Seth Glickenhaus - Sobering Analysis
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. |
