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Gabelli Chat With Charles Minter & Martin Weiner
Transcript of Chat Session on Nov 6, 2002
Transcript of Chat Session on Nov 6, 2002
With Charles Minter & Martin Weiner
QUESTION> What does the republican sweep in the congress do to your economic models -- is the now tax cut friendly pro business government going to drive this economy to a meaningful recovery?
COMSTOCK> We don't think it will make much difference. We are running big deficits already. We have seen some estimates that the fiscal 03 deficits will run about 250 billion dollars as it is. So we think it will be difficult to pass more tax cuts now. if they do so the deficit will really start to look huge and result in the long term treasury bond rate going up - due to issuing more debt. This is really the key rate for corporations and for residential mortgages. In this sense rising rates would offset any stimulus from a tax cut. That is if tax cuts can get passed/
QUESTION> What stage of the market cycle are we in now?
COMSTOCK> We think that we are probably in the last stage of this bear market. you may have seen on comstockfunds.com in our daily comments we have discussed the three stages many times. The first stage is denial. The second stage is concern and the third stage - which we believe we are entering now is fear and capitulation stage.
QUESTION> Would investors pulling record amounts of funds out of equities funds be a sign of a market bottom? What other signs should we look for?
COMSTOCK> That would be one of the signs to look for. The amount of equity mutual funds peaked in the first q of 2000 at 4.5 trillion dollars. About 4 trillion of that was accumulated in the decade of the 90's and mostly in the last few years. That equity total is down to approx. 3 trillion. And that represents over 30% of total stock market capitalization. We believe that this amount will decline substantially before this bear market runs its course you have the same problem with equity mutual funds as you have with foreign investors and we believe that the foreign liquidation of US equities will take place before this bear market ends. IN limbo on comstockfunds.com you will be able to see the levels where the US markets peaked and troughed over the past 75 years.
QUESTION> Does today's 50 basis point cut in rates or the accompanying commentary provide you with any reason to think the market will rally through December?
COMSTOCK> No. We believe that the legacy of the late 1990 bubble is still holding back economic activity and there is not much the fed can do. They have already made 11 cuts totally 475 basis points. Another 50 BP is not going to make a big difference. the main effect of lower rates is to drive housing and autos but money from mortgages has been abundantly available and autos have already benefited from 0% financing and other incentives. Auto sales have already fallen steeply in Sep and Oct indicating that the incentives are loosing their potency. In addition, one of the problems emanating from the bubble is that consumer debt is already at record levels and inducing them to go into even more debt magnifies the overall economic problem rather than offering any cure. This is not a new position of Comstock. If you go to comstockfunds.com and look in the archives you will see that we wrote "is Greenspan superman" on 12/28/2000 before the first rate cut of Jan 3 2001 we discussed the difficulty he would have if affecting the stock market and the economy. In fact there is a cartoon there that I think you will enjoy.
QUESTION> Could one argue that the 12 cuts in rates to date totaling 525 basis points has prevented the economy from entering a major period of stagnation and has limited real economic impact of the bursting bubble post y2k?
COMSTOCK> We think that it has so far limited the impact BUT that is a lot of easing and it is significant that with all that the economy is barely treading water. At this point there is only the possibility of another 125 BP of rate reductions before we hit zero. And without any possibility of further stimulation the economy is likely to continue weakening. Ordinarily the extent of monetary stimulation that we have already seen would have caused a strong recovery by now. The negative after effects of the bursting bubble are preventing the economy from moving forward. And we think the current cuts will have little effect
QUESTION> Your assumptions about the market are based on what has happened in past Bear markets. Why does history have to repeat itself and trade down to the low P/E's you speak of?
COMSTOCK> It doesn't necessarily have to trade down to the bear market troughs of the past at 8-12 times earnings. But we would expect the market to trade at least down to normal valuations before this bear market ends. After all, we have just gone through the largest financial mania in all of history. Which was accompanied by the most outrageous greed ever witnessed. the after effects of the longest economic expansion in history - which was associated with that bubble. we would expect something like that to be followed in some form of symmetry to the greed - and that would be associated with fear. So far the ramifications has been the mildest recession ever recorded.
QUESTION> What are the chances of the US falling into a Japan style economic stagnation?
COMSTOCK> Please refer to the articles on comstockfunds.com dated 12/17/01 and 12/18/01 you will see on 12/17/01 many differences between the US economy/market and Japan. After reading that you will be comfortable that we are not entering into that cycle. However after reading the comment on the 18th, which describes the similarities, you will be more concerned. The deflationary cycle starts with excess capacity and debt and is resolved through the liquidation of that debt.
QUESTION> This is now the longest bear market in recorded history and one of the worst percentage drops in the S&P. how much more could we have on the downside.
COMSTOCK> We think we could have a lot more on the downside. The extent of the drop is a function of the tremendous speculative run up from 1997 through early 2000 - part of the big drop was the elimination of that unrealistic rise. At this point we are still significantly over valued. Reported earnings for 2002 will come in at $30 on the S&P500. If you use the historical average multiple of 15 it comes to 450 on the s &P which is half the current price. We don't say it necessarily will go that far down but it indicated the market has great risk on the downside.
QUESTION> Wayne Angel said today on CNBC that lowering Fed Funds rate will force people invest in stocks because of low returns on money market funds. What do you think about that?
