Market briefing---Lane (medium)
Interview: David Tice---Prudent Bear Fund---David & Associates (slow)
>> all right. welcome back to “world financial report”. i’m lane bajardi. recapping the day on wall street dow jones industrial average, we take a look and see the chart up 40 points, 9,374, the s&p 500 up six points higher to 1,002. nasdaq composite with the largest gain of the day, up 1%, 18 points at 1800 even. one of the most actives at the big board, agere systems at the top of the list. pfizer and disney were there as low, but headed lower. shares of g.m. rose today. the auto analyst at goldman sachs upgrading his rating on the world’s largest automaker to in line from underperform, saying it’s less overvalued than ford. the analyst also raised his figure for vehicle sales here in the united states. while that was happening our next guest says the current economic environment is not conducive for general motors and is shorting the stocks or, of course, betting they will drop in value for lack of a better term. for more on that and what else he sees for the markets, david tice joins us, president of david w. ties and associates and manager of the prudent bear fund joining us from dallas this evening. glad to have you here.
>> glad to be here, lane.
>> let’s start off talking about this. g.m. in particular, why are you short g.m., what do you see that the goldman sachs analyst does not see about general motors right now? g.m., though it sells at a modest p.e. multiple and has a high dividend yield, we think you look at the earnings, more than 99% of recent second quarter earnings came from gmac, more of a finance company today than it is an auto company. over half those earnings from gmac are coming from the mortgage business. if you watch ads on tv you see die tech funding, a company recklessly extending credit to individuals for homes, and gmac is recklessly extending credit for auto finance. that’s helping keep the factories out but it’s generating very little profitability for the auto area.
>> is the profitability your main concern or is also the concerns concerning pension liabilities affecting g.m. also on your mind here.
>> certainly pension liability and healthcare benefits, and the fact that we have a multiple of retirees for every person employed there today. these are all concerns. this is still an expensive stock . we think the economy is going to be in trouble down the road. the economy is largely geared towards luxury consumption today and that’s because we have financial companies recklessly extending credit.
>> going forward, a company like g.m. with gmac, if they are forced to give zero percent financing to people and the interest rates rise, will that just continue to have an even worse effect on the bottom line there, is that your expectation, that that’s going to continue to pretty much run down the hill in that direction?
>> this economy will not do well with interest rates backing up. over the last two or three years the growth that we’ve had has largely been due to falling rate environment, people going out and refinancing their homes, taking on average $25,000 of equity outd of their homes in cash and going out and spending that money on a new car or vacation or add it on to their kitchen. unfortunately it’s unsustainable.
>> now, of course, it is your role to be a prudent bear here. at what point does becoming a bear become very very difficult, with the market the way it’s been since the beginning of this year, i can’t imagine the returns have been that great for your fund at this point, with the fact the market has risen at this point. does it still pay to be a bear here?
>> we had a great three years from 2000 to 2002. we are down this year. this is a rally inside a bear market. if you look at the japanese market from the end of ‘89 to today, it’s down from about 40,000 to 10,000. there were two more than 50% rallies. this is a rally inside a bear market. it’s been tough so far this year. we are down 11% or so year to date. however, we think it’s a respite in what’s likely to be a longer term bear market.
>> so when do you see this turn around in your favor at this point? where do you peg it, the expectation that this is going to pay off?
>> well, we are going to hate to see the market go down because we hate to see the economy go down. most of our friends and family are long stocks and long the u.s. economy. we are warning people to be prudent and careful and hedge their bets.
>> it’s going to be an economy play as opposed to an individual industry play, those places that are fundamentally overvalued in your view, you expect this to be a full market downturn once it comes?
>> yes, we expect this to be a full market downturn, a full market recession. unfortunately, we’ve depended upon credit excess to get us to where we are. we are at the latter stages of that. this is a point where the fed should be tightening. instead they are keeping rates extraordinarily low and keeping a lot of liquidity in the system. however, the excesses and imbalances are just building.
>> the economy is showing signs of strengthening. we are seeing strength in a number of indicators. what do you think of those numbers?
>> well, the economy is doing better but it’s extraordinarily imbalanced. if you look at the average loan to value for a new car today is about 97%. the average car loan is about five years. auto companies are even lending you money to pay off an old car loan and then giving you new money for a new car. if you throw enough trillions of dollars at this economy you can have a great party. however, unfortunately that’s not sustainable, healthy economic growth.
>> and you expect that to hit the bottom line of the consumers that have been keeping things above water, as far as the economy is concerned as we get through the end of the year?
>> the consumer is still very stretched. you look at f.h.a. mortgage delinquencies are nearing 12%. there are a lot of consumers out there that are deeply deeply in debt, and once refinancing activity slows down, we’ve already seen long rates back up, there is not going to be the juice for the economy that it needs.
>> david tice, thank you very much, manager of the prudent bear fund joining us with his bearish outlook. one chief investment officer says his firm has been trying to increase its stock investments in southeast asia.
