ins and outs and the ups and downs and the whys
and wherefores of Wall Street have imbued Glickenhaus with a
knack for sensing seismic shifts in the stock market.
That, along with careful
research and a value
discipline, has allowed him
to deliver outstanding returns
for his private clients through
thick and thin. His
longest-running (started in
1981) fund, the Dorchester
Fund, has gained an average
of 16% a year. Overall, his
shop has produced average
composite returns of 16.1%
a year. And after toughing
out the bubble years of
1998-1999, Glickenhaus
showed he hadn't lost his
touch; his portfolios gained
16.7% in 2000 and were flat
in 2001, against two losing
years for the Standard & Poor's 500. Always one to tell it like it
is, Glickenhaus doesn't hold back now.
--Sandra Ward
Barron's: Throughout your career, you've had a heck of a
crystal ball. What do you see ahead for the economy and the
markets?
Glickenhaus: I should tell you that I also have an error ratio.
The crystal ball is not infallible. Fortunately, I've been on the
right track of late and have foreseen this slowdown in business
and in the markets. From 1982 to 1999 or early 2000, the Dow
Jones Industrial Average went from 1000 to 11,700. That was
the greatest growth this country or any country has ever seen,
both in the stock market and in the economy. There was more
wealth created, more billionaires, more millionaires created,
better standards of living, even longevity increased. In almost
every criterion, it was a golden period.
Q: The question now is: How real was all that growth?
A: It was real up until 1999. The averages did get there, and
there was full employment at very high wages. Where we're
going now, and it's going to take 16 years, is to consolidate that
marvelous move from 1000 to 11,000. In 1949, the Dow Jones
Average was 160. By 1966, 16 years later, it was at 1000. Then
it spent the next 16 years consolidating. From 1966 to 1982, the
market could not move out of the 1000 range. And, in 1974, the
average even got as low as the 500s. A chap by the name of
Reagan was appointed President in 1980 and, from then until
1988, the market went from 1000 to 3000. Not coincidentally,
the federal debt went from $1 trillion to $3 trillion in that time.
Q: Your expectations for the market are based strictly on
historical trends?
A: This is a cyclical economy and in a period of a boom of that
magnitude, companies get overexpansive. They create far too
much capacity for the world and for the country. People spend
money in the most promiscuous, irresponsible ways. They get
into wild debt. The very success of the business cycle breeds
excess. That's why we have to consolidate. A period of growth
such as we've just had takes many years to rectify, to eliminate
the problems and readjust for the world as it is. Historically, this
has always been the case. Go back to 1929, when we had a
huge post-World War I boom and we reached a peak in the Dow
average in the 300s. Do you know how many years it took
before it reached the peak of 1929? Twenty-four years. It was
1953 before it hit the same level of 1929.
Q: Seth, you often use 1949 as a reference point for your
historical analysis. Why?
A: It was a Friday afternoon in June 1949 when I looked at my
partner and said: "Today marks the end of the consolidating
phase from 1946 to 1949." Do you know what the volume was
that day?
Q: I have no idea.
A: It was 600,000 shares. They were doing only 100,000 an
hour. Volume was slow -- the market sold out. I said, "From this
point on, this market is going to go up very, very sharply." And I
was right.
Q: You focus on the Dow Jones. Do you also incorporate the
Nasdaq into your analysis?
A: The Nasdaq would show you a very similar pattern, not
identical by any means, but roughly similar. I use the Dow Jones
because it's the most commonly known index and it goes back a
long time.
Q: How low do we go?
A: The Dow could go down to 8000, possibly to 7000 or 6000,
within a year or two. The multiples are too high and the averages
are too high.
Q: Are you concerned about weakness in the dollar?
A: The dollar weakening against all other currencies has a double
effect. Foreigners will reduce their exposure or just sell their
dollar investments outright and take back their money to invest
locally. On the other hand, it will help our multinational
companies. But, overall, it is more a negative than a positive.
Q: You mentioned "wild debt" as a consequence of the boom
years. Is the level of consumer debt going to be a problem
here?
A: It's already beginning to be. The great majority of states are
finding sales-tax revenues off sharply this year. For the last three
months they have averaged down 30%. You see the discount
stores doing beautifully, whereas other stores, even the ones that
cater to the billionaires, are beginning to curl up and not do so
well. The consumer is up to his neck in debt. Because of the
work the Federal Reserve has done bringing interest rates down,
a huge number of cars and a huge number of homes are being
sold. The average person doesn't ask what a car or a home
costs, he asks what the carrying charge will be. In the auto
world, you just saw General Motors, which had been giving very
big incentives, adding to the incentives by reverting back to zero
financing. But the auto world is cannibalizing future sales terribly
by encouraging people to accelerate purchases they might have
waited to make a few years out. They've created a situation
where normal demand in future years is going to be below
average. The same is true in housing.
