Comstock Partners, Inc.October 03, 2002
MARTHA MCCALLUM, REPORTER: The Dow down about three points right now, the NASDAQ is up about eleven. But regardless of what happens today there is one mutual fund manager who believes the long-term trend, ready -- still down. He’s been making money for the last three years because of that trend. Joining us for her daily strategy session is Consuelo Mack. Hi, Consuelo.
CONSUELO MACK, ANCHOR: Thanks, Martha. Well, the two portfolio managers who run the $200+ million Comstock Funds have been warning clients that the markets are over-valued for six years now. They were punished, betting against the market in ’97, ’98 and ’99, but since then their bearishness has paid off big time. Their flagship, Comstock Capital Value Fund, has made money in each of the last three years, and is up forty-six percent year-to-date. Joining me for today’s strategy session is Marty Weiner. He is co-portfolio manager of the two Comstock funds, and Marty it’s great to have you here. You have made money shorting the stock market, which is a risky strategy in the best of times, but you think it’s even riskier to be invested in the stock market still right now. Why? Why do you think the market is so over-valued?
MARTY WEINER, PORTFOLIO MANAGER, COMSTOCK: We definitely think it’s riskier to be in the market than to be out of it, or to be short right now. The market right now is still trading at a P/E multiple of 29 times on a trailing basis. Selling 27 times if you take the estimate for 2002, over a period of 76 years the average P/E multiple has been about 15.5. So that means its way over-valued. You had a zone prior to the late ‘90s boom. It traded between 22 times on the high side, 7 times on the low side, never traded more than 22 times earnings, and you had this tremendous bubble where it burst out and traded over 40 times earnings, and even now it’s back to 29 and even that is way over-valued and we don’t think that is a bargain.
MACK: Now where do you think it’s heading? I was looking at this chart we have up where the trough was 8.5, or the P/E was 8.5, after the ’29 crash, and in January of ’73 the trough in a bear market was a 7 P/E. Where do you think we’re heading as far as a P/E multiple on the S&P 500 for instance?
WEINER: On the P/E multiple we think it’s headed at least back to a reasonable value, which would be between 15 and 16 times, but it’ll also over-shoot and in most bear markets you’ve gone down to 8 to12 times.
MACK: So we’re talking about a level in the S&P of around what?
WEINER: If you look a little bit ahead, give it $35. Per earnings, give it a 15 or 16 multiple, you come out with an S&P below 600, which would equate to a Dow of between five and six thousand.
MACK: That’s a pretty scary thought. The other thing thing, I remember talking to your co-portfolio manager, Charlie Minter in April of 2001, when the Fed came out with a surprise rate cut of 4 ½% at that time, and he said at that time, contrary to nearly everyone else we were talking to on the street, that the Fed easing wasn’t going to work. It wasn’t going to prop up the market well lo and behold it has not indeed propped up the market. You still think that easing isn’t going to work. Why?
WEINER: I think that was a great call and I think it’s still valid today. You’ve gone from 650 on the Fed funds to 175, you can only go to zero, so you’ve done 475 out of a possible 650. You only have 175 left. Does anybody really think that’s going to matter at this point? In 19 out of 20 times that the Fed has eased since 1915 the market has been up substantially a year and one half later. Now it’s lower than when you actually started, and this only happened once before and that was in 1929.
MACK: You’re shorting the market. You think individual investors should be investing in T-bills and T bonds, but isn’t there a bubble developing in the T bond market?
WEINER: No, we don’t think so. We think in a softening economy and deflation we think rates could go even lower than they are today, and the bonds could go very high.
MACK: So that’s where you would advise investors go for a safe haven. Marty, thanks for much for joining us, appreciate it.
WEINER: Glad to be here.
MACK: And congratulations on your performance for the last three years. Marty Weiner’s co-portfolio manager with the Comstock Funds.