Felix Zulauf
Barron's: So the party's really over. What happens next, Felix?
Zulauf: We are doing well in these markets because gray hair counts again. We manage a European equity fund and we are up 11% or so in euros, a little more in dollars, for the first five months of the year. Still, the market is a very different animal from what it used to be in the previous 18 years. This is a structural bear market, and those usually last, on average, at least 10 years. That doesn't mean there won't be opportunities, but investors should be aware that you cannot buy, sit and hold and then get rich over time. You have to trade this market, for several weeks to a few months. In and out, in and out. If you don't do that you will end up a loser. And the majority of investors eventually will.
Q: Speaking of which, what's happening at Zurich Financial, which you panned in January?
A: There have been lots of changes. I blamed top management for the company's problems. The chairman first stepped back as CEO, hoping to remain in charge as chairman. As the pressure mounted, he finally said goodbye. The point is, the company does not have enough capital, and the market is realizing that it has to restructure. It is short about two billion-four billion Swiss francs.
Q: Are you still short the stock?
A: Because the market has fallen we have covered a lot of shorts, including Zurich, in the past few days. But we will short the stock again after a rally. Many people think the insurance business is turning around because premiums are going up. But a company that doesn't have the reserves cannot participate in writing new premiums. That's why the weaker insurance companies are not buys yet. We are still short MLP, which I mentioned in January. A few weeks ago a German financial magazine wrote that the company had discovered creative accounting. In January the stock was €77, and now it is in the low 30s.
Felix Zulauf
July-August:
• "Tremendous" short squeeze will lift technology, telecom, biotech stocks and the Nasdaq
Long term:
• Gold-mining and energy stocks
Q: Is the broader market about to rally?
A: The general market is making a good short-term, if not intermediate-term, low. The next four-eight weeks will be a lot of fun on the upside. The markets are extremely oversold in Europe and the U.S. They trade almost in lock step, although the valuation gap is the widest ever. In the past two weeks, there have been heavy stock liquidations by some large institutions. As in the U.S., some European pension funds now are underfunded due to the equity market's decline. There are many insurance companies that have to protect declining reserves. When the market falls as we approach a key reporting date or the end of a quarter, these companies start selling or hedging the stocks they have left. That has accelerated in the past two to three weeks, and is a classic sign of the creation of an intermediate-term bottom.
Q: Before the real one, we take it.
A: There is a tug of war in world economies between deflation and inflation. On the one hand, because of globalization, low-cost producers like China are pushing prices down. For example, the Chinese will produce a new airplane soon, and within the first 10 years will sell more of these planes than McDonnell Douglas did in the history of the company. On the other hand, there is a huge amount of debt in the world, and servicing it puts downward pressure on economic growth in the industrialized world. Debt-service payments now are about as high as new credit creation. In the U.S. the game is over, and Japan is the same. Europe is not as bad, but is getting there fast. In general, nominal GDP in the U.S. and Europe probably will not grow by more than 5% for the next few years. That means corporate earnings will not grow faster than 5%, either.
Q: Wall Street will be very surprised.
A: In the U.S. earning are expected to grow 14%-15% annually for the next five years, and in Europe, 11%. Over time these estimates will fall, putting pressure on stock valuations. But from time to time markets decline to a point where they can rally. Then you can trade, but exit and go short when things turn down. You have to be nimble, not dogmatic.
Q: Have you got some new investment ideas?
A: I'm not in the mood to buy stocks for the next six months, but I can tell you what I think is going to happen into August. We will see a tremendous short squeeze in technology, telecom, biotech and other Nasdaq-type stocks in Europe and the U.S. That's where the huge short positions are. There are more and more hedge funds around, and they cannot stand on the sidelines when markets go down. The bounce will not be over until the majority of the shorts are covered. The Nasdaq could go up 30% or so over the next two months. If you buy companies like Nokia or Vodafone or Ericsson or STMicroelectronics or Microsoft, you'll make 30% to 50% over a relatively short period of time. But you have to get out after that move, because it won't last for six months. And, if the bounce is shallow and disappointing, the market will be in even deeper trouble afterward.
Q: Is the bull market in the dollar over, too?
A: Yes. The U.S. is not a special case any more, compared to other economies. That means foreigners won't spend $1.5 billion a day to support the dollar. This is a long-term structural change, and the start of a multiyear decline versus European currencies. U.S. assets are the most overvalued in the world, and money is flowing out of them because they no longer promise good returns. What's happening in gold is the other side of the coin. In an effort to fight the restraining forces in the industrialized world, central banks eventually will create unprecedented amounts of liquidity without creating more value in the real economy. This will lead to a further debasing of currencies, and a structural bull market in gold. Within 5-10 years gold will hit new highs. Gold and energy stocks are some of the few long-term investment trends I see. I would buy a portfolio of gold-mining stocks, particularly those that don''t hedge, like Gold Fields, Newmont Mining or Meridian. The next few months might not be a good entry point, but a long-term investor should own some gold stocks.
Q: Thank you, Felix.
ZULAUF
Price Price Percent
Company Symbol 1/7/02 6/14/02 Change
Short
Zurich Finl Serv ZURN VX 407.50 Sfr 316.50 Sfr -22.33%
MLP MLPG VX €77.70 €32.00 -58.82
Long
OTP Bank OTP HB 1707.50 f # 2190.00 f 28.26%
Surgutneftegaz SNGSP$ RU $0.21 $0.24 14.29
Frontline (ADR) FRO $9.87 $10.58 7.19
# forint |
