Comstock Partners, Inc.April 05, 2001
Dow Shoots Up 400 Points - Bears Snicker 'Suckers'
The Street.com on AOL - Aaron L. Task - Senior Writer
Additionally, I recently received an unsolicited invitation (urging) to check in with the folks at Comstock Partners, one of the most outwardly bearish mutual fund groups in existence. In an interview today, Charles Minter, co-manager of the Gabelli Comstock Partners Capital Value fund and Gabelli Comstock Partners Strategy fund, expressed a view reflecting that philosophy. Death, Doom and Destruction "I'm not really excited about the market today," Minter said. "Dell saying, 'We're not going to warn' is not going to provoke me to get out of the way of the terrible bear market I envision." How terrible? Comstock's feverishly bearish outlook is predicated on two main issues: Valuation and the level of public participation in stocks. At the firm's Web site (Comstockfunds.com) in a piece entitled "Limbo, Limbo, How Low Can It Go?" Minter and partner Marty Weiner detail how a host of valuation measures -- from the Dow's price to dividend ratio, to the S&P 500's price to book ratio, to the Nasdaq's regular old price-to-earnings ratio -- reached unforeseen peaks in March 2000. All those metrics would have to fall below trough levels that emerged during previous bear markets before the fund managers would even consider becoming constructive, much less bullish. "After that kind of overvaluation in the greatest bubble in the history of the United States, I can't imagine [the bear market] could stop at normal valuations," Minter said. "It goes to trough [valuations] and probably below." For example, the S&P 500's P/E bottomed at 7 in March 1937, January 1973 and September 1976, he said, citing data from Ned Davis Research. Estimating S&P 500 reported earnings for 2001 will be about $50 a share, excluding one-time write-offs, Minter said if the index traded at a P/E of 10 (much less 7), that would result in a price of 500 for the S&P. "That's what will go on if the bloodbath takes place as we expect." The "public participation" argument is destined to be controversial. Those on Wall Street who think heavy public participation signals a market peak seem elitist for they are suggesting, de facto, that the public is foolish. Minter acknowledged that it's not a popular viewpoint, but noted history is on his side, and not just in stocks. In addition to stock investing in the 1920s, heavy public participation in gold in the 1970s and oil in the 1980s also augured peaks in those markets. The public's level of interest (obsession?) with the stock market in recent years "has got to be a signal to look at for a climactic ending," he said, noting that February 2000 saw record inflows into equity mutual funds as well as new stock issuance and secondary offerings. "People that come in late get killed." Clearly the skeptical approach has served Comstock well of late. The roughly $32 million Strategy fund was up 1.7% in 2000 and 12.2% in the first quarter of 2001, according to Morningstar.com. The $55 million Capital Value fund, which can (and does) short individual stocks and stock futures as well as use leverage, was up 10.1% last year and 21.7% in the first quarter. Comstock has previously shorted tech bellwethers including Dell, Cisco Systems (CSCO:Nasdaq) , Oracle (ORCL:Nasdaq) , Amazon.com (AMZN:Nasdaq) , Brocade (BRCD:Nasdaq) and the Nasdaq 100 Trust (QQQ:Amex) , and "still has significant short positions in Nasdaq stocks," Minter said, although he declined to specify. Additionally, because of what they view as a technical breakdown of long-term uptrends for both the Dow and S&P, Comstock has recently shifted its shorting focus to so-called Old Economy names, he said, declaring that the bear market "has just begun." Currently, the Strategy fund is net 70% short, while the Capital Value fund is more than 100% net short. The rub with guys like Minter is that he was a bear long before it was profitable to be so. For the past five years, the Strategy fund is down 5.74%, while the Capital Value fund is off 12.7%, according to Bloomberg. In the same time, the Dow and S&P 500 are each up more than 70%, while the Comp is up (still) more than 50%. Minter makes a compelling argument -- particularly on the valuation side -- about why the bear will be far longer and more painful than most of us care to contemplate. But those long-term performance figures also speak volumes.