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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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This message is intended only for the personal and confidential use of
the designated recipient(s) named above. If you are not the intended
recipient of this message you are hereby notified that any review,
dissemination, distribution or copying of this message is strictly
prohibited. This communication is for information purposes only and should
not be regarded as an offer to sell or as a solicitation of an offer to buy
any financial product, an official confirmation of any transaction, or as an
official statement of Gabelli Asset Management Inc. Email transmission
cannot be guaranteed to be secure or error-free. Therefore, we do not
represent that this information is complete or accurate and it should not be
relied upon as such. All information is subject to change without notice.
Last Updated on 11/6/02
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