Kangas: An Interview with Bernie

12/05/2003 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Paul Kangas, host of Nightly Business Report, is one of the most popular figures in the financial media. Each week, his show features a "market monitor" and the latest guest was options expert, Bernie Schaeffer. Here are excerpts from the show.

PAUL KANGAS: My guest 'market monitor' is Bernie Schaeffer, chairman and CEO of Schaeffer's Investment Research and publisher of the popular monthly newsletter The Option Advisor. Welcome back to Nightly Business Report,  Bernie; good to see you.

BERNIE SCHAEFFER : Great to be here, Paul.

KANGAS: I noticed that in your December newsletter, you were of the opinion that the US stock market is losing its upward momentum with each rally, losing the fire power that the previous one had. Are you thinking that this market is in for a very serious downturn?

SCHAEFFER: I think this market is vulnerable to a very serious downturn. From a technical standpoint, we've rallied to some very significant resistance levels on the Dow and on the S&P.

KANGAS: And haven't gotten through them?

SCHAEFFER: We haven't been able to retrace, for example, halfway between the highs that we reached in 2000 and the lows that we reached in 2002. That's a very important demarcation point and we keep going up to that 1065 level on the S&P 500 and we keep pulling back from there. I'm also concerned bull markets tend to climb a wall of worry. I am seeing some complacency out there. We have seen four bulls on four separate magazine covers over the past six months. That's at least a yellow flashing light- if not a red light.

KANGAS: Okay. But the fundamentals look very good, but you are not that concerned about fundamentals when you see this kind of a chart pattern.

SCHAEFFER: Well, the fundamentals look good. Then again, we have got to have some pretty healthy earnings growth next year in order to justify the valuations where we are. We have got dollar that's weakening seriously here. And that's a concern.

KANGAS: What does that mean? How important is that weak dollar?

SCHAEFFER: Well, I think it can be very important because the Fed is so concerned about keeping interest rates low. And the Fed has a certain amount of control over that. But if the dollar decline should get out of hand, it could ratchet up inflation, and we might be forced to raise our rates just to stabilize the dollar, and that could jeopardize the economic recovery.

KANGAS: Well, this in combination with gold hitting $400 an ounce. What does that mean to you?

SCHAEFFER: I think we're coming out of a 20-year decline.

KANGAS: A bear market, yes?

SCHAEFFER: Yes, in the real assets part of equation, which coincided with a 20-year rally in financial assets. I think we're starting to reverse that polarity. And I think hard assets are going to be the place to be for a while, and financial assets are, again, vulnerable. Both stocks and bonds.

KANGAS: On your last visit with us in July you had several recommendations. Of course, you play the calls and the puts, the option market. You liked the idea of buying a call on Ford Motor (F NYSE).

SCHAEFFER: It was a six-month call option, I believe.

KANGAS: Well, you had another recommendation on the sell side or the put option side, and that was General Electric (GE NYSE), which is about even with where it was. Now that was an 18-month put option that you were recommending.

SCHAEFFER: Correct.

KANGAS: So that has yet to be decided.

SCHAEFFER: The jury is still out.

KANGAS: All right. Let's have a look at some new recommendations that you might have. What do you like?

SCHAEFFER: Well, I continue to like Ford. If you're going to own a stock, I say, own Ford here.

KANGAS: And buy the calls at this level.

SCHAEFFER: I would go for a six-month call on Ford from here, which would cost about 10% of the price of the stock.  I also remain bullish on tech. I think tech continues to be where the opportunity is. Research In Motion (RIMM NASDAQ), the Blackberry device manufacturer blowing out earnings, performing at three times the level of the NASDAQ. If you want to be in tech, that's the stock to own, with a 15% premium on a six-month call option.

KANGAS: All right. It has had a good ride. But you say more is coming. And a gold stock, Newmont Mining (NEM NYSE). You like the call on that?

SCHAEFFER: I think if you are going to be in stocks, you have to have a portion of your assets in gold stocks. And we talked about that swing from financial assets to hard assets. With Newmont Mining options, I go out a year and I will pay about 10% up for call. I would note that I own all these stocks that I mention. 

KANGAS: OK. What do you like on the put side?

SCHAEFFER: On the put side, I'm going to stick with GE, a one-year put. I own one-year puts on GE. I think the blue-chip area is where the greatest vulnerability is. GE has a $200 billion-plus market cap. It's going to have trouble growing to justify its market valuation.

KANGAS: All right. Thanks very much for being with us. My guest, Bernie Schaeffer."

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