Daily Market Analysis

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The US Federal Reserve has finally raised interest rates and ended its long-standing Zero Interest Rate Policy (ZIRP); this in itself should leave the US Dollar well-positioned versus major counterparts through the start of 2016. And indeed the Fed’s hike stands in sharp contrast to the European Central Bank, which moved to cut interest rates just a week before the FOMC decision. Market reactions to both the ECB and the Fed are nonetheless telling—the Euro rallied sharply as the ECB’s rate cut was less aggressive than feared, while the US Dollar was mostly unchanged following a lackluster Fed announcement.

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BYD HK Stock Quote

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=1211:HK

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BARRON'S COVER Part 2

Rocky Road
By LAUREN R. RUBLIN

In our second installment, Bill Gross, Felix Zulauf, Archie MacAllaster and Abby Cohen take center stage to promote their investment picks and pans for 2008. (Video)

ARE WE THERE YET? ARE WE THERE YET? "There," in case you're wondering, is a genuine stock-market bottom, not a temporary low before the next tsunami of selling. It's the point (and price) at which it's safe to jump back in the market, with plans to stick around for a while. And no, we're not there yet, not by a long shot after the unprecedented events of the past year, say the wise men and women of Barron's 2009 Roundtable.

Yet, attractive investments -- and trading ideas -- surface even in grizzly bear markets, and our panelists have found quite a few. As usual, they were eager to share them, along with their typically trenchant views about the economy and financial markets, when the Roundtable convened Jan. 5. In this week's installment, the second of three, we're pleased to pass along the picks, pans and prophecies of Bill Gross, Archie MacAllaster, Felix Zulauf and Abby Cohen, along with observations from the rest of the crew.


Brad Trent
This week, Roundtable members (from left) Bill Gross, Felix Zulauf, Archie MacAllaster and Abby Cohen share their investment picks and pans for 2009. Some themes: Treasuries are finished, gold rocks and dividends are hot.

Bill, founder and co-chief investment officer of Pimco, needs no introduction, but here goes: He is only one of the most influential guys in the bond market, give or take a Fed chairman or two. So, when he says something is the most "incredible" or "remarkable" thing he's seen in all his years in the business, as he does several times in the pages ahead, you'd best sit up and take notice. Bill hopes to exploit today's stranger-than-fiction anomalies by investing alongside Uncle Sam in bank preferred shares. He's also a fan of TIPS.

Archie, head of MacAllaster, Pitfield, McKay, should be classified as an endangered species. After all, the man says he's an optimist about stocks. Archie, who knows his way around financials like no one, and around bear markets, too, sees dirt-cheap bargains everywhere. He's especially keen on the prospects for Hartford Financial , Franklin Resources and Delta Air Lines .

When Felix talks, everything should sit up and listen. His 2008 Roundtable picks, showcased in last week's Barron's, made him and all who took his advice a bundle. For better or worse, his bearish macro forecast also came to pass. As founder and head of Zulauf Asset Management in Switzerland, Felix sees the forest and the trees. What he doesn't see is a quick resolution to the problems bedeviling the global economy and financial markets, which is why he's sticking with gold.

Abby changed hats about a year ago at Goldman Sachs, but it's what's under the hat that matters. No change there -- just the usual triple-A-rated mind (in this case, the rating means something), and an enviable eye for financial facts and figures. This year Abby's got a keen interest in interest, which leads her to a trio of high-yielding corporate bonds and a utility, among other stocks culled from the list of those recommended by Goldman's analysts.

So, buckle up, and read on.

Barron's: What grabs you in the bond market, Bill?

Gross: The government has issued hundreds of billions of dollars of Treasuries, but with yields of 2.5% on 10-year bonds and 0.8% on two-years, who wants to buy them? The market is beginning to address that question. Treasuries don't make sense at these levels. It will be at least 2010 before we see a hint of the Fed moving interest rates higher, simply because they are aware of the Japanese experience. They know the Japanese raised rates prematurely [after Japan's economy went into a tailspin in the 1990s].

