Special Edition
secular bear and secular bear markets tend to last a long period of time. if we’re in a secular bear market , it’s going to make it difficult to make money on the long side. some points that were made before about, yes, can this go on for another year or two because the monetary combination that’s going on, yes, it’s possible. however, if we’re right and this is just a rally inside a secular bear market , you’re going to have to be a lot more cautious. we think that debt levels, the falling dollar are major problems that this market ‘s about ready to turn over, therefore, technology especially is very highly priced because the most exuberant, the most speculative names have gone up the most, and those are the most highly priced names. growth has been great in some areas, however, in p.c.’s, it’s starting to slow down. memory prices are rolling over. we’d be wary about technology stocks.
>> how much do you think technology as a whole will turn over?
>> technology stocks could easily fall in our opinion 60%, 70% from these levels.
>> in what time frame?
>> over the next 12 months.
>> now, a lot of people may have had that view a couple months ago saying every time we saw a rally, technology was due to fall, it has not as of yet. what makes you think that now is the time?
>> you know, timing is of course difficult. we’ve had an extreme accommodation from the financial system with massive amounts of debt that’s being created. if you go to the website of country wide funding, you can see you can borrow money at 0% down, you can borrow money at an adjustable rate mortgage and fix your payments so even if rates go up, you can continue to pay the same payment.
>> can i just say, of course there are very low interest rates and that has really helped put cash back in the hands of the consumer over the last year or so, and really we have to give a lot of credit to the recovery for that. that being said, the whole point was to try to get the consumer to stay on his or her feet until capital spending started to pick up, which it has. you just can’t―you can’t deny that we have an economic recovery underway. it’s been going on since last march, and it has not started to fade at this point. certainly, if you want to say at some point it will fade, at some point it always fades. but we still have stimulus coming, companies are starting to spend more, hiring is starting to pick up just at the margin. so, i would say for an individual investor, perhaps try not to look at being scared of the market as a whole and look at individual companies, think about buying companies selling for 12, 13, 14, 15 times earnings and that have a dividend yield with the dividend tax yield down to 15%, you keep 85% of the dividend. if you have a few percent earned on the dividend in your investment, you’re paid to wait until the company price appreciation picks up.
>> i think part of david’s idea, barbara, is that if we see the overall consumer roll over because of high debt levels, less money as a whole may come into this market , and no matter how undervalued a company is, if inflows into stocks slow down, isn’t that going to be a negative?
>> nobody rolls over because of high debt levels. it’s like our own debt problems don’t cause anything. they become a problem as the economy turns down, for example, if we have a high debt level it becomes a problem if i lose my job, but high debt levels don’t cause anything to turn over. they’re a problem down the road when the economy turns down, but right now there’s no indication that the consumers should turn over. as we say, hiring is starting to pick up. companies are starting to improve spending. those are the facts. that’s in the economic statistics, so certainly a year from now we can worry about things rolling over and turning down, but that’s not happening today. if i were an investor i would feel comfortable putting money into the market . there are a whole host of companies selling at decent multiples and slightly depressed earnings and pay good dividends.
>> go ahead, david.
>> if i could agree with one of barbara’s points and disagree with another one, i would agree for the individual investor if you’re buying stocks at 12 and 13 times earnings with dividend yields, you’re far better off than buying speculative stocks. i would encourage him to look at that and look at the underlying source of those earnings and how cyclical the company is and how dependent it is on the economy. if you’re talking about a housing stock that’s selling at eight times earnings, i think that’s very dangerous. but i would generally concur with buying low p/e stocks with dividend yields if you have stable earnings space. where i’d like to disagree with barbara, we all know the market discounts the future, and you can’t just look at the next two or three months ahead in the economy and say the market is safe for the next nine months, because the market is always going to look forward, and we see the potential for higher interest rates, this massive decline in the dollar that’s ahead of us, and --
>> when do you think rates will rise, david?
>> it’s very likely they go up over the next three to six months.
>> by how much?
>> i’d say 100 basis points.
>> 1%. would you agree, michael?
>> something interesting about interest rates, everybody has been waiting for the rise in interest rates, and i think most investors, bond investors, have shortened the duration of their bond portfolios in anticipation of an increase in interest rates. i believe interest rates, being that they’re at 40-year lows now, they’re more likely to rise than fall over the next few months or couple of years or so. but i think it’s important to distinguish the fact that we’re not back in 1994, for example, where the fed raised interest rates six times and bond yields backed up 200 basis points. what we’re probably going to have is maybe two or three interest rate hikes over the next few quarters and a fed funds rate at 1.5% to 2%, which would still will stimulative.
>> you can have a rise in interest rates and still have a moderately low interest rate environment, which is what i think can happen over the next one or two years. certainly, alan greenspan has signaled that rates will rise by year end, but oddly enough, they haven’t yet. it’s interesting that they haven’t.
>> maybe we’ll talk more about interest rates when we come back. we’ll talk about gold, the fall of the dollar, and where you need to be putting your money.
