Kangas: An Interview with Schaeffer

01/21/2005 12:00 am EST

Focus:

In the world of financial TV journalism, Paul Kangas, anchor for the long-running Nightly Business Report, has no peer. He recently featured Bernie Schaeffer as his "Market Monitor," a weekly interview with a leading financial seer. Here are excerpts from the interview.

Paul Kangas: "My guest market monitor this week is Bernie Schaeffer, chairman of Schaeffer's Investment Research and the publisher of the popular monthly newsletter called The Option Advisor. And Bernie, welcome back to Nightly Business Report . Great to see you.

Bernie Schaeffer: Always a pleasure Paul.

Kangas: For most of this year, you have been extremely cautious about the stock market's advance, even though you’ve done well on the long side of the options market, which is your specialty. Why are you so cautious and why do you feel this market is in your own words, vulnerable?

Schaeffer: The key is that the market is vulnerable to something coming out of the blue. That’s when markets are most quiescent, so to speak, when volatility gets extremely low, when investors focus away from the risks and focus on the opportunity, which is what we’ve seen in the post-election rally.

Kangas: So it’s a combination of things like the weak dollar and the giddy growth in the economy, things like that?

Schaeffer: Growth, particularly on the earnings side, seems to be decelerating. We’re going to get into single digit growth in the first quarter of next year. The Fed is raising rates. The dollar is weakening. Gold and gold stocks are taking off. And there is the geopolitical risk that’s already out there. In the mid 1980s, the market went up, up, up, even though the dollar was declining, and even though we had trade and budget deficit problems. Then, all of a sudden, a certain breaking point was reached and the market tumbled. That’s the concern I have now and that’s why I advocate having an aggressive cash reserve.

Kangas: How much of a percentage would you hold in cash?

Schaeffer: About 25%, and even more if you are a more conservative investor. But at the same time, I still suggest pursuing opportunities that are out there in sectors that I’ve been recommending over the past year like energy, gold, utilities, and some special situations.

Kangas: When you were last with us last May, you were also very cautious but you gave us three recommendations that performed as you had forecast. Let’s go for some more big profits with some new suggestions.

Schaeffer: Sure. I got two recommendations on the call side. The first is  XM Satellite Radio (XMSR NASDAQ), which I own. I am recommending XM Satellite Radio calls going out to April of 2005.

Kangas: What's the premium percent?

Schaeffer: Currently, the premium would be about 10% of the price of the stock. The stock has been very volatile. It is up from the single digits, but still down from its all-time high of 48. I think it has a lot of appreciation potential. In particularly, I see potential for a big short covering rally.

Kangas: Okay, number two.

Schaeffer: Pixar Animation (PIXR NASDAQ) is also a special situation. This is in a dynamically growing industry. The stock also has big short interest, and offers a lot of potential for an aggressive move to the upside. I’d emphasize that this is not without downside risk. But we would use options to take advantage of that upside potential. Currently, the options on PIXR April 2005 calls are at about an 8% premium.

Kangas: Do you have a put recommendation?

Schaeffer: My biggest concern is the big-cap area, and as a subset of that, the big-cap tech stocks. Thus, I’m recommending puts on Cisco Systems (CSCO NASDAQ), in particular, the Cisco January 2006 puts. The option premiums are very low, currently only 8% for a 14-month put on Cisco.

Kangas: It’s already had quite a drop. But you think it’s going to have an even bigger drop.

Schaeffer: Yes. I think Cisco has the potential to move down to the low teens

Kangas: All right. Bernie, thanks very much for your insight."

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