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Hi Board
Here is an article that I think should be read by everyone. I know I've posted a number of gloomy reports but everything I've read tells me that the underlying economic problems of the major nations have not gone away despite the recent bullish sentiment expressed.
In one respect this report is positive because it certainly points to areas to concentrate on eg gold etc and ones to avoid.
Here it is FWIW.
Regards
Harmy

http://boards.fool.com/Message.asp?mid=16832621

From: George S. Cole on SI,

Top money manager says bear market still has a long way to go.
'By midyear, markets will be at new lows.'

A pundit speaks: 'By midyear, markets will be at new lows.'

Once a pundit always a pundit? The case of Felix Zulauf, president of Zulauf Asset Management AG in Zug, Switzerland, may provide a clue. Zulauf, who with his partners, Daniel Koeppel and Nicholas Mathys, manages Zulauf Europe Hedge Fund, used to get a lot of media exposure. Besides his ongoing annual appearances in Barron's Roundtable of top financial pundits, Zulauf often appeared from the mid-1980s through 1998 on CNBC as well as Louis Rukeyser's "Wall Street Week" and a variety of financial television programs in Germany, Switzerland, even Portugal..

A month before the 1987 market meltdown, Zulauf, then head of Union Bank of Switzerland AG's institutional portfolio management department, decided to liquidate his clients' equity portfolios..

In 1998, Zulauf decided to leave the limelight and avoided all media appearances save Barron's. "I saw that things would get ugly. I saw many, many people investing in a way they should not. Eventually they would turn out to be big losers," he said, adding, "If you had warned them at that time, they would have thought you were an idiot, and you would lose your status.".

While the past two years have left many investment advisers red-faced, Zulauf Europe Fund, which goes long and short on equities, has gained 80 percent after expenses since its August 1998 debut. So far in 2002, it is up 3.9 percent; the Eurostoxx 50 index is down 4.8 percent. In his first non-Barron's interview since 1998, Zulauf spoke with Sharon Reier as one of his top short positions, Zurich Financial Services AG, revealed its weakness..

What is your overview of the economy and the stock market now?.

The consensus is that the United States economy has bottomed, is turning around, and the market hit a low on Sept. 11. That analysis puts us in a bull market that will carry over the next few years..

I do not believe that. I do not think we are in an economic situation that allows for a sustainable recovery. Last year there was a refinancing opportunity where interest rates were lowered and the consumer could cash out and spend. But long-term interest rates have risen, and therefore the window for lower interest rates is spent. Moreover, energy prices declined and left more money to spend for other goods and services. But energy prices are rising again. Thirdly, there was a [U.S.] tax cut last year that will not be repeated this year. There will be a big disappointment as people realize the recovery is spent. The market is smelling it and selling off. I think by midyear the markets in the U.S. and Europe will be at new lows. There will be another big rally in the second half, then another decline. That is the way markets decline..

How low do you see it going?.

I think we are in a structural bear market that will last for five to 10 years. It is not a nice picture. But it will not go straight down. From time to time there will be fiscal and monetary stimulus. Markets will get oversold and will rise for awhile. Markets will zigzag downward. It will not be over until stocks trade at attractive valuation levels..

Don't forget that the norm for the U.S. stock market over the past 80 years is a price/earnings ratio of about 15. The current reading is in the 40s. Most structural bear markets usually hit a low where stocks trade at book value. When the stock market trades at book, you get a lot of stocks that trade below book and are good values. Book value [for the S&P] right now is $220 and the S&P index now [is] at about 1,100. It is still trading at a valuation level higher than in any historic period.
People are looking back and saying the market has come down 20 percent to 30 percent. We had a rally from September to January. Then down we go. It may go up again next fall, and then there will be another decline..

What strategy do you suggest for investors in this market?.

What is important for the investor is that the winning formula of buying and holding is not working any more. In fact, it is working against him. If you cannot be successful in the current environment, get out. Leave it to those who can. This is a market for opportunistic investors who can play rallies and can also play the short side. But it is important to know what you are doing if you short
stocks..

What is your fund shorting?.

