Market View from an Old Timer....

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    Subject: Market View from an Old Timer....


    >
    >
    > 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.
    >
    >
    > "You see discount stores doing beautifully, whereas other stores, even the
    ones that cater to billionaires, are beginning to curl up.
    > The consumer is up to his neck in debt."
    >
    >
    > 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, a
    > gainst 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.
    >
    > Table: Glickenhaus's Picks... and Pans
    >
    >
    >
    > 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.
    >
    >
    > Thank you, Seth.
    >

 
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