THE INTERNATIONAL FORECASTER 17, AUGUST, 2002 (#3) (cont'd)
Reprint from Financial Times, Monday, August 12,2002 - Bloomberg
BILLIONAIRE PUTS HIS FAITH IN GOLD
Billionaire Julian Robertson has become the lead investor in three Idaho-based gold funds run by former Morgan Stanley analyst Peter Palmedo.
Mr. Robertson, who closed his own funds two years ago, has invested in three funds operated by Sun Valley Gold, Mr. Palmedo said. Sun Valley had $35m under management in a single fund as of June 30, before Mr. Robertson’s investment. That fund gained 21 per cent in the second quarter as gold prices rose to a 2-1/2 year high, he said.
“We now have a pre-eminent strategic partner who is backing our view that there is opportunity in this sector to make money,” Mr. Palmedo said. “Gold and the gold equities are still very much in the early stages of an emerging up move.”
Mr. Robertson made the investment through his family’s Tiger Partners, his spokesman Fraser Seitel said in New York.
Mr. Palmedo gave up his partnership at Morgan Stanley in 1989 and moved to a ranch in Idaho, where he started the gold fund. Sun Valley had $250m under management at its peak in 1996, the last time gold prices were above $400 an ounce, he said.
“The price of gold today is still at historically low levels,” Mr. Palmedo said.
Gold prices have risen 12 per cent this year, boosted partly by expectations that investors would turn to gold as an alternative to stocks. The Standard & Poor’s 500 stock index is down 21 per cent for the year.
"The abandonment of the gold standard made it possible for the welfare statists to use the banking system as an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process."
Sir Alan Greenspan
World Gold Council
Major changes at the World Gold Council (WGC) could prove to be very positive for the gold price. Earlier this year Chris Thompson, Chairman of Goldfields (non-hedger) replaced Bobby Godsell CEO of Anglogold (hedger) as Chairman of the World Gold Council. Since this change was made the WGC has been involved in a review of its entire organization. The goal is to restructure and revitalize the organization so that it can be a more effective voice for gold. In the past it is our view that this group operated at such a high level it was not in touch with what was really going on in the gold market. It appears now that the WGC is ready to roll up its sleeves and battle for gold with a much stronger, more unified voice.
It appears that the non-hedging gold producers have taken control of the future direction of the WGC from the large hedgers whose past activity has actually hurt the price of gold.
Another very recent change was the appointment of a new CEO for the WGC. James Burton, former CEO of CalPERS will become the CEO of the WGC effective October 1, 2002. One of the primary focuses of Mr. Burton’s mandate will be to build gold’s reputation as an investment vehicle. This is a refreshing change from the previous regime at the WGC who were largely focused on boosting jewelry demand. Let’s hope the WGC can truly transform itself into a champion for gold.
Reprint from Financial Times, Wednesday, August 14, 2002
By: Prue Clark in NY
Prudent Bear Avoids the Honey Pot
Bears do not come much bigger than David Tice. The manager of the $303 million Prudent Bear Fund says the market is sitting on a precipice: its next move will be a savage plunge.
“We think the Dow could fall below 3,000,” he says. “The Nasdaq to 400 to 500 and the S&P 500 in the 400 to 500 range as well.” The reason for this pessimism? “The economy has been the beneficiary of a credit bubble, not a productivity miracle. The excesses have got to be worked off.”
Interest rate cuts and other policy interventions just frustrate “the cleansing of these excesses”, he says. “Maybe we’ll get a late summer rally, maybe we’ll get a blip because of all the real estate financing, but eventually that can’t save (the market). Bear markets tend to take a long time to reach their ultimate levels, so it could be 12 to 18 months.
“There will be disappointment in future earnings in consumer and cyclical names.”
Of course that is exactly the kind of environment in which a bear fund thrives, and Mr. Tice’s fund has done far better than most. The Prudent Bear has leapt 60 per cent so far this year, topping Morningstar’s list of US domestic funds.
The key to this success is the portfolio’s 70 per cent weighting in short positions, (selling stocks at one price and betting they will fall further before he has to deliver them).
As much as 30 per cent of the portfolio was in short positions in the telecommunications and semiconductor areas alone when the technology bubble burst in March 2000. The fund also profited from well-timed long positions in gold mining stocks, such as Francisco Gold.
But his timing was not always so good, Mr. Tice and his team turned bearish on the market in 1996 when they launched the portfolio. The early years were tough – the fund trailed the S&P 50 index by 63 percentage points in 1998. “We were certainly way too early,” he says. “We remained confident we would be correct, but it took longer than we thought.”
A team of analysts assesses each company, “looking at expectations for companies and analysing their current prospects,” Mr. Tice explains.
“We try to determine a differential opinion relative to the consensus where we feel strongly we can make a judgement that stocks will underperformed.”
Tech stocks still feature in the fund’s short holding. Chief among them are “dramatically overpriced stocks” in the semiconductor area such as Maxim and Linear Tech, maker of mixed-signal integrated circuits, where Mr. Tice “sees earnings falling”.
The fund is short semiconductor equipment makers. “They’re selling at high prices where we feel there’s too much capacity in the semiconductor fabrication world,” Mr. Tice says.
Lenders are among the short-term losers, according to Mr. Tice, including “credit-card companies and sub-prime lenders” such as MBNA and Citigroup. And he is one of a growing chorus who think the American consumer is going to run out of steam: “there will be disappointment in future earnings in consumer and cyclical names.”
The fund’s long holdings have been devoted to defence stocks such as Raytheon. “We think more money is going to be spent on defence, we think there is some great technology on some of these defence contractors. The stocks are cheap relative to their 10 year history.”
A handful of micro-sized health stocks make it to the fund’s long holdings.
This all raises the question: what role will the Prudent Bear take on if Mr. Tice sees the market turn around? “We may change the fund to the Prudent Bull down the road,” he says. “But it’s going to be far in the future.”
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