COMSTOCK> The easy answer is something is better than nothing and something positive is better than a big loss. All you have to do is look at the Japanese example - lower rates drove investors into stocks, as rates moved towards zero - if that happened the Nikkei index would be above 40,000 today rather than 9,000. Wouldn't you rather have been in Money funds since early 2000 than in equities? Or in 1/2% yields on Japanese 10 year bonds rather than the Nikkei for the past 12 years.
QUESTION> What about gold and gold stocks? Are these still a significant part of your portfolio?
COMSTOCK> They are not a significant part of the portfolio. However we do consistently consider the possibility of investing in gold stocks. We are not as convinced as many of the other bears that Gold stocks will perform well during the most severe parts of a deflationary bear market.
QUESTION> Do you have any idea what the real unemployment rate is? I think it may be more like 9-10%.
COMSTOCK> There are various ways of looking at it. If you look at yesterday's comstockfunds.com comment you will see that there has been some distortion in the unemployment rate, which has made it, look lower than it is. In addition the unemployment rate does not account for people who have dropped out of the labor force because they cant find work. They are not included because they are not actively looking for jobs but they would take a job if there were any around. We have seen estimates that if they were included that rate would be 8-10%
QUESTION> Do you think that investors are now looking into next year and seeing great chances for improvement? Won't that keep stock prices rising?
COMSTOCK> That has been the same questions we have been answering for 2 1/2 years now. Ever since the market started down recovery has always been six months away. This has not prevented markets from going down but has prevented it from going down more than it has. The recovery still looks to the consensus that in six months out but as we move in time it keeps getting pushed out. We would not be surprised that when we do this chat in March the recovery wills till be six months away.
QUESTION> Hi. Love the website. In regards to your comments of high public participation in the market doesn't online trading provide a lower barrier of entry than past investing? The fees online vs. a broker make it much more accessible. Would you maybe revise the figures 5% upward because of that?
COMSTOCK> Anything that allows the public to participate more easily would be a factor that would make us more negative on the market. Every time the public participates in any financial asset in masse the final result has been very ugly. you could look at tax shelters in the early 1980's you could look at gold in 1974 when the public was first allowed to buy gold and then again in 1980 when the public drove Gold to $870 as examples of public participation. There was massive public participation in the late `920's when computers didn't exist, television didn't exist and radio was in its infancy.
QUESTION> How does The Wall Street treats an average investor, in your opinion? Is there a brainwashing campaign, trying to lure investors into the stock market?
COMSTOCK> Not very well and that is there business/.
QUESTION> Do you think there will be a catalyst to take the market down hard or will it be more of a continued grind down. When will people believe our economy is in serious post bubble trouble?
COMSTOCK> We get that question all the time and we think it shouldn't have any bearing on investors posture. We think investors either way should have the minimum exposure to stocks and that is the key. Anybody that agrees with us that the market is in an extremely risky position should not be exposed to stocks no matter which way the market goes down.
QUESTION> Looks like there is enough positive psychology to keep the market up through year end. Are you positioning the fund accordingly?
COMSTOCK> No. We are in a very bearish position. As contrarians we believe when the psychology is too positive the market will go down. Strong markets develop out over negative psychology and doom and gloom. This was true at the bottom in 1974 and 1982. Those years looked like the worst time but turned out to be the best time. And the worst time to invest was in early 2000 when psychology for investing was very high. Since the peak in 2000 we have yet to come close to the stock market bottoming conditions of 1974 and 1982.
QUESTION> Do you have any estimation of how large the balance sheet distortion due to, shall we say, "unrealistic" defined-benefit pension fund return projections is across the market? Say across the S&P 500
COMSTOCK> The point on pension funds is during the years when the market was strong most corporations didn't have to make contributions to their DB plans. now with he market down for three straight years most pension funds have gone into deficit and corps will have to have big contributions to these funds/ this will be an expense that will come right out of profits.
QUESTION> I had a question about seasonality. There is talk ad-nauseum about the great Nov-April calendar and the Pres cycle. Do you think this is applicable today in the current environment? I'm struck by the numbers of strategists and letter writers who keep commenting on it because it supports their current bullish stance. There is truth to the thesis, but I wonder if there are so many believing in it, wouldn't that suggest that the very buying required to sustain such a move would be taking place no
COMSTOCK> it is true but it is far from 100%. We believe that the excessive over valuation and negative fundamentals will overwhelm these seasonal tendencies.
QUESTION> So Fed rate cuts have no impact on economic recovery?
COMSTOCK> we did not say that.
QUESTION> Both last year and now this year you had fantastic ytd returns up until the last quarter when a big portion was given back. Is there any way you can manage around that?
COMSTOCK> We are up over 100% from September 1 2000 to date. We were able to accomplish this even while missing each and every rally through that period. What we have attempted to do is get more aggressively bearish during the counter trend rallies and we believe that philosophy will have a significant payoff between now and the final market low. it is the mirror image of what the most bullish investors were doing during the bubble years of the late 90's where they bought every correction.
QUESTION> How is the US dollar fairing in your opinion. It seems foreigners are not selling U.S. assets en masse yet despite the weakness in our economy.
COMSTOCK> It is true they haven't yet started the liquidation that always takes place during a bear market. The reason could be the US economy is the global economic engine and their economies and markets are not doing well. Most of the foreign participation came from Europe where the economies and stock markets are performing just as poorly as ours. We do believe that the foreign liquidation will take place sometime soon and we are preparing for this eventuality by owning the Euro currency in both funds.
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Last Updated on 11/6/02
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