If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Transcript of On-Demand Webcast: What's Ahead for Stocks, Bonds, and the Economy
02/19/2009 3:31 pm EST
ABOUT THE SPEAKER
Edwin Finn is the editor and president of Barron's, the Dow Jones business and financial weekly, and the chairman and editorial director of SmartMoney, The Wall Street Journal magazine of personal business which is co-owned by Dow Jones & Company and Hearst Communications, Inc. He also oversees SmartMoney.com and SmartMoney Custom Solutions, a custom publishing operation. Mr. Finn joined Dow Jones as a national copyreader for The Wall Street Journal in 1980, then moved to the foreign desk as editor, then to the Dallas bureau as a banking and finance reporter. He left to join Forbes as a senior editor, covering international business and finance, and later became an assistant managing editor. From 1990 to 1992, Mr. Finn was the editor of American Banker, a daily trade newspaper. He re-joined Dow Jones in 1993 as the managing editor of Barron's and was named editor of the magazine in 1995. Mr. Finn assumed additional responsibilities as the president of Barron's in 1998, and also served as the magazine's publisher for a year in 2000. He earned a Bachelor's degree in English and political science from Tufts University and a Master's degree in international banking and finance from Columbia University's School of International and Public Affairs.
Edwin Finn, Editor and President, Barron's; Chairman and Editorial Director, SmartMoney
Thank you very much, Charles and it's a pleasure to be here with you and Kim and all the folks from the MoneyShow. I think we are, we have become family over the years from [Bob McTeer] down to my years coming here. I should also mention that Jason Zweig and Howard Golden all worked together at Forbes Magazine 20 years ago, so it's old home week around here, and it was great to hear their presentations.
All right Charles, that we've made some calls in Barron's. We've had a pretty good year this year. We called the bubble in oil at about $45 about last June. We said the dollar was going to strengthen last April and we're proud of that story.
The Maddoff story would have made us prouder if something happened about it. We certainly laid it in the SEC's laps, but the main reason I mention those stories is that we don't always get them right. We like GM at $17 so we're not infallible. But those of you know us, who read us, know that. But we try and we do actually, we do account for all the stories we write about, and we have a pretty good record of beating the market over the last five to six years.
But the important thing that people look for in us is a different viewpoint. I think the saying goes, "We're not always right but we're never unsure of ourselves."
What we try to do is make an intelligent argument that's not in the marketplace. We're trying to look for contrarian information, and today what I would share with you is some optimism, and there's not a lot of that around.
We do have to take a breath. It is the worst of any market I've seen in my 32 years of covering the markets and it's been tough. I congratulate all of you for being here and staying interested and I think it's incredibly important to do so. I think a lot of investors who just got involved in the last couple of years have given up on the market. I think that's a huge mistake.
Our feeling is that job losses which you saw reported today for January will continue at a heavy rate but will abate somewhat over the few months. We think the economy will probably turn somewhere between the middle of the year and year end, and stocks as most of you know, turn up three to six months before the economy. The stock market is a leading indicator.
We recently did a cover story and went back and tracked all the swoons in the stock markets and the recoveries and related them to economic activity and usually it was three to six months, and so I would expect that to happen again.
The key variable here is Washington, D.C. How is that policy going to be played out and I'll talk about that in more detail later. I'm going to try to keep my remarks short to about ten, twelve minutes or so, so we can have time for questions. I gather the format is for people to come up to the microphones and ask questions, but I can try to hear you from abroad if that's what we have to do, but try to think of questions over the next ten minutes or so and it can be on something I've talked about or something I haven't talked about. Anything you want to ask me is fine with me.
One call we are proud of this year is we called a bottom, not the bottom, but a bottom on October 10, and the reason I bring it up is not to talk about Barron's, but you've seen the DOW sort of bounce around that level of 8,000. We haven't gone below it.
There are a lot of people on Wall Street who think stocks are going to be down 50% from here which is a pretty frightening thought to refer to Jason's, my brain is definitely - gets very hot when I think about that idea. But I think also, some of the brains that are predicting it are quite hot. This is the toughest recession on Wall Street that we've seen in my lifetime, where we're looking at more than 100,000 job losses.
And I remember interviewing John Templeton down in the Bahamas, and I said, "Why are you down here?" And I suspected it was for tax reasons, but he wasn't going to say that.
