Interview with Byron R. Wien, Elder Statesman Of The Investment World
By Lawrence C. Strauss, Barron's | 24 August 2008
|
Barron's: What's been the biggest surprise for you about the market and the economy so far this year?
Wien: How far things went both up and down. Commodity prices went much higher than I thought they would. I thought oil would go to $115 a barrel, for example.
I was a bull on oil. And I thought it would go down at the beginning of the year, which it did. Then I thought it would go up— but to $115— and it went to nearly $150. All other commodities went to extremes, including corn. I was bullish on agricultural commodities, but their prices went up much further than I thought they would. I certainly didn't expect that Bear Stearns would fail. So the problems in finance turned out to be more severe than I had originally expected.
Anything else?
At the beginning of the year, every strategist thought large-capitalization stocks would outperform small-caps. That hasn't happened. We probably should have known it wasn't going to happen, just because everybody thought it would. The fundamental reason behind that prediction was that large-cap stocks had a higher percentage of foreign earnings. That turned out to be right, but large-capitalization companies just have a tough time being flexible.
Wouldn't you think that in this kind of market, investors would seek more dependable earnings growth?
Investors look for companies that do something new that's going to have a big impact. A big company does something new, and it just makes up for something that's going bad somewhere else.
How do you compare this market with others you've seen in your career?
This market is different because globalization has changed the nature of investing. When I started as a securities analyst, I was focused on U.S. equities alone, and I didn't know much about what was going on around the world, and I could do my job very well; today, you can't.
In 1965, the United States was the unquestioned economic, political and military leader of the world, a position it achieved in 1945 and maintained until 1980. But in 1980, Japan started to become a factor and Europe was back on its feet. I don't think I, or most other American investors, globalized enough. And then in 1990, after Communism failed and China became a factor and India entered the world economy, we didn't understand fully enough that these were not only potential customers of the United States— but very real competitors [[especially with regards to the labor market: normxxx]].
As a global strategist, you spend a lot of time visiting other countries. What's caught your eye lately?
The biggest new thought I have related to my travels is that the United States and Europe are going to have a tough time showing real gross-domestic-product growth in excess of 3% in the next five years, maybe the next 10. That means that the market, which did so well from 1982 to 1999, may be slow in coming back.
In January, you wrote, "I worry that the problems in housing and credit are more significant and longer-lasting than the usual market-adjusting events." What raised those concerns?
An idea was evolving: that we didn't get into this mess in the usual way.
Usually when we are in a recession, the Fed eases and then we come out of the recession. Business gets good. Inflation picks up. The Fed tightens. And then we go back into recession. But this wasn't anything like that. Interest rates weren't high. Inflation wasn't a problem. We got into this because of an excess of credit, both in the financial system and in housing. There was too much leverage in the financial system, and housing had gotten out of control.
Is there a sign of a bottom in financials?
The leverage in the financial-service industry is going to be wound down a lot, and I don't think the return on equity for these companies is going to be as great as it has been in the past [[it can't be; they would have to 'invent' and sell anew to customers— who no longer trust them or their 'inventions'— something as rewarding as the fees they got from manufacturing and selling that 'alphabet soup' of derivatives, which is currently rapidly shrinking— and can hardly be sold to anyone anymore at any price.: normxxx]]. So the earnings for these companies in the next up-cycle aren't going to be as good [[especially after you allow for a few more years of 'writedowns'! : normxxx]] Maybe the financials have gone down as far as they are going to go down, but I don't think they are going up with any verve.
And it sounds as if you see the business model changing for these firms, and becoming less profitable in the post-credit-crunch world.
When I came into this business in the mid-1960s, what a doctor made or what I made as a securities analyst or what a lawyer made working at a big firm was all the same. Five years out, our compensation had increased— pretty much in parallel.
But in the period from 1982 to 1999, the compensation in financial services expanded much more rapidly than it did in any other field. I don't know that a securities analyst is a whole lot smarter than a lawyer at a major law firm, and I don't see why securities analysts or investment bankers should be paid so much more. So I think there's going to be a convergence of compensation.
One of the topics you've written about in your notes to clients is the possibility that stagflation, which combines inflation and stagnant growth, will rear its head again as it did in the mid-1970s. What's your assessment of that possibility?
I'm probably not as worried about it as I was in the beginning of the year. In other words, I understood the "stag" part of it better than I did the "flation" part of it. So I was more worried about inflation at the beginning of the year than I am now. I'm buying into the idea that maybe the slowdown around the world is going to take pressure off inflation. But I'm concerned that growth is going to be harder to come by.
What's your take on the U.S. recession?
We are in a recession, but there are two parts of it that you haven't seen yet.
The first part is an increase in unemployment, and the second is a collapse in consumer credit. You've seen it in housing, which is a form of consumer credit, and in finance. But we are in a recession, and we are not going to come out of it until sometime next year at the earliest. The market will discount that by six to nine months. I have said that the market low on July 15 was a very significant low. I am not saying it won't be tested, but I don't think it will be severely penetrated.
Let's go through some of the key market and economic indicators, starting with oil.