Q: Isn't there still a large pool of first-time homebuyers and
pent-up demand?
A: That is perfectly true. Home-building has been very good.
The one sustaining influence that's maintained itself has been
construction, but I suspect we are on the verge of seeing that go
south.
Q: What else troubles you
about the economy?
A: There's still too much
capacity. Consider the auto world. The people running the three
major U.S. auto companies, in their infinite wisdom, made a deal
with the United Auto Workers two years ago where they have to
pay them 90% of their wages if they fire them, so that it actually
pays them not to close plants and fire people but to produce at a
loss. All of these companies have to pay retiree health benefits in
addition to high wages, and that has become very, very painful
and puts them in a very precarious position. Retiree health
benefits account for a bigger part of a car's cost than steel does.
And automakers around the world have the capacity to produce
60 million to 65 million cars a year, even though there's demand
only for about 50 million cars globally on an annual basis. When
the UAW contract comes up a little over a year from now and
with all this overcapacity, it is going to be fascinating to see what
happens. I would not be surprised if there were a major strike.
The companies can't afford what they've been paying, but the
concessions they are going to attempt to extract could make the
union leadership vulnerable if they acquiesced.
Q: How does this compare with other bear markets?
A: It's an entirely different market than any that has existed
since the 'Thirties. The bear markets we've had for many years
now have been very short in duration and often had a crisis
involved. In the 'Sixties, the Cuban crisis triggered it, then there
was the oil embargo in the 'Seventies. There were several wars.
But this is different. This is a full-fledged
business-recession-inspired bear market. This is going to be
comparable to what happened in the 'Thirties.
This is very bleak picture I'm giving, but unfortunately it is what
I believe. If 10 years ago, I said to you General Electric would
lose 40% to 50% of its price, IBM would lose almost half its
share price in a relatively short time, AT&T, one of the great
icons like motherhood and apple pie, would be going to hell, and
our steel business would be in dreadful shape to the point where
they need all sorts of subsidies and Bethlehem Steel stock sells
for less than a half a point, you would have said, "Seth you
better take a rest." We have four or five key industries in
trouble, including the autos, steel, phone companies and metal
companies. It is going to be very, very negative and deflationary.
Q: Do you put technology companies in your group of troubled
industries?
A: No. Technology represents the best hope for the country. We
are going to continue to use technology for production and
manufacturing. It is an industry that will grow from this level.
Unfortunately, technology is available to competing companies
abroad.
Q: Where's the value in this market?
A: The only real bargain in the whole securities market is in
intermediate- and long-term municipal bonds, tax-exempts,
which yield much too closely to prime taxable bonds. They just
happen to be priced more cheaply because of supply and
demand.
Q: That is the only place you see any value right now?
A: I see certain bargains in the stock market. In the stock
market, you've had an extremely different reaction to different
sectors. I'll name four stocks that are grossly overpriced and
which you can't possibly make money shorting because the
money keeps pouring into them, no matter how overpriced they
are. They are all part of the Nifty-Fifty: Coca-Cola, Procter &
Gamble, Gillette and 3M. They are all trading at multiples
around 40. Then there are other stocks where the multiples are
much more reasonable and the prospects are outstanding.
Q: Such as?
A: General Electric at 27-28 has been hit very bad and is really
an interesting stock. Another is Countrywide Credit, which has
had a spectacular growth record and sells at nine times earnings.
Q: If you're concerned about consumer debt and whether
housing can remain strong, why would that be a pick?
A: This company is unique. They service about $375 billion of
mortgages and it keeps growing. That is like an annuity because
they don't own the mortgages and have no risk to speak of; they
just get paid for processing the collection of payments and
keeping the mortgagor and mortgagee advised. That has grown
at a good rate through the years and will continue to grow. When
the mortgage business slows, the servicing business provides an
offset. With the huge amount of refinancing that's gone on they
have also been able to get a bigger share of the market.
Q: Does this mean you also like brokerage houses and banks?
A: No, I am not interested in them now. Even though they have
lost some value, they have got much farther to go on the
downside.
Q: What's another idea?
A: Stelmar Shipping is very attractive. It is a little company that
is selling at six times earnings. It transports crude-oil products.
Close to 80% of its contracts are sewed up for five years. It is a
little- known but very well run company and a very cheap stock.
Q: Any others that come to mind?