But what he did say as many other successful investors say, whether it's a state of mind or geographical difference, it really helps to be away from the herd. It helps to think independently, and that's what we try to do, what we try to get our readers to do and has been very successful for investors and the mentality on Wall Street now is bad.
We think that real estate prices will go down a lot. You're going to see a lot of Wall Street jobs lost and a lot of jobs lost of people that depend on those Wall Street people. That's going to be very tough on New York. There's not going to be a lot of violin music. I think people are not too pleased with Wall Street at the moment which is understandable.
But the reason I bring it up is I don't see stocks sliding 50% from here. There are lot of good values when you look around and if you're a long term investor you see great stocks trading at seven, eight, nine, ten, twelve times earnings.
As Charles mentioned, we talked about oil stocks recently. I can't tell you that oil prices won't dip below $30, but I can tell you that we think they're probably going to end up somewhere in the $50 to $70 range over the next five years and a lot of these oil companies, you get paid 5% to 6%, to 7% dividends to wait. And dividends are very important in this market.
That's a major change. The dividend rate as most of you know is now up to 3% down from about 1% during most of the past 15 years, 1% or 2%, and so that's going to be an important component, because when this market comes back, we don't expect it to jump up 15%. I would agree with Jason. I don't think we're going to 14.5% over night. It may take years and years. And so in that environment where appreciation is 5% or 10%, perhaps even less some years, that dividend becomes very important.
Of course the other thing to analyze if you're picking stocks on your own is, how safe is that dividend? What's the coverage ratio? How much earnings does that company have to cover that dividend and when is it going to be cut? In the current environment, that's something to keep a very close eye on.
I think many of you will invest through funds where you rely on others to keep an eye on that, but dividends is part of this market. In fact, we think that the perfect portfolio for this market is very different from what the perfect portfolio has been over the last 15 years or so.
One difference is there will be more dividend stocks. One difference is that there will be more bonds, particularly corporate bonds. As Charles mentioned, we wrote a story just at the first of the year saying, asking the question whether Treasuries were safe. They're safe in the sense that you'll get your principal back at the end but if you buy Treasuries any time in the last few months, long term Treasuries and you decide to hold on to them, you run the risk that you're going to get sub-par returns when inflation comes back and rates move back up.
And you can see the big divergence. Obviously a big part of the flight to Treasuries was a flight to quality. People just didn't want to lose the money. And there are some great corporate bonds out there yielding 5%, 6%, 7%. Again, you may want to rely on a fund to determine which corporate bonds are safe credits, but you've seen a move just since we wrote that story, much more into corporate bonds as a way of not only getting some improvement, but getting that sure yield; the sure yield on the bonds, the sure yield on dividends.
The other thing that's different about portfolios now is, you've seen people talk about gold. Private banks and individual advisors have talked about gold. And the reason is, right now we are certainly in a very bad recession, almost a depression you would say.
I think the government spending will have an affect. The economy will come back and when it does, you're going to see probably much higher rates, a lower value on the dollar and inflation, and that's the time you do want to have some gold and have that bent and are worried about that. It could be gold. It could be gold stocks.
We've done stories in Smart Money and Barron's about that, you can look them up on the net. How to buy gold is a whole separate topic but gold has emerged as a legitimate of people's portfolios in my estimation really over the last couple of years because of the inflation that could lie down the road.
Foreign stocks, as most of you know who come to this conference I'm a big believer in foreign stocks. I've covered them for 20 years. The returns have been really tough the last year but what I've said at this conference in recent years when China was high; then was not the time to go into China. There will be better entry points and I think there are better entry points now.
I advise going through a fund that diversifies across Asia because you could have a problem with the government in China or the government in India or whatever country, so if you have a mix you're in good shape. I think you need exposure to the fast growing economies of Asia and I think they will be growing fast again before long.
Europe is another situation. I wouldn't rush to Europe. I think their banks are in tougher shape than our banks partly because they haven't 'fessed up to a lot of problems that they have so as a result their economies are in tougher shape. Their central banks are under more pressure. Their companies are going to have a tougher time getting credit so I would be selective about investing overseas.
And I think there are opportunities in South America. For most of my time covering international investing I've been saying South America is the country of the future and it always will be. But in fact, I would argue that the future is here for Brazil. You've seen a Socialist President elected in Brazil. Many of the other countries such as Chile have made free market changes, and I think you're going to see more legitimization of those markets and more rapid growth and I think that's something that's worth looking at.