Oil got ahead of itself. It's now stabilized. I don't think it's going back to $50 a barrel. I think it will stay in the $100 to $115 range, but, tax bill for that longer-term, oil prices are headed higher because China and India are consuming.
What do higher oil prices bode for the U.S. economy?
Europe has been operating and growing with much higher energy prices. Gasoline is much more expensive in Europe than it is in the United States. I'm not saying it isn't a problem. I just don't think it's a problem that is going to force us into a deep depression.
What about other commodities?
The standard of living is rising around the world, and other commodities are going to be rising in price. There's going to be a good corn crop this year, so maybe corn won't go up as much, yet China and India are increasing their standard of living, and their demand for agricultural commodities is going to be intense. When a country starts to do better economically, they eat more protein— and that means more demand for chicken, meat and corn to feed them, so there's going to be upward pressure on commodities. Even so, commodities have always been extremely volatile, and I don't expect that to change.
What do you see the S&P 500— down 14% this year— doing for the rest of '08?
I expect the market will end the year higher than it is today, though maybe not a lot higher. I thought S&P 500 earnings would be down this year. Almost nobody thought that would happen. There were two things that every strategist thought. One was that the S&P would move up and the other was that large-cap stocks would outperform small-cap stocks. Both of those turned out to be wrong.
Earnings have already been very disappointing, and they will continue to be disappointing. On the other hand, the disappointment has primarily been in consumer discretionary and in financials, while the rest of the economy is doing better, especially exporters, where performance has been impressive.
Some take the view that many of the non-financial sectors are doing very well, thereby offering some hope for the overall economy and market. But it doesn't sound like you buy that.
Finance is important, and whenever a category in the Standard & Poor's 500 gets to be more than 20%, you should probably pay attention, because a reversal is probably in store. That certainly was true of oil in 1980, and it was true of the financials two years ago. So financials are going to shrink as an important part of the S&P 500, and the question is, "What's going to expand?" Two areas that have potential to expand are technology and health care.
What's your outlook for Treasuries and the rest of the bond market? Late last week, the 10-year was yielding around 3.80%.
Treasuries are in a trading range. There are going to be more defaults, however, and the yield on high-yield bonds is going to go higher. As for the housing market, the inventory of unsold homes is still very high. Prices are still declining. I don't think it's over yet, and we have further pain to go. We are definitely more than halfway through. The question is, "Are we three-quarters of the way through?"
Where do you see opportunities?
There is opportunity in pharmaceuticals, selected biotech companies, oil-and-gas exploration, including natural gas, and in Brazil. I'm also positive on coal and agriculture.
Any names?
I can't mention specific stocks. Once I do, our managers are restricted [in their trading], and in this kind of market, they don't want to be restricted.
So I would recommend the Pharmaceutical HOLDRS Trust [ticker: PPH], an exchange-traded fund. Everybody's concerned about the drugs coming off patent for the big pharmaceutical companies, and a few of them have new products coming on. It's an area that has done so poorly for so long that opportunities have developed. And it's true in certain biotech stocks.
Another ETF I like is the iShares Dow Jones US Technology [IYW], which includes a lot of technology companies such as Microsoft [MSFT]. I am particularly bullish on natural gas, which we are going to use more extensively, and the price has come down. In looking for natural gas, oil and oil-service companies are going to continue to show very good earnings improvement in a difficult earnings environment. I feel that coal stocks will represent good value. If you can clean coal up, you can use more of it, so I am optimistic that the price of coal is going to stay firm, and the companies there are attractive.
You are positive on Brazil but not Japan. Why is that?
I am worried that Japan is in the mature— economy area along with the United States and Europe. So [while] I'd love to love Japan, because it's the one market that hasn't performed. I just don't see it, and I still see the economy there struggling.
What about China and India?
I am positive on them. I was negative on them at the beginning of the year, but they've corrected and they are now becoming attractive.
Do you see opportunities in fixed income?
I am not particularly bullish on the bond market. I'm on a number of investment committees, and I have de-emphasized fixed-income securities and emphasized alternative investments, because in the slow-growth environment for Europe and the United States, it's going to be a difficult way to make money. From these levels, I think equities will outperform bonds, and alternative investments, such as hedge funds, will outperform traditional long-only investments.
What do you see for the rest of this year and into '09?
One of the things I am worried about is that the problems in the financial system are deeper than I think they are, and that the recession turns out to be worse than I expected and the recovery turns out to be disappointing. In other words, the excesses that the United States built up were enormous. I tend to be an optimist, so maybe I assume they could be unwound more gradually than they can be, and maybe there will be a more precipitous decline— a sort of convulsion is necessary. That's one worry.
The other stems from the notional value of derivatives, which is enormous, and it is a threat to the system. It was considered a threat to the system as far back as the crash of 1987, and nothing bad has happened. But the fact that nothing bad has happened doesn't mean that something bad won't happen.
ߧ
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
I dont know what to make of the economy but I see thousands of high paying jobs posted on employment sites, this is a great barometer...
ReplyDeletewww.indeed.com (keyword)
www.simplyhired.com (keyword)
www.realmatch.com (matching)
Lots of $150k jobs!