A View From Holland...
06/30/2006 12:00 am EST
Michael Holland, chairman of Holland & Co., sees reasons for near-term caution, but remains optimistic on long-term outlook. Here, he highlights some of the reasons behind his long-term bullishness.
“I think global growth is actually going to continue much like it is today with the US slowing down somewhat and other parts of the world picking up. We have more people grubbing for money around the world today than ever before in the history of the world. And as people try to compete worldwide with their products and services, I think it's possible that the continuing pressure that we've seen on commodity prices will continue to be more than offset by the global competition. So I think that the surprises could continue to be that the concerns about inflation have been overblown.
“A couple of years from now, the global growth will have continued apace, although with a different mix. And, having said that, now I'll take off my Pollyanna hat and say 1987 may not be a bad precursor for lowest quality, highest risk stocks. What I'm trying to say is that it's possible we could get a wreck in the capital markets of some sort. It’s the risk that's not been priced into the equity markets that may be more significant.
“And the reason I say that is that the junk bond market has been a conundrum for most of us veterans. Why should crummy companies have such incredibly small yield spreads between Treasuries and themselves? Well, you say there's just too much money in the world. That's what I've been saying for years. But someday the reckoning will come. Well, you know what? Fortunes have improved. The leverage has been reduced and there's a tremendous amount of capital out there that will go into these areas.
“In addition, their fundamentals have gotten better over time. Now that could change. But if global growth continues I think the bigger risk would be in junk stocks, not junk bonds. If that happens, you could have a major decline in relative multiples and relative prices in the stock market. Going along with that, you have one other piece that's really significant, but it could be just accidental.
“Meanwhile, in our lifetime, every time we've had a change in the chairmanship of the Federal Reserve, we've had an unfortunate disaster. Just go back to the last two. When Paul Volcker took over, short-term interest rates went into the stratosphere and we had one of the worst economic outcomes ever in the stock market. Then we had the major stock market debacle in '87 when Greenspan came on. So I am prepared.
“Okay, what about your money? I'm actually prepared to lose some money here, but I think it's possible that we could have an economic backdrop that will actually be okay. We could have an inflation backdrop that could be okay. Yes, we could actually lose some money for a short period of time. But I don't think it's going to be fatal.
“Back in 1995 when I started Holland & Co., I bought Disney (DIS NYSE) and Pfizer (PFE NYSE). I later sold Disney but bought it back again several years ago when Robert Iger looked like he was going to step in. I think that it is a very good global economic play, and I think he's going to continue to do things right. Pfizer and Johnson & Johnson (JNJ NYSE) are also in this global category. Those are easy ones because they've been beaten up so badly by so many different quarters over the last several years.
“But over the next few years they may be very interesting places to have some money. A name from the past, 3M (MMM NYSE), continues to be a large holding. As opposed to other things I own, like Microsoft (MSFT NASDAQ) or Google (GOOG NASDAQ), 3M has no one shooting at it. They have 40,000 things out there. You can't shoot at 40,000 things, so there's no regulator in any part of the world shooting at them. They do things so well. It's again, a kind of a no-brainer for me.
“Take a company like Varian Medical Systems (VAR NYSE). They provide cures for cancer. They earn a lot of money and they continue to earn a lot. I don't care if the stock goes down 15% or 25%. I will probably buy a little bit more. Finishing up, look at sector funds, the ETFs like the StreetTRACKS Gold Shares (GLD NYSE) versus the other commodities like oil, or copper.
“When you look at the relationship between those two commodities and gold over our whole lifetime, something's out of whack. Either oil and copper have to come down, or gold should go up. Probably something in between. But I think the idea of having a little bit of the gold ETF today probably makes some sense, which is totally counterintuitive to everything else I've said.
“Meanwhile, if you look at just natural gas versus oil, either natural gas is out of whack or oil is out of whack. I think oil is overpriced. But having said that, I am a long-term investor in the three—gold, oil, and gas. For instance, I think ConocoPhillips (COP NYSE) is one of the cheapest stocks out there. It may get cheaper, but I think it's a really cheap stock.”