I mentioned that Treasuries should be avoided. It doesn't mean you should sell everything you have if you bought it a few years ago and the yield is pretty good, you may want to hold onto it but you may want to look at lightening them up and I wouldn't advise people going out and buying long term Treasuries in this kind of environment.
The key thing though is diversification. Most of you are experienced investors and you know this, but a lot of the people came rushing into the market both this bull market that just ended and the one in 2002, just piled into the hottest momentum stocks. If in either of these markets you were 30%, 40%, 50% involved in bonds, particularly Treasury bonds the last time around, you would be in very good shape.
Barron's portfolio, Barron's portfolios actually did quite well in the crash of 2000 partly because they were exposed to bonds. Before I take questions, I'm just going to talk about Washington, D.C. because it's incredibly important what's happening down there.
We have a problem with our banks. They are still sitting on a lot of bad assets. We haven't solved that yet and that is the bloodstream of our economic system. The idea out there is to create a bad bank as was done here and in Japan, and that could work but we'll get details from Treasury Secretary Tim Geithner next week.
The big problem is, what does the government pay, or what does a bad bank pay for the assets? So they agree to the TARP and the governments' involved, they can't win. If they buy the assets too cheap, and they appreciate and the tax payer gets a profit, they get criticized for not helping the banks enough. And of course if they buy them too expensive and the TARP program shows a loss, they get criticized for helping the banks at the expense of the taxpayers. It's going to be a difficult situation to work out. That's something to watch very closely.
We have advanced a couple of radical ideas at Barron's. One is something that seems to be happening. The authorities seem to be buying up Treasuries, keeping rates low, and perhaps, bringing Fannie and Freddie in to do a lot more refinancing and I would suggest with rates this low, to those of you who still have mortgages, it's a time to look at getting lower rates. That could help the whole country.
But I actually think to solve the sub-prime problem, which is not what happened in Japan and not what happened in the FTC situation that I covered 20 years ago, the government may have to actually take TARP money, give it to the banks and say, "You've got to forgive, say with $100 billion that could forgive 20% of all sub-prime loans."
You're going to get huge howling from tax payers or mortgage owners saying, "Why are you helping them and not us?" Well, the reason is, the banks would then be forced to write down those securities 20 percentage points more than they've already been written down. There's a good chance you'll have trading in that market and the banks could get them off the books.
It helps the bank and their capital. It helps the individuals. It helps the economy. And I think you are going to see some effort to use TARP money directly to pay down principal of sub-prime and maybe even all day mortgages. I understand that it's not fair, but at the moment I don't see another way out of this mess, because despite the good feelings, I think there's going to have to be some change in sub-prime loans and maybe it would be extended to some credit card loans and other problems.
Things have improved since last September when we had complete gridlock in this commercial paper market, but we are still not where we need to be, so watch Washington very closely.
I am concerned about the spending bill as we had it covered in Barron's recently. We think it would be much better to spend $500 billion than $800 billion. A lot of us feel it would be better to spend nothing at all, but that's kind of an argument that you don't want to go too far down the road with because in fact, we are going to have a stimulus bill. We figured the best thing to do was get involved and make it the best stimulus bill we could, and that of course would include a lot of tax cuts.
I do think there's a need for infrastructure improvements. I do think a lot of cities and towns do need help in making their budgets and that makes sense in this environment.
That said, there are some signs that are worrisome. There was some talk about rolling back welfare reforms. One of the best things Bill Clinton did for the economy was actually push through welfare reforms that made it more difficult to not work and pushed a lot of people into the work force.
And like Tony Blair in England, a lot of times the Socialist or the Democrat can do things that a Republican or a Conservative could not do. To see that rolled back would not be a good thing. I think we have a culture of work and we want to keep it that way.
President Obama said today that we don't begrudge people their success in talking about limiting salaries on Wall Street. I think that's incredibly important. The good news as I said is that Obama seems to be governing from the middle. There was some concern he would govern from the left. If he governs from the left I don't think he will get re-elected, and obviously there would be a lot of things done that would be harmful to the stock market and the economy.
In recognizing that we don't begrudge people their success, he recognizes that personal success is what has made America great both for investors and individuals and consumers whether it's in science, in technology, entertainment or finance and I think that will continue. That's one of the things that gives us hope as investors and as citizens. And as long as we can keep that independent spirit of entrepreneurialism at the forefront and not over regulate it, I think we'll be in good shape.
So I wish you all good luck in the markets and good luck in life.
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