Thursday August 15, 2:20 pm Eastern Time
Reuters Company News
INTERVIEW-Bear fund team trumpets deflation risk
By Bruce Kamich
NEW YORK, Aug 15 (Reuters) - In a horn-tooting year for investment contrarians, a team of two seasoned bears are sticking steadfastly to a negative view on commodities and stocks, seeing the pressures of deflation punishing prices further in the year ahead.
Charlie Minter and Marty Weiner, co-managers of the $100 million Comstock Capital Value and the $50 million Comstock Strategy Funds, can tout their performance numbers as their ideas about deflation have showed some signs of playing out.
"There are no forces to drive inflation. Our main case is that the stock market is going down and we are positioned to take advantage of it," Minter said in a phone interview with his partner from their Yardley, Pennsylvania office.
This assumes the FED doesn't open the money floodgates or that Congress doesn't cut taxes. The latter is impossible because punishment is more important than prosperity.
Weiner and Minter, who run two of the few actively managed bear funds, have been selling stocks short, buying puts, shorting S&P futures and buying treasury notes, cuing off weak commodity prices and looking for stocks to decline another 30 to 50 percent from current levels in the next 12 months.
"Our Capital Value Fund is up 37 percent year-to-date and was up 22 percent in 2001 and 10 percent in the year 2000," said Weiner.
KEYING OFF COMMODITY MARKETS
Besides being students of history, Minter and Weiner also heed the price action of several key commodity markets as economic signals.
They are restricted from trading in the metals and food futures, but can use the financials and currencies.
"We do monitor silver and gold and we might change our views if gold went above that $330 high, its latest rally peak," said Minter.
Not $335?
Traditionally gold has been viewed as a safe haven for investors worried about rising prices and financial market uncertainty, but actually has a poor record as an inflation hedge, according to Weiner.
"It's better to hold currency in a deflationary period because you can buy more goods (as prices fall)," Weiner added.
Gold has a poorer deflation history although there is a small group who have bent history to accommodate their view.
"We watch the various measures of money supply, bankruptcies, PPI and CPI and credit quality spreads," said Minter, referring to the difference between corporate bonds and U.S. Treasuries.
The duo also watches lumber and copper as two major commodities that indicate how the economy is doing.
They pay attention to the CRB Spot Price-Raw Materials Index because it tends to move before other measures of prices.
Weiner found it gave the first warning of the inflation in the early 1970s, having started rising a year before the OPEC-driven oil price rise.
Not quite. Wage cost push and Vietnam oriented frivolous demand was roaring in 1972. In Jan '73 the market, not the FED, started raising rates. Coincidentally commodity prices started rising. The embargo had a deflationary effect although final prices had to adjust to the new swing level price.
The index is composed of 13 raw goods, and though it is above its late 2001 lows, it is down 2.7 percent from its June high and off 11.5 percent from its December 1999 peak of 271.69, standing at 240.43.
"The CRB Raw Materials Index needs to get above the last resistance at 275 to give us a signal" that deflation has run its course, said Weiner, referring to the area near where the index had a peak in December 1999.
CYCLE OF DEFLATION AND IMPLOSION
These two money managers have seen the markets follow a path of over-investment, excess capacity and unserviceable debt to speculation and sky-high valuations in the equity markets that they believe ultimately results in a bearish situation for goods and financial assets.
That was perfectly evident to anyone who wished to look two 3 years ago.
"This recession is different and is being driven by excess capacity," Minter said.
We've discussed this endlessly on this thread. You can tell these two are just using this argument as a rationalization for what they do. Briefly, the problem isn't excess capacity, it's quality of capacity. The amount of capacity is always what it should be, but unless you have favorable tax structure, the quality of capacity will deteriorate resulting in a rise in the marginal cost to run utilized or shut-in capacity. The cost acceleration to scale prohibits upgrade and inhibits profitability on the marginal unit.
The next steps in what these money managers believe is an unalterable cycle involves devaluation, protectionism and tariffs.
None of which is good for the short side because what is finally learned, is finally wrong. Bottled demand would drive profitability in spite of the character of capacity with a resulting embedded inflation.
Minter says that protectionism can be seen already in the tariffs on steel imports signed in March by President Bush.
Yawn.
"This is not going to be a good period of deflation as we unwind all the greed from the biggest financial mania of all time," Minter said.
It wasn't greed which drove the upside in the '90s, or it's always greed that drives everything. In any event how is that related to deflation and when was there ever a good period of deflation?
But mostly I can't find this deflation no matter where I look. Prices continue to rise in spite of all this hack's double talk. The CPI hasn't lost a beat in 50 years. I guess these two clowns do what is popular in this revisionist era and define inflation as an acceleration of prices, and deflation as a slowing in the rate of price increase. They may be right about where the stock market goes, since what is needed can't be applied since the 'crats must wage their war on wealth, but that doesn't have anything to do with the hand waving nonsense these two clowns spew out to rationalize what they do. |