Because of their low yields, government bonds are a trap. First the government lowers interest rates to the point where the investor receives a negative real return. That's where we are now. Second, the principal is depreciated through inflation. That's a hidden tax. The combination takes away any advantage Treasury bonds have, except under a deflationary scenario.


Chris Casaburi
Bill Gross (center): "Perhaps the biggest question is whether the dollar can hang onto its reserve-currency status."

This crowd seems a lot more worried about inflation.

Gross: There is a 10% possibility that government policy won't work and the U.S. will experience deflation à la the 1930s. That's not our prediction but it's more than a thin tail [low probability]. In that circumstance, long-term Treasuries yielding 3%-plus might make some sense.

Schafer: Doesn't a little inflation help us out of the current mess?

Gross: The entire capitalist system is based on a little inflation. A little, but not a lot.

Zulauf: How do German government bonds compare with Treasuries?

Gross: They are monitored by the ECB [European Central Bank], and inflation in Euro-land looks to be lower. If you had to buy government bonds, you'd want German bunds over U.S. Treasuries.

Bill Gross' Picks

1/2/09 1/2/09
Investment Price Yield
Preferred stock issued by banks
AIG 8.25%,due Aug. 15, 2018 $75.91 12.6%
iShares Barclays TIPS Bond ETF (TIP) $97.38 6.3%
Pimco High Income Fund (PHK) $6.16 23.4%

Source: Bloomberg
The cost of insuring the U.S. Treasury against default has been rising. Is this just a hedge-fund game, or does it mean we're a worse credit than, say, Germany?

Gross: We're a worse credit than Germany, and at least a few other countries. That said, the CDS [credit-default-swap] market in Treasuries is relatively illiquid, and an anomaly. Countries default in a number of ways. They default by inflation. They default by devaluation, and, yes, sometimes they default and don't pay their coupons. But to go the third route through actual default would be a "black swan" [extremely rare and unpredictable]. It won't happen in my generation.

Faber: From whom would you buy such credit-default swaps? If the U.S. government goes bust, the sellers of such swaps would go bust, too.

Black: Bill, it's one thing when the Treasury prints money and issues bonds. It's another when the Federal Reserve expands its balance sheet from $750 billion to $2.2 trillion. Is this a ticking time bomb?

Gross: The Fed is expanding its balance sheet because the private sector is contracting its balance sheet. If it's one for one, it's not a problem. The Fed is trying to gauge how much is disappearing, versus how much should be put into the system, which is difficult.

Zulauf: How far can they go? Ireland has guaranteed its whole banking system, which is five times GDP [gross domestic product], and in a currency [the euro] over which it doesn't even have sovereignty.

Gross: Ireland and Iceland are examples of economies that have gone too far. The U.S. has had the benefit of being the world's reserve currency. How much longer can we abuse it? Probably not too much longer. If asset reflation works and the real U.S economy kicks back into gear, the dollar can hang on. If it doesn't work, it's a new ballgame. Perhaps the biggest question for the next few years is whether the dollar can hang onto its reserve-currency status.

Cohen: This is a function not just of the dollar but of the currencies that might be able to step in. One thing that has disappointed but not surprised many people is how long it has taken for the euro to assume a larger role as a reserve currency.

Gross: In Asia the yen can't take the mantle because China eventually will be the dominant economy. But it's not ready financially.

Zulauf: The euro has problems. The eurozone is not a homogenous economic bloc. There are weak economies and structurally strong ones, and stress in the system. It is questionable whether the euro can survive in its current form long term. There may need to be a euro A and a euro B.

Cohen: We talked this morning about the state of the U.S. banking system. The European banking system by many measures started out in a much more levered state, and still is much more levered than the U.S.

Zulauf: European banks have approximately one-third less equity capital than U.S. banks. In general, the banking system in the industrialized world is still fragile, and not equipped to handle what's ahead in corporate defaults and loan write-offs.


Goldman Sachs Senior Investment Strategist Abby Joseph Cohen says that the economy/market is on its way to recovering a sense of equilibrium and stability, but is not out of the woods yet. Mike Santoli reports from the Barron's Roundtable.

MacAllaster: Bill, what is your view of the quality of the assets the Fed is taking on? A lot depends on whether the government will get anything back when it tries to sell these assets.

