HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The Barron’s Art of Successful Investing Conference
Part I of III
Every fall I attend this conference in Manhattan, and devote several issues of the newsletter to recapping the highlights. This year, for the first time, the conference is detailed in this week’s Barron’s.
For those of you who receive Barron’s, I hope I can add some perspective. If you don’t, I trust you will find the comments of interest.
Edwin Finn
Finn is Editor and President of Barron’s.
The two crises we face at present are in Europe and the upcoming election here in 2012. Barron’s believes we will end up with a more fiscally conservative government. The average America is starting to understand our financial problems. The Republicans may gain control of the Senate.
Barron’s believes:
1) CEOs tell them their companies are in their best shape ever, costs are under control, and there is cash on the books.
2) Interest rates will remain low.
3) The resolution in Europe will be painful; several big institutions will go under.
4) There will be 2% economic growth in the US for the next 5 years.
5) They encourage investing in emerging economies.
Felix Zulauf
Barron’s Roundtable member Felix Zulauf, based in Switzerland, is one of my favorites. His macro-economic views have consistently proven accurate. Of more importance, I have made money from his insights and recommendations.
The Euro is a monster; you are trying to put together countries that don’t fit. The conflict is between the competitive, creditor countries of northern Europe and the non-competitive, debtor countries of Southern Europe. The creditors want a stable currency and the debtors want inflation (RMD comment: This is always the case; creditors want their money back, with interest; debtors want to repay with cheaper money).
Politics cannot bridge this problem in one step. There will be one quick fix after another. It will be necessary to describe what the next step will be. It is a process that will only end when there is a crisis; there must be pain. The banking system is integrated; if one country exits, it brings down all the banks; they could be wiped out in 24 hours. The periphery countries must have more austerity; this will cause a recession that finally brings in everyone. Eventually the politicians will be forced to ease (print money).
The weaker demand from the Eurozone, and a structural decrease in demand here, will weaken the US. The entire process will last 7-10 years, to about 2017.
How do you invest in this environment? It is difficult, returns will be below normal. The mistake is to assume too much risk to chase higher returns. Accept that returns will be low (RMD comment: I have been emphasizing this for the last 2 years). Trade a little in and out. It is difficult and time-consuming, but one of the few ways to make money now. Bond coupon (interest) rates are below inflation. Traditional (stock market) measures of valuation, such as P/E and book value, are still too high. The second half of 2012 to the second half of 2013 will be the next buying opportunity (i.e., important market bottom). We will not undercut the low of 2009, but the S&P 500 will go below 1,000, maybe 800. Book value is S&P 500 of 550, we won’t go that low.
Gold: The recent high of $1,900+ was a 25-year technical extreme. The correction could take several more months. Sometime next year the run (to new highs) will start. Where will gold end? If you look at the monetary base: $10K. Where to put your money besides gold? It is too early for equities; he is making a shopping list for next year.
Commodities: Will go down over the next 12 months. The big surprise is that China will slow down more than expected. The Western World has been too optimistic.
Energy: He would do some energy equities as a trade, but not as an investment.
Hong Kong equities: Be cautious. Problems from China are spilling over (RMD comment: The Chinese currently respect the rule of law in Hong Kong because it serves their interests. When it doesn’t; they might not).
Equity markets around the world: It is time for a bounce. That will cause optimism, then another decline that may be even worse in emerging markets.
China: In the next 10 years will be strong. But after that, their poor demographics (decreasing population) will cause problems. The renmimbi will not be the world’s reserve currency.
Singapore is the best run government in the world; it can do things that are painful in the short-term which pay off in the long term. Democratic governments can’t do this. Singapore will be to Asia what Switzerland used to be to Europe.
His current portfolio:
1) Trades equity positions.
2) Still holds physical gold (RMD comment: at a previous Barron’s conference, Zulauf said he had enough physical gold to fund his family until he was 90 years of age).
3) 50% cash: as bonds, primarily Swiss francs. He has shortened maturity from 7-10 years to 3-5 years.
Beware of counterparty risk (see more below). The system is stretched and dangerous. One big political mistake and the system could go down.
There is a 30-year cycle in interest rates in the US. We are currently at the bottom.
