Posted on: Thursday, June 27, 2002
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How low can it go? Comstock Capital Value's Minter and Weiner
By Justin Wiser,

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Through one of the greatest bull markets in history, Comstock's Charlie Minter and Marty Weiner sat dumfounded while the rest of the world basked in the sweet glow of seeming success.--YARDLEY, Pa. (CBS.MW) 

The pair correctly called the bubble in the go-go market of the late '90s and started shorting stocks immediately -- the only problem was that it was three years too soon.

Now, two years into a bear market, Minter and Weiner's Comstock Capital Value Fund is finally scoring some fantastic gains with an eclectic portfolio net short on stocks by more than 100 percent. The pair is also knee-deep in bonds and placing bets on the euro.

The $83 million fund is bare of even one long stock position.

Such pessimism proved prescient during the second quarter, when the Comstock Capital Value Fund (DRCVX: news, chart, profile) proved to be one of few mutual funds to pull out a double-digit gain -- up a stunning 26 percent amidst the market's swift decline, according to Lipper.

The bad news is, they see no immediate let up in the market's downward spiral.

As of Tuesday, Comstock Capital Value is up roughly 20 percent since the beginning of the year and scored a 21 percent gain for calendar year 2001.

The Comstock fund has not fared well over the long term, however, posting an annualized loss of 6.3 percent over the past 10 years. recently spoke with Minter and Weiner about past woes, current success, and their outlook for the stock market's future.

Q. Comstock was early with its bearish call on stocks and actually suffered through the final years of the greatest bull market in history. What was that experience like?

Minter: The bubble was an excruciatingly painful period for Comstock, because we did fight it. As the years went on, we got more and more bearish as the bubble took place. We started shorting stocks on a net basis in about 1997, and that continued in 1998 and 1999. We lost about 25 percent a year back then. It was a disastrous situation for us and our fund. I had to wind up selling out to the Gabelli (GBL: news, chart, profile) organization. When the fund got down to under $100 million, we had to do something. At its peak, the fund's assets were probably about $700 million.

When it made sense to sell the fund, a lot of people wanted to buy the fund but most of them wanted us to turn over the management, too. When you know you're right on something, something that's as clear as the nose in front of your face, you just can't possibly give up management of the fund at a time like that. We've very pleased that we went with Gabelli because it gave us the chance to at least see our vision through.

Q. What made you so negative on stocks then, and today?

Minter: There were quite a few concerns. The biggest thing was valuation. The market got tremendously overvalued in 1997, and more overvalued in 1998 and 1999. And valuation is still probably the primary issue. At market troughs, the average price to sales ratio is about 0.59, and it's 1.6 now. Price to cash flow averages 5.6 at market troughs and it's 14 now. And the price to book averages about 1.20 at troughs and it's 5 now.

Weiner: For the S&P 500 ($SPX: news, chart, profile), the last 12 months earnings are only $20. If you normalize those earnings and look at the trend line, we come out with earnings of about $48. Even at $48, you're still at a 22 or 23 multiple, compared to a historical average of 15. At bear market bottoms, the average multiple has been 11. No matter how you slice it, the market is really highly overvalued.

Q. What about investor sentiment? Many say we can't have a bottom until there's a true capitulation on the part of investors.

Weiner: We think that people just have not given up here. People are talking about this being a downside extreme, but when you look at a real classic downside extreme like 1974, it is just completely different. In 1974, the S&P 500 was selling at 7 times earnings. The number of bearish investment advisors was 65 percent in 1974, and it's about 35 percent now. Equity mutual fund cash at that time was almost 12 percent of assets, now it's only a little over five. At that point, only 4 percent of all stocks were above their 200-day average, and now it's about 60 percent. What we have today is not really an extreme pessimism. People are talking pessimistically but they haven't acted pessimistically. The public is still in there.

Minter: We look tremendously at public participation. Stocks as a percentage of household financial assets are 35 percent presently -- at the market trough in 1974 it got to 14 percent, and in 1982 it got to 11 percent. We expect that to go down to 20 percent or lower, just like we expect the price earnings multiple to get to 15 or lower.

Q. Do you think the economy will slip back into recession?

Weiner: The economy here is very fragile. It's kind of an artificial recovery based on some of the things that happened after 9-11. We had zero-rate auto financing and the heavy discounting on general merchandise, and we had the 2001 tax refund. There's just a whole host of artificial factors that bumped up the economy on a one-time basis.

Usually during a recession the savings rate increases and consumers reliquify. But we have record consumer debt and record corporate debt, a record trade deficit and tremendous dollar overvaluation. Usually recessions are a process where you cleanse out some of these imbalances, but it hasn't been done this time. These imbalances will hinder any recovery, or throw us into a recession.

Minter: What we just witnessed was an unbelievable situation. We just witnessed the longest economic expansion in history, accompanied by the largest financial bubble in all of world history, followed by the biggest drop in corporate earnings history. You have to say to yourself, with all of those things that just took place, could that really be followed by the mildest recession in history? We just think it doesn't make any sense whatsoever.

Q. So what kind of levels do you envision for the stock market?

Minter: Remember, we just lost $12 trillion of wealth worldwide. You just don't come out of something like that easily. We think the S&P will fall to at least 750 or 700, and probably 6,000 for the Dow. But we definitely think it can go lower than that. The Nasdaq has gone down so much, we think the Dow Jones and the S&P will be catching up to it.

You're going to have to see the public -- who has never, ever participated like they have this time -- act like they did in 1974. They had net liquidations for years after the 50-percent decline in 1974.

Q. How long do you expect this unwinding to take?

Weiner: This dates back to March 2000, so it's slightly over two years now. The 1932 bottom was about three years from the 1929 peak even though it started out with a crash very early. If you look at Japan, theirs hasn't ended after 13 years. If we see capitulation take place this year the bottom could very well be this year, but that would be at far lower levels than we are at today.

Minter: Marty is probably leaning more towards it being a three-year phenomenon, and I'm leaning more towards a Japanese style drop.

Q. Why has the public been so slow to abandon stocks in the kind of mass exodus that you're expecting?

Weiner: I think because of the big bull market, which went all the way from 1982 to early 2000, and particularly with the bubble during the last few years of that 18-year period, people got the idea that all declines were there to be bought and that the market always came back quickly. And the message from Wall Street has always been to just buy more when it goes down and to hold long-term. People just think it's going to come back pretty quickly, and this is a very hard attitude to overcome.

Q. Gold has done extremely well through the bear market -- do you own anything in the sector?

Minter: We don't own one gold stock right now because they moved up a little bit too much too early and we're watching for a pullback on it. But we have to watch gold very carefully because we do think there's a high probability that gold will act very, very well after being in a 20-year bear market.

Justin Wiser is a reporter for in Washington.

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