Gross: Up until this point the government has been buying primarily triple-A-rated paper. Its plan to start financing asset-backed securities such as student loans and credit-card receivables theoretically and technically will involve triple-A assets. I am skeptical that every triple-A-rated assets is in fact triple-A in quality. The Fed, though, is very careful and not likely to make mistakes in this area.

Zulauf: The Fed may go down the ladder and buy lower-quality assets.

Gross: [Federal Reserve Chairman Ben] Bernanke made that clear in 2002 with his helicopter speech, in which he said the Fed would be willing to buy almost anything in order to prevent deflation and support the economy.

Hickey: Has Pimco detected any reticence among governments in the Middle East and Asia about continuing to buy U.S. Treasury bonds at these low rates?

Gross: No. There is a reticence to take risks, including an unwillingness to buy even mortgages backed by U.S. government agencies like Fannie Mae and Freddie Mac. There is an anathema toward corporate bonds. Foreign central banks and others don't want any part of risk.

Hickey: Are they losing faith in the U.S.?

Gross: They recognize markets here are illiquid, and there is a possibility, be it 5% or 10%, that not just the U.S. but the global economy will enter a mini-depression. Isn't that what you see, Abby?

Cohen: Between January and October 2008, total foreign holdings of U.S. Treasury securities rose from $2.4 trillion to more than $3 trillion. The most significant change by country had to do with the U.K., where Treasury ownership rose to almost 12% of the total from 6.7%. The additional purchases came from two types of buyers: petroleum-producing nations whose investment offices are based in London, and global asset allocators who manage money for pension plans and others whose security of choice in recent months has been U.S. Treasuries.

Zulauf: The $600 billion increase is just about equal to the U.S. external-account deficit for that period, so it means foreigners recycled those dollars into the U.S. Treasury market.

Didn't risk-aversion peak in late November?

Gross: It did, as evidenced by stocks, credit spreads, oil and currencies. But that's not to say it peaked for foreign central banks and foreign investors. They continued to buy Treasuries and forced them to overvalued levels.

The bond strategy we have followed for the past 12 to 18 months is to go where the government goes in terms of its purchasing power. The government is going to buy $500 billion in the next six months of the $3 trillion in agency mortgages outstanding. We have been buying agency mortgages. Through the TARP [Troubled Assets Relief Program], the government has bought several hundred billion dollars of preferred stocks and attached equity warrants. The Treasury has accepted a 5% coupon on the preferred. Treasury Secretary Hank Paulson has decided 5% is a decent compensation for bank preferred, but the private market affords 11%, 12%, 13% yields on the same bank preferred stocks, which is remarkable. We are buying bank preferreds.

As for specific names, the best example of partnering with the government in the bond market is the case of AIG [ticker: AIG]. Some of us might agree it was a mistake for the government to bail them out, but it happened. The Treasury basically has taken $60 billion of troubled assets off AIG's books and extended it a $50 billion credit line. It has extended a commercial-paper program to one of its major subsidiaries, International Lease Finance, worth another $2.5 billion. The government has given or guaranteed AIG close to $200 billion. The outstanding debt of the United States is $10 trillion, so 2% of everything the U.S. government has issued has gone to AIG. But here's the most incredible thing.

You mean, that wasn't it?

Gross: In the past three months, AIG bonds that are senior to the Treasury's $40 billion in preferred could be bought at 14%, 15%, 16% yields. You can buy them now at 11% and 12%, under the cover of nearly $200 billion of guarantees, or 2% of the outstanding debt of the U.S. Normally you can't have a bond yielding 14% without significant potential to default. It is the most incredible example of value I have ever seen in the bond market. AIG has a 10-year bond that can still be bought at 12.5%. Technically it's A-rated, but realistically it's close to triple-A. We own a lot of them.