Gold stocks have been a disappointment. The cost of finding gold is going up about 15% per year, and is now about $1,000 per ounce. Next year, when gold goes up, will be the time for gold stocks. Gold is the best currency.
Scott Black
Black is a long-time Barron’s Roundtable member.
The good news is that by historical standards the market is cheap. The bad news is the macro-environment. In 1998, Greece would have been just a blip, but now they represent a confluence of debt problems, and they aren’t going away. The problem in the US is poor growth; Obama should do an infra-structure program like Roosevelt did in the 30s (WPA, CCC, etc.). We need to get people back to work. We must stop the bi-partisan bickering (RMD comment: I have already noted our bi-partisan lack of leadership), rein in entitlements, and the far-right position of no taxes is not real.
Black is a great stock picker, analyzing companies in detail.
Helmerich & Payne (HP): the best of their breed.
Oracle (ORCL): Ellison is a good manager. They are one of the few tech companies that have been able to integrate acquisitions. It is a powerhouse.
Cliffs Natural (previously Cleveland Cliffs, CLF): has a ridiculously low P/E of 4. Vale (VALE) is a great company, but Mrs. Roussseff (the President of Brazil) is a Socialist. He previously recommended both and still owns both.
Endo Pharmaceuticals (ENDP): Has made many acquisitions. Selling at 5X next year’s earnings, it is a giveaway.
Digital Realty (DLR, see chart and comment below): Is broadly diversified and pays a 4 ½% dividend. If you think the cloud is expanding, this is a surrogate.
US Bancorp (USB) is the only big US bank that is adequately reserved.
Black is a sophisticated art collector, focusing on Impressionist paintings. Prices on Impressionists are up because of no supply. Modern art: prices are strong on the high end, but supply is good.
Buy the art you like, rather than as an investment. Buy fewer and better works; you must be discriminating (RMD comment: I have emphasized this since the beginning of my financial writing. One collectable of $10K is worth at least twice as much as 10 collectables of $1K). Before you buy something, go to a museum: If the work won’t look good on a museum wall, it won’t look good on your wall. The Old Masters are always a good value.
There is a close correlation between individual stocks and the market. Macro issues trump everything. The case for gold is not clear, because inflation is being held down. The money supply is growing, but people are paying off debt, so the velocity of money is low.
RMD
One of the basic problems in the US is too much debt and not enough savings. You don’t get rich by going further into debt. You get rich by working hard, saving your money and staying out of debt. Debt is the final common denominator of all crises.
Our tax laws penalize savers and reward debt. The Chinese make 1/10th of what we make and save 1/3rd of that. Is shouldn’t be a secret why they have all of the money. And our politicians criticize them. I find it embarrassing. They are busting our chops, and to be truthful, we deserve it. It will only change when we change.
I use fundamental analysis to help determine what to buy or sell and technical data to help determine when. When something breaks to a new high it is bullish; a new low is bearish; people are willing to pay more than they were willing to pay before or sell for less than before.
Digital Realty (DLR, mentioned above) is on the verge of breaking to a new all-time high. This would be very bullish.
Counter-party risk refers to the ability of the other party to honor their commitment. For example; if you have home insurance and your home burns down, but in the interim the insurance company goes bust, your policy is worthless.
This is an issue now because of the fragility of the banking system. Monitor the health of any institution where you have accounts. If it is a publically-traded company, watch the stock price. We are in difficult times; if you have concerns, pull your money and put it elsewhere. Wire transfers are the quickest way to move large amounts.
After the conference I stayed with cousins Mary Ann and Tony in New Jersey. I then took the train from Manhattan to New Haven to visit son John and family.
As soon as the conductor stepped into the car; I said to myself “Turner’s Syndrome”. The normal male is 46 (chromosomes) X-Y, the normal female 46 X-X. Turner’s is 45 X-O (Actually, it is much more complicated; some are mosaics, and some have only a partial deletion of the X chromosome). They are short, have a webbed neck, wide carrying angle of the arms, shield-like chest, and are sterile. Turner’s are about 1 in 3,000 live female births.
I had 3 in my practice: two with a bicuspid aortic valve (two leaflets instead of the normal three), and one with coarctation of the aorta; both problems with an increased incidence in Turner’s.
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