We see lots of losers. At present we are more short than long. For instance, we are short financial asset gatherers and managers because the bear market environment will slow their business sharply. Also insurance companies. These are companies that made money on their financial asset portfolios and now are suffering losses. You will see more and more disappointments in these sectors. Stocks are not the only problem. Corporate bond yields have actually gone up, and quality spreads have been widening. Many professional investors have moved to the higher yields. But we now have a corporate environment with the weakest balance sheets ever.

It is like this in Europe also..

Remember the 1990s was a period where companies bought back stock, and took out loans to do it, to boost the stock price. By contrast in the past, when equity prices were high, people issued new stock and strengthened their balance sheets. These weak balance sheets are coming home to roost..

We are also shorting banks. We expect loan losses will continue to rise in commercial banking. Investment banking is hurting as the capacity built up during the boom time proves too big to support the very low revenue flow in the future. In general, we are also shorting any industrial company with a weak balance sheet and high valuation of its equities..

What are you long on?.

Companies with low equity valuation, strong balance sheet and a dividend yield. One finds more like these among the midcap stocks, particularly in industries where there has been consolidation. That would mean basic industries. We also like metals and mining stocks; energy stocks and gold stocks. We are long Newmont Mining Corp. and Goldfields Ltd., a South African company listed over the counter. Gold and energy - sounds like you expect inflation. But people are talking about deflation, as in Japan..

There are a number of crosscurrents at play. It is true that globalization has lowered some prices. So we have deflation in tradable manufactured goods. But the local service sector is inflationary. And credit creation has grown at an extremely high rate in the last decade and has produced inflation there. The U.S. economic boom was created by a consumer spending boom interlinked with a financial asset boom. The financial asset boom was made possible by an aggressive easing of money, the accounting gimmicks we are beginning to see - and a lot of hype by the investment community. It came from the belief that we were in a new age of productivity and innovation. At the end, it all has created the weakest balance sheets in U.S. corporate history. Weaker even than in
1929, and now the boom is over..

And due to the financial asset boom, you had the savings rate collapse. So in order to keep the consumption boom going, you have to keep the savings rate declining at the same rate. For that to occur, you need the stock market booming as in the past. If not, the savings rate will most likely rise, which means a lot less consumption and a weaker economy. Governments will compensate for this in part by going into deep deficit. I think governments will go into deficit and there will be deficits of 3 percent and 4 percent and still very little growth. Central banks all over the world will not be able to stay a stable course. If the economies are weak, the central banks will not limit money supply to 2 percent growth. They will go to 10 percent or 20 percent or 30 percent growth, whatever it takes to support the system. And that will mean a devaluation of paper currencies. Investors will turn to gold, as they are already doing in Japan..

Our enthusiasm for energy stocks is based on another premise. Oil reserves are depleting at a rate of 6 percent a year, and demand is growing 2 percent a year. Just to keep reserves even, the industry should find 8 percent new reserves per year. That is not happening. Because prices have been low, there is little incentive to find reserves. Oil prices a year from now will be higher - and five years from now will be much higher. That should benefit oil companies with lots of reserves in the ground.. Does the prospect of inflation make real estate a good investment?. Real estate with a decent yield will do well. So will undervalued assets. But I would not go into financial districts or fat-cat houses in Greenwich, Connecticut. They are certainly overpriced..

Americans have become obsessed with the stock market. You see CNBC and other financial programs at bars, airports, restaurants. Are Europeans equally interested in financial media?.

Today virtually everyone in the United States owns equities, and now nearly all Europeans do. And ntil two years ago, everyone was enjoying it. Now they have calmed down a little, but the stock market is now quite important in Europe. There are three reasons. Firstly, investors are investing in equities on an individual basis. Secondly, savings plans through life insurance tax incentive programs and insurance companies have never been more in equities - until a year ago - and now are having trouble meeting performance criteria. Thirdly, pension funds have become important players in equities, and they are now entering a more troubling era. People are concerned whether
their pension funds are well invested.
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That was a very good article Harmy, thank you.

(I believe he's quite correct in his assesment!)


Cheers.
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(I believe he's quite correct in his assesment!)

Cass
The interesting thing is that when you look at the chart for the Oz All Ords over the last three years there has been about an 18% gain. It has dipped here and there but it really has had a positive gradient. Given that markets are supposed to interact with each other it would appear that although there are fluctuations in sympathy with the Oz major trading partners the Oz market as a whole has retained it's independence
and regardless of what happens in the world simply continues on it's merry way.
Regards
Harmy
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Harmy,


Our market has held up really well hasn't it-- I think to everyone's surprise!!Housing boom helped I guess, but that's all over now...