My next pick is Treasury Inflation-Protected Securities, or TIPS. Here's an example of deleveraging at work. Theoretically TIPS should have performed like Treasury bonds. Instead they went down in price while Treasuries have been going up. TIPS now sport real yields of 2.5% in an economy that is growing nowhere close to that. And that's before you tack on the inflation kicker. [The principal of a TIPS increases with inflation and decreases with deflation, as defined by the consumer-price index. TIPS also pay interest twice a year, at a fixed rate applied to the adjusted principal.] When an economy deleverages, almost every asset goes down. As Abby discussed this morning, hedge funds, levered institutions, sold what they could when they had to raise funds. TIPS were the most liquid thing in many levered portfolios, and the hedge funds have been spitting them out billions of dollars at a time. Yet, the potential for inflation five to 10 years from now is high. You can buy TIPS via the iShares Barclays TIPS Bond ETF [exchange-traded fund].

Maybe the problem with TIPS was marketing. They were sold as an inflation hedge. If inflation no longer is a problem, people feel they don't need them.

Gross: But they are getting the inflation insurance for free. That's the opportunity. Nothing is totally safe from the ravages of inflation or deflation. In a deflationary environment TIPS aren't going to work. Pimco will be a substantial buyer of TIPS in the next few months. There are few more attractive investment alternatives, except for municipal bonds. You can get a double-A-rated muni bond these days that yields almost twice as much as Treasuries.

Schafer: TIPS won't pay off for a number of years under your scenario.

Gross: That's not true. The big payoff comes in the next six months if this deleveraging cycle is halted and asset managers are reliquefied. TIPS bottomed in November. They are a risk asset without much risk. They can go up 10% or 20% in price simply on the basis of optimism that deflation has been averted.


Barron's Mike Santoli speaks with Chairman Archie MacAllaster of MacAllaster, Pitfield, and MacKay at the Barron's Roundtable, who says to look for markets where things get to be really cheap. The opportunity is there. Just start slowly.

Cohen: TIPS don't have the issuer risk associated with municipal securities. So, while municipals look appealing, there are concerns related to the budget problems of specific state and local governments.

Gross: Pimco is not a fan of the high-yield market. It is a little early to be buying high-yield bonds. Defaults are on the rise, but in recent months our closed-end funds, and others', have been subject to selling and to regulations that force such funds to delever. If assets fall by 20% or 30%, closed-end funds that typically are levered by 50% have to delever. Several Pimco funds, including Pimco High Income, were forced to suspend dividends for a month, which sent a confusing signal to the market that something was wrong. We had to reduce leverage somewhat by paying off adjustable-rate preferreds. The dividend suspension was a temporary regulatory fix.

Gabelli: You didn't need to build up capital. You had to reduce leverage.

Gross: Exactly. No one should have a favorite child, but this fund was my, and our high-yield desk's, focus every morning. It isn't a high-yield fund any more; 40% of its assets are high-yield, but 60% are investment-grade. Yet, while junk-bond funds in general yield 14%, the Pimco High Income Fund yields 23%.

Schafer: When it pays the dividend.

Gross: The fund sells for about net asset value. It has doubled in the past month, so somebody sees something. It has about $1 billion in assets. It's about as good a deal as any in the bond market today.


Chris Casaburi
Archie MacAllaster: "If you're a long-term investor in airlines, you're bankrupt, so you have to buy Delta carefully."

What is the status of Pimco's closed-end municipal-bond funds that ran afoul of regulations? Have dividend payments been restored?

Gross: We hope to restore them quickly. It's a matter of ensuring leverage is in line with the rules. The muni market is doing better since late November. Munis are another non-risky asset that investors sold because they had to. Given the fiscal problems state and local governments face, there may be a bailout for munis. When you see a single-A or double-A-rated California muni yielding 6% to 7%, you should anticipate Uncle Sam will bail out Dear Arnold [Schwarzenegger, governor of California]. We might not support bailouts philosophically, but as Bob Dylan said, you have to know which way the wind is blowing. We have been buying munis for several months.

