Interview with Bernie Schaeffer

02/07/2003 12:00 am EST

Focus:

Thom Calandra

Editor, The Calandra Report

"By three methods we may learn wisdom," Confucius said. "First, by reflection; second, by imitation; and third by experience." And the application of all three could be seen in the work of Bernie Schaeffer, whose financial wisdom has placed him among the most respected and popular advisors in the nation. Through a three-pronged approach--fundamental, technical, and sentiment analysis--he has developed an enviable track record of successful forecasting. Here, we look at his current "contrary" outlook.

Bernie Schaeffer was recently interviewed by Thom Calandra at CBS Marketwatch.com: Says Thom, "I asked Bernie, a longtime market analyst and student of market psychology, what investors might glean from headlines that followed the Columbia space shuttle disaster that left seven astronauts dead. 'A tragedy, without a doubt,' says Schaeffer. 'But if we as a nation are going to go into paroxysms of nationally televised, 24-by-seven grief over the death of American astronauts, how might it be should scores of our soldiers come home from a Middle East war in body bags? And if a 17-year-old boy sniper and his accomplice could effectively grind the DC suburbs into a fearful paralysis, how might it be should we experience multiple acts of terror on American soil?' Schaeffer in the past 18 months has been increasingly confident that gold, the polar opposite of stocks, will stage a lasting rally. 'What I find interesting,' he says, 'is the fact that weakness in the dollar and strength in commodity prices is hurting bonds more than stocks. This supports the general theory that if in fact the reflation efforts now under way by the powers that be--the Federal Reserve and other central banks-- are successful, the result will be unambiguously bearish for bonds, unambiguously bullish for gold, and just plain ambiguous for stocks.'

In a separate special report for CBS Marketwatch's monthly newsletter, Trading Strategies, Schaeffer adds, "Investors believe that the core of their funds should be in 'safe' sectors. But I believe the conventional wisdom is once again going to be turned on its head in 2003. What is considered 'safe'--large-cap non-tech--is actually most vulnerable to being decimated on the next major market downleg. And what is considered "risky"--small/mid-cap tech and gold shares-- is actually much safer than it appears. Why do I see these safe havens as carrying so much risk?

1. Big money has already flocked to these stocks as it fled the plunging techs and telcos and other erstwhile popular imploding acts such as Enron, Tyco, and AOL Time Warner. The current weighting of the financial sector in the S&P is more than 20%, an all-time high. And three drug/medical names--Pfizer, Johnson & Johnson, and Merck-- are among the top ten market capitalizations in the S&P 500. With the big money already in, there is little new money available to drive these stocks higher. At the first sign of serious trouble in the stock market it will be these mega-cap safe havens that the big boys will be looking to sell to raise cash.

2. Bear markets ultimately take no prisoners, though like a rampaging tornado they can leave certain areas of the market relatively unscathed. But by the time the bear has run its course, no stocks or sectors escape devastating declines.

3. It is very important to put on your contrarian hat when reviewing the year-ahead forecasts of the 'experts'. Remember the tech revolution that was to power these stocks forever higher? The same suspects who are now advising you to play it safe in pharma and in financials bought this 'blue sky' tech story at the top. Will they be any more accurate in their current assessment of the opportunities and risks?

"Why do I like small/mid-cap tech and gold shares?

1. In the case of small/mid-cap tech, so much price damage has been done and current market capitalizations are so modest that any sign of improving fortunes can rally these stocks sharply. 2. The gold shares get no respect on Wall Street or on Main Street, despite being the best performing sector for each of the past two years. One of the best performing gold names-- Goldcorp (GG NYSE)--has been downgraded four separate times since December, and collectively Wall Street's 'Hold' and 'Sell' recommendations on the leading gold stocks outnumber their 'Buy' recommendations. And the percentage of assets held by Fidelity sector fund investors in the Select Gold fund is at no better than middling levels historically.

3.Contrarians should be strongly attracted to erstwhile weak sectors that have reached the 'fear and loathing' point (small/mid-cap tech) and to strong sectors that have not yet excited traditional investors (gold)."

Finally, here are some specific trading opportunities from Schaeffer:

"Cerner (CERN NASDAQ) designs and markets information technology and content solutions for healthcare organizations and consumers. The company has been on an earnings hot streak recently, meeting or exceeding the consensus estimate for the past six quarters. The firm has grown 24% over the past five years. CERN expects to see growth of 29% for 2003 vs. 18% for its industry peers. These statistics are impressive amid the backdrop of a sluggish economy. It's encouraging to see corporate insiders believing in the company. Since August, there have been 19 insider transactions on CERN and 17 have been purchases. I also like the fact that short interest continues to climb on the shares, increasing about 170% since January 2002. Traders should target a move to 41.10 with a stop-loss on a close below 36.20.

"Computer Sciences (CSC NYSE) reported fiscal third-quarter results that beat Wall Street's estimate by a penny per share and said its fourth-quarter forecast is in line with Wall Street's view. The company said it sees fourth-quarter earnings (ending in March) to be in the mid-90 cents range compared to Wall Street's estimate of 95 cents per share. The strong earnings and outlook aren't the only drivers behind this bullish recommendation. Options players were looking for a negative view from one of the world's leading information technology consulting firms. The combination of positive earnings and growing pessimism should lift CSC higher. Traders should target a move to 35.50 with a stop-loss on a trade below 30."