If this guy's right we should be looking again at resources,--
what do you think? I would have thought that Gold had almost had it's run, but apparently not so,


Best.FC.


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Cass
When looking at the last three years I'm not sure you can attribute the housing boom to the entire three years - there must be other factors.

If this guy's right we should be looking again at resources,--
what do you think? I would have thought that Gold had almost had it's run, but apparently not so,


I like resources anyway - I like holes in the ground !! I'm amazed at the continual listing of new mineral discoveries that occur almost on a weekly basis. I'm sure that this is contributing enormously to the Oz economy. Gold seems to be a hedge (although I'm not a gold follower) against many other equities - if even half of this article is true then gold would appear to be a commodity that will be much in demand.
As far as other mining resources are concerned I have a pretty basic attitude which says that even if the coal, zinc, iron etc can't be sold or it's not profitable to dig it out, it doesn't disappear - it remains in the ground waiting for a resurgence in price.
Incidentally, have you noticed my favourite coal miner - AUO up to 64c and heading higher ??
Cheers
Harmy
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"AUO up to 64c and heading higher ??"


Harmy, it's doing great isn't it--- up 116% in 6mths and doesn't
look like it's slowing down yet at all..

Like you said, the good part about minerals is they can store the
stuff-- more than can be said for electricity for instance!
Cheers.
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I've been wondering how the decisions made at the OPEC conferance
will affect the oil price..
If they reduce the supply will that encourage more exploration
Maybe they are just trying to conserve existing wells and store that
in the ground as well to keep the price up. Be interesting to see
what happens..
FC,
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I've been wondering how the decisions made at the OPEC conferance
will affect the oil price..


Cass
I think that long term oil (and natural gas) will be winners. From memory the worlds oil stocks are being depleted at a rate of around 8% per year with new supplies coming on stream at a rate of around 6% per year (I'd have to check those figures but I think that is about right). This leads to a shortfall of around 2% which must eventually show up when the worlds economies turn round and demand increases.
The present oil price is low by recent levels and is bound to increase.
Cheers
Harmy
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Cass
Here's some more long stuff on oil supplies. If you go to this site the article is well worth reading. I've just picked out a couple of interesting excerpts which should give you a guide on where things are heading. Also the whole site is an enormous treatise on oil supplies - if you can absorb this you'll the board guru - it's all a bit much for my simple mind !!
Regards
Harmy

http://www.hubbertpeak.com/overview.htm

The Global Hubbert Peak
The World's Endowment of Conventional Oil and its Depletion
Overview
... as of end 1999 ...
Depletion rate 2.2%/yr
Depletion midpoint 2003


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Like you said, the good part about minerals is they can store the
stuff-- more than can be said for electricity for instance!


Sorry Cassie I beg to differ. What is a coal body and a lake behind a dam if not stored elecricity.
Another side of the coin is, why do you need to store something that is delivered free in abundant quantities almost every day - wind & sunshine?

BUT- I do totally agree with you about resources. Whether they be trees, gold, nickel, bauxite etc. If you don't harvest them, then you still have them.
I do not go along with the viewpoint that if you don't use it , then it is a wasted resource. I think this is crap bandied about by the "rape and pillage now" crowd. You still have it. It is not wasted. It is still worth something.
Actually if you can keep it till everyone else has used theirs, then it is worth even more.
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Harmy, that's a great link, thanks very much-- havn't had time to
have a good read yet but I should have a few more clues about the oil
patch after I get into it....
I had a quick read of one of the articles (F DeWintour) and he said-

"It may be a traumatic experience. Energy prices may explode overnight. We may get a significant increase in nationalism and in oil wars. The pressures for population and immigration control are bound to go up. Some countries with poor energy supplies and with large and poor populations may begin to breed and export terrorist groups. To realize that this would not be a new development one need only consider some of the "militias" in the USA, or some of the curious groups in Japan or in the Middle East. Some of these groups have government support, but most do not need any. All it takes to do great harm to society is a large supply of twisted minds, with only a small supply of money. Such resources have often been found together"

The footnote says the article was last updated July 1996..
pretty chilling anticipation in that case..

Best,
FC.

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