A: Stocks like Altera and Texas Instruments have had huge
clobberings, and their businesses are beginning to come off the
trough. They are in a real growth area. They are dependent on
some capital spending, but with all the huge military spending
our government is doing -- needless spending in the wrong
direction -- a good percentage is going into the technology for
various armaments. These stocks are either a buy now or will be
a buy a little bit below this. Nothing is clear-cut, but Texas
Instruments is down to 23 from 99 and it is a beautifully run
company with great products that are going to grow into the
future, and its earnings are leveraged enough so, though its
price/earnings multiple looks high today, it can turn around very
quickly. You have to look for companies that are in industries
that have abnormally high growth that will help them offset the
recession/depression I see coming.
Q: You think this could be turning into a depression?
A: Not only could be, it will be. We are not there yet -- the
unemployment rate isn't even at 6% yet -- but it is going to go
much higher.
Q: So how have you been making money for investors?
A: Better selection and less invested in stocks and more invested
in tax-exempt munis where appropriate. And taxable bonds in
qualified accounts. We were heavily into REITs [real-estate
investment trusts] and very heavily in oil and energy, mainly the
oil-drilling stocks and some natural-gas stocks, and those stocks
have held up very nicely. Natural gas is going to surprise people
and be scarcer than people think, and those gas companies are
going to do pretty well. So far they've done much better than the
averages. But we bought them when they were much lower.
Q: Are you still buying REITs?
A: We are still in the REITs, but the REIT story isn't as
compelling today as it was. However, a few of them are in good
shape. Corporate Office Properties is a very solid company.
Another is First Industrial. We like the yields they offer, plus the
properties they own and their management. It is possible, if you
hunt hard, to find an honest, capable management.
Q: And honest accountants as well?
A: I do think there is such a thing as an honest accountant. Most
of them are.
Q: What kinds of stocks are you buying now?
A: CIT Group is an interesting stock. We bought a little bit at the
IPO, but we have bought more since it broke down since then. It
is just too cheap. They've got a good finance business, they
always have. They have gotten their investment-grade rating
back from two of the rating agencies. At this price -- 22.30, as I
speak -- it looks good. We've been buying stocks with good
yields and one of them is Williams Energy Partners, which owns
gas pipelines. They have raised their dividend every quarter now
for the past four quarters. They are going to raise their dividend
again. The stock sells at 35 and is yielding 7.21%.
Q: Hasn't this been tainted by exposure to Enron and
connections to Williams Communications?
A: The parent company, Williams Cos., has been, yes. But this
company is clean as a whistle.
Q: Lots of great investors are dipping their toes in the telecom
waters. Are you?
A: Not for our clients, no. But we are starting to look at them. It
is very hard to tell how that industry will consolidate out. So far,
we've avoided losing more than very minor sums in them.
Unfortunately, in a few cases, we had some new accounts where
that's all they had and even though we cut back a great deal, we
didn't cut back enough. But none of us are perfect.
Q: Any other recent additions to the portfolio?
A:Ivax. It has 30 applications out for new generic drugs. In fact,
the whole generic- drug industry is interesting because generic
drugs are certainly the world of tomorrow. We bought it about
this price -11 or so.
Q: What about the big drug companies?
A: They were greatly overpriced. Some, the really good ones,
still sell at 40 times earnings. They are fine companies, but the
prices they were selling at were totally unrealistic. Some even
have some huge stock-buyback programs at prices that are
unreal. Pfizer, for example, is buying too much and at too high a
price. At best it will hold this level. At worst, it can go down.
The risk/reward just isn't there. Nonetheless, it is a fine
company, it can grow at 10% a year, and I have nothing against
it other than the price it is selling at. It is much too optimistic.
Q: I notice you still sit at the trading desk.
A: Intelligent traders who are contrarians can make a lot of
money for their clients. In this kind of a market, you are going to
have to be much more of a trader. And you will have to be
contrarian. Some of us were born that way. Early on I realized
two of the great icons of America, apple pie and motherhood,
were the worst experiences in the world. Apple pie has fat,
cholesterol and too many calories. A good mother is to be
revered, loved and admired. At least one out of five is a good
mother. I think I make myself clear.
Q: Thank you, Seth.
====================================
Nightly Business Report Friday Interview:
nbr.com
7/12/02: Market Monitor-Bernie Schaeffer, Chairman of Schaeffer's
Investment
Research
PAUL KANGAS: My guest market monitor this week is Bernie Schaeffer,
Chairman of
Schaeffer's Investment Research, Inc., the publisher of the popular
monthly "Option
Advisor," newsletter which sponsors his popular Web site. And welcome
back, Bernie.
BERNIE SCHAEFFER, CHMN., SCHAEFFER'S INVESTMENT RESEARCH:
Good to be here, Paul.