N* Bernie Schaeffer was recently interviewed by Thom Calandra at CBS Marketwatch.com: Says Thom, "I asked Bernie, a longtime market analyst and student of market psychology, what investors might glean from headlines that followed the Columbia space shuttle disaster that left seven astronauts dead. 'A tragedy, without a doubt,' says Schaeffer. 'But if we as a nation are going to go into paroxysms of nationally televised, 24-by-seven grief over the death of American astronauts, how might it be should scores of our soldiers come home from a Middle East war in body bags? And if a 17-year-old boy sniper and his accomplice could effectively grind the DC suburbs into a fearful paralysis, how might it be should we experience multiple acts of terror on American soil?' Schaeffer in the past 18 months has been increasingly confident that gold, the polar opposite of stocks, will stage a lasting rally. 'What I find interesting,' he says, 'is the fact that weakness in the dollar and strength in commodity prices is hurting bonds more than stocks. This supports the general theory that if in fact the reflation efforts now under way by the powers that be--the Federal Reserve and other central banks-- are successful, the result will be unambiguously bearish for bonds, unambiguously bullish for gold, and just plain ambiguous for stocks.'

In a separate special report for CBS Marketwatch's monthly newsletter, Trading Strategies, adds, "Investors believe that  core of their funds should be in 'safe' sectors. But I believe the conventional wisdom is once again going to be turned on its head in 2003. What is considered 'safe'--large-cap non-tech--is actually most vulnerable to being decimated on the next major market downleg. And what is considered "risky"--small/mid-cap tech and gold shares-- is actually much safer than it appears. Why do I see these safe havens as carrying so much risk?

1. Big money has already flocked to these stocks as it fled the plunging techs and telcos and other erstwhile popular imploding acts such as Enron, Tyco, and AOL Time Warner. The current weighting of the financial sector in the S&P is more than 20%, an all-time high. And three drug/medical names--Pfizer, Johnson & Johnson, and Merck-- are among the top market capitalizations in the S&P 500. With the big money already in, there is little new money available to drive these stocks higher. At the first sign of serious trouble in the stock market it will be these mega-cap safe havens that the big boys will be looking to sell to raise cash.

2. Bear markets ultimately take no prisoners, though like a rampaging tornado they can leave certain areas of the market relatively unscathed. But by the time the bear has run its course, no stocks or sectors escape devastating declines.

3. It is very important to put on your contrarian hat when reviewing the year-ahead forecasts of the 'experts'. Remember the tech revolution that was to power these stocks forever higher? The same suspects who are now advising you to play it safe in pharma and in financials bought this 'blue sky' tech story at the top. Will they be any more accurate in their current assessment of the opportunities and risks?

"Why do I like small/mid-cap tech and gold shares?

1. In the case of small/mid-cap tech, so much price damage has been done and current market capitalizations are so modest that any sign of improving fortunes can rally these stocks sharply. 2. The gold shares get no respect on Wall Street or on Main Street, despite being the best performing sector for each of the past two years. One of the best performing gold names-- Goldcorp (GG NYSE)--has been downgraded four separate times since December, and collectively Wall Street's 'Hold' and 'Sell' recommendations on the leading gold stocks outnumber their 'Buy' recommendations. And the percentage of assets held by Fidelity sector fund investors in the Select Gold fund is at no better than middling levels historically.

3.Contrarians should be strongly attracted to erstwhile weak sectors that have reached the 'fear and loathing' point (small/mid-cap tech) and to strong sectors that have not yet excited traditional investors (gold)."

Finally, here are some specific trading opportunities from Schaeffer:

"Cerner (CERN NASDAQ) designs and markets information technology and content solutions for healthcare organizations and consumers. The company has been on an earnings hot streak recently, meeting or exceeding the consensus estimate for the past six quarters. The firm has grown 24% over the past five years. CERN expects to see growth of 29% for 2003 vs. 18% for its industry peers. These statistics are impressive amid the backdrop of a sluggish economy. It's encouraging to see corporate insiders believing in the company. Since August, there have been 19 insider transactions on CERN and 17 have been purchases. I also like the fact that short interest continues to climb on the shares, increasing about 170% since January 2002. Traders should target a move to 41.10 with a stop-loss on a close below 36.20.

"Computer Sciences (CSC NYSE) reported fiscal third-quarter results that beat Wall Street's estimate by a penny per share and said its fourth-quarter forecast is in line with Wall Street's view. The company said it sees fourth-quarter earnings (ending in March) to be in the mid-90 cents range compared to Wall Street's estimate of 95 cents per share. The strong earnings and outlook aren't the only drivers behind this bullish recommendation. Options players were looking for a negative view from one of the world's leading information technology consulting firms. The combination of positive earnings and growing pessimism should lift CSC higher. Traders should target a move to 35.50 with a stop-loss on a trade below 30."

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