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An Eye on Eisen
07/22/2005 12:00 am EST
"Harvey Eisen, chairman of Bedford Oak Partners, is one of the most successful investors around," notes Lou Dobbs. "He was the first person I asked to join The Lou Dobbs Money Letter as an investment advisor." Here are excerpts from his recent interview.
Lou Dobbs:Now that we’re at the mid-year point, what do you see up ahead for the market?
Harvey Eisen:I find this to be one of the more confusing times I have ever seen. Oil continues to rise. And the Federal Reserve, which I consider to be the most important thing in the economic equation, is continuing to raise interests rates. However, consensus is saying the Fed is close to stopping rate hikes. That is a positive. If oil stopped going up this year, that would also be a positive. The real question is what happens to the ten-year bond. If the ten-year stays around 4% and the curve inverts, that implies a negative outlook for the economy. And that hurts corporate earnings. If the yield curve inverts, I think that is a negative for the economy. Then there’s the housing market, where I think everybody is walking the plank. For the housing market it’s only a question of when, not if.
Since you brought up housing, I'd mention that a home in New York just sold for $90 million. What do you think of that?
"When you look at the world today and you look at the form of financing that’s taking place, you have the recipe for the ultimate real estate speculative bubble. People are buying second homes and third homes; people are buying homes to flip, not to live in; people are buying homes with interest-only loans so they could become upside down very quickly with no equity value. And the bottom line is that it is a question of when, not if. To debate it everyday as the media does is an exercise in futility because it will happen when it happens. From my point of view, the outcome is a hell of a lot clearer than the timing. I think the #1 thing that always drives the markets is the level of interest rates. Alan Greenspan in 1996 talked about the irrational exuberance in the stock market, and it took several years for the market to crack. Similarly, housing can continue. Oil can continue. That doesn’t make it right. It just means that it’s currently happening. And therefore it is accepted as the norm.
If interest rates are a key factor, how far do you think the Fed will go?
"Remember, Greenspan is retiring in January, and I think he would like to go out on a high note. The other thing is that Pete McTier, who is no longer on the Fed board but still widely interviewed, has publicly said on numerous occasions that Greenspan recognizes that in the past he has tightened too much, that he has overdone it. So my guess is that 3.5% is a minimum, and there is a very good chance that Greenspan might stop there.
What sectors do you see doing particularly well or struggling right now?
"I see a split market where energy has been vertical and been a great performer. Housing has been vertical and been a great performer. Materials, until recently, have gone up a lot. So I see those areas as overvalued and very high-risk. From my point of view, those are sell candidates. On the other side of the coin, I think there are areas that have not performed. They represent very good value but nobody wants to buy them. I think that the big pharmaceuticals companies are extraordinarily cheap.
"Abbott Labs (ABT NYSE) is one of the better of the pharmaceuticals. Healthcare, to me, based on the demographics is as about as simple a bull case you can have. If you are really looking for long-term, quality names Abbott Labs is at the top of that list. Ivax (IVX AMEX) is a good company with good management, and it’s had a great run-up. It got recommended recently by Smith Barney. Basically it is a company that continues to deliver—and it’s in the healthcare space that I like. It’s in the generic drugs space, which I think is one of the real solutions to the whole issue of cost containment in medicine.
Since we focus on long-term investing, let’s go over the rest of your stocks.
"American International Group (AIG NYSE) is a controversial stock. That’s the bad news. The good news is that I think the people involved in today are very high-quality people, and I think they will get this thing straightened out. The stock is at what appears to be roughly ten times earnings. So I think AIG is a hold for longer-term, patient people, or even a buy if you have the stomach for that kind of controversy. You’ve got to have patience, and you’ve got to be able to wait atleast six months, probably a year. But I think in that time the stock could easily trade for something approaching a market multiple 15 to 17 times earnings, and that gets you into the mid-$70s. But it’s going to be slow.
"Berkshire Hathaway (BRK.B NYSE) to me is still about Warren Buffett. As far as fallout from General Re/AIG, I don’t know. Clearly the stock’s been tainted. And there is also always the risk of Warren Buffett himself, because he gets older every day. But the valuation is compelling, and I still say it’s a long-term stock.JP Morgan (JPM NYSE) is my favorite in the financial group for the simple reason that I worked with Jamie Dimon for ten years, and he is running the firm. And I think there is tremendous upside leverage at JP Morgan from restructuring and cost-savings. It is my favorite financial stock. Citigroup (C NYSE) is cheap right now. Again, it’s a stock with a low market multiple and high yield, so it’s in good shape. I also think Coca-Cola (KO NYSE) is cheap; I think it’s out of favor. It is a world-class brand name, and I think things are getting better there. And it also happens to be a major holding of Mr. Buffett’s. That is worth noting.
"Wal-Mart (WMT NYSE), to me, is almost beyond comprehension. All it does is go down and all the other retailers go up. To me, Wal-Mart is in a class to itself, which means it’s the worst-performing stock. The valuation today is cheaper than I’ve ever seen it. But earnings continue to grow. They are expanding abroad. They are by far and away the best major retail operation that I know of. I mean, you just can’t even compare these things to the other retailers that have been mediocre companies and great stocks. You can go buy stocks on the new high list like Sears, and JC Penny, and Target. Or you can buy Wal-Mart on the new low list. To me that’s the best play. It just doesn’t get better. Last time I checked, one out of every $10 spent in America is at a Wal-Mart. It is amazing to me what you can buy today that is out of favor. That’s my message to your readers.
That’s a great story, Harvey. I look forward to hearing more of it next time we get together.
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