KANGAS: You know, with this kind of volatility we've been seeing in
the stock market
recently it's got to be an option traders' dream. It's got to be what
you hope for forever,
up and down, wonderful for option trade. But in the bigger picture,
Bernie, what does it
mean? Are we approaching a bottom? Is it the beginning of a big down
move or what?
SCHAEFFER: Well, we, the market has a footprint or a fingerprint, so
to speak, of
when it declines sharply, the volatility of the market increases.
KANGAS: Right.
SCHAEFFER: That's just the way it is. So now people look at this
volatility, they look
at the CBOE Volatility Index, the VIX, and they say wow, it's really
increased
significantly from where it was before. Does that mean we have a
bottom? Because
bottoms are associated with increases in volatility.
KANGAS: What do you think?
SCHAEFFER: The key, as I see it, is it's not just the volatility, but
is the sentiment
getting to the extreme that you'd like to see at a bottom.
KANGAS: OK.
SCHAEFFER: And, for example, the sentiment as reflected in the CBOE
Volatility
Index is not nearly as bearish right now, even with this horrible
week that we just had in
the market as it was in September.
KANGAS: So we could get a pop up here?
SCHAEFFER: We could get a pop, but the point is the ultimate bottom
from our
sentiment indicators is not in place. There's actually bigger call
activity lately on the QQQ
on the OEX Indices than put activity, not consistent with a bottom,
as I see it.
KANGAS: All right, and last time you were with us, November 30 of last
year, you said
Dow 7,500 a distinct possibility. You still believe that?
SCHAEFFER: I think Dow 7,500, maybe even 7,000. Our target on the
Standard &
Poor's is 775 to 800.
KANGAS: Oh boy.
SCHAEFFER: That's about 50 percent off the highs. But compared to
other bear
markets, given the fact we went up over tenfold since 1982, a 50
percent decline from
top to bottom is not --
KANGAS: Almost normal.
SCHAEFFER: I would say it's almost normal after a big pop. Right.
KANGAS: Yes. The last time you were with us in late November you were
short-term
bullish. You recommended two month calls on Juniper Networks (JNPR),
Symantec
(SYMC) and NVIDIA (NVDA). They all did very nicely, went up. I hope
you took
your profits. I'm sure you did.
SCHAEFFER: Sure.
KANGAS: And the long-term you were negative. You recommended three to
six month
puts on General Electric (GE), AOL Time Warner (AOL), Schwab (SCH)
and J.P.
Morgan (JPM), and they're all way down so you must have profited
nicely on those put,
those options.
SCHAEFFER: They were very nice trades. And option premiums were low
then, so
that was nice, too.
KANGAS: Yes. I congratulate you. What's the strategy now? You're still
bearish, but
how about the short- term?
SCHAEFFER: Short-term we could see a bounce, but I don't think it's
playable.
KANGAS: OK.
SCHAEFFER: Except for scalpers and real short-term traders. I still
think the play is on
the put side. I think we've got some significant down side in the
market. I'd go out six
months to January 2003. I got some put and call plays for you for six
month options and
I can run down those for you.
KANGAS: Let's have the puts. That's what you favor here.
SCHAEFFER: OK. The puts is what I favor. I have five of them.
Microsoft (MSFT),
which --
KANGAS: You own?
SCHAEFFER: -- I have a position in on the put side.
KANGAS: You and your company?
SCHAEFFER: Correct.
KANGAS: Yes?
SCHAEFFER: Verizon (VZ) and G.E. (GE). Verizon I have a position. G.E.
I do not.
KANGAS: OK.
SCHAEFFER: J.P. Morgan (JPM) to the downside on the put side. I have a
position.
Merrill Lynch put side. No position.
KANGAS: OK. What about the calls, just short-term? Because we can't
short change
the bulls.
SCHAEFFER: Well, six month out again to January, I'm counter trend.
Gold stocks I'm
bullish on, so I like Newmont Mining (NEM). I have a position. And I
also like Krispy
Kreme Donuts (KKD), a nice midcap restaurant type grower.
KANGAS: Also volatile. You like that sort of thing. Have a position.
KANGAS: Yes?
SCHAEFFER: And General Motors (GM). I have no position. A nice
dividend yield of
four plus percent. Some long- term price support there.
KANGAS: So pretty much the same as last November, when you were very
short-term
bullish -- and right -- and then long-term bearish, which was right.
SCHAEFFER: I think that, yes. And I think the play for here is to the
bearish side, but a
little bit longer out.
KANGAS: All right. Bernie, thanks very much for being with us again.
SCHAEFFER: A pleasure, Paul.
KANGAS: My guest, Bernie Schaeffer, Chairman of Schaeffer's investment
research. |