Archie MacAllaster's Picks

1/2/09
Company Ticker Price
Franklin Resources BEN $66.60
Supervalu SVU 14.88
Williams Cos. WMB 15.23
Hartford Financial Services HIG 17.09
Delta Air Lines DAL 12.13
MetLife MET 35.97
Prudential Financial PRU 30.77

Source: Bloomberg
As an aside, the size of government programs to date is staggering. The FDIC [Federal Deposit Insurance Corp.] will now insure bank deposits up to $250,000 [through Dec. 31], versus a previous $100,000. People assume that's where it stops, but it doesn't. The FDIC has guaranteed many more liabilities of the banking system through a program called TLGP, which extends the insurance temporarily, at least to checking accounts. In addition, there's the TARP, which guarantees a significant portion of the equity capital of banks. The banking system in effect has been nationalized. If you can buy a corporate bond issued by a bank at a 5% or 6% yield, as opposed to a Treasury bond that yields 1% or 2%, you've got a good deal. If you can buy bank preferred shares that yield 11%, 12%, 13%, you've got an even better deal. Hopefully, the government will have an exit strategy.

Agreed, and thanks.... Archie, your turn.

MacAllaster: I am an optimist about the stock market. There aren't many of us. It's going to be slow going, but bargains are out there. If you can find them, you may do well. I have a few, starting with Franklin Resources, another California money manager. The stock is 66, about 50% below its high for the past year, 133. The low was 45.50. The company pays a dividend of 84 cents a share, and yields 1.3%. It has about $4 billion of net cash, equal to $15 to $17 a share. Total book value is $30 a share; cash is half of that, or more. Franklin, which manages mutual funds, bought up Templeton and Mutual Shares, and seems ready to buy other assets, which are cheap right now. Over the years the company has bought in a lot of stock. They have indicated they won't be buying in so many shares in the future, which tells me they are going to use their money to buy assets.

Templeton invests mostly in foreign equities. Mutual Shares invests in U.S. equities, and the original business was primarily tax-exempt investments in the U.S. In the fiscal year ended September, it earned $6.68 a share. Like other fund companies, it has had redemptions. It has $450 billion or $460 billion of assets under management, down $50 billion or $60 billion on the year. Therefore, earnings could be lower this year, at perhaps $4.75 to $5 a share.

With people exiting mutual funds in droves, isn't this a bit like buying straw hats in winter?

MacAllaster: My view is long-term. Franklin's success goes back a long way. This year the company will earn less than last year, and it may earn less next year, too. But it is going to end up a much bigger company because it will use its cash to buy assets. In two years it will be making more money than ever before. And remember, the stock was as high as 133 last year.

That doesn't mean anything. Everything was higher last year. The important thing is where it's going.

MacAllaster: It's going higher. My second stock is Supervalu . It closed Friday [Jan. 2] at 14.88. The 12-month range has been 35.91 to 8.59. The company runs both wholesale and retail grocery operations. They've got the third-largest grocery chain in the U.S., after Wal-Mart Stores [WMT] and Kroger [KR]. Supervalu pays a dividend of 69 cents and yields 4%-plus. Book value per share is $29, just about double the stock price. [The company wrote down goodwill and intangible assets when it reported earnings Jan. 7. Book value is now around $16 a share.] Sales are flat to down in retail and positive in wholesale. Earnings were $2.76 a share in fiscal 2008, ended February, and should be about $2.75 for fiscal '09. The stock sells for five times earnings. Debt is high due to the purchase of the Albertsons grocery chain in 2006, but the company has been paying down between $400 million and $500 million a year. [It announced Jan. 7 that it would pay down $600 million in fiscal 2010.] Sales are about $45 billion.

My third stock is Williams Cos. , which produces and transports natural gas. The stock sells for 15.23. Once again, the range is 40.75 to 11.69. The dividend is 44 cents a year for a yield of 3%. They have raised the dividend in each of the past four or five years. Book value is about $15 a share, so the stock sells right around book. The company earned $1.40 a share in 2007. Last year's earnings haven't been announced yet but should be around $2.25 a share. This year they'll earn somewhat less -- $2 a share -- in view of the lower price of gas. But Williams has hedged a lot of its gas production, so its average selling price will be more than $7 per thousand cubic feet. Gas sells now for $5.50.

Where is their natural gas?

MacAllaster: All through the West. Natural gas is the place to be in energy production. It's clean. It's domestic. It's cheaper than oil, and it looks like we'll use all the natural gas we can find in this country. Williams sells for about seven times earnings. The company raises its dividend every year. I suspect they'll raise it by a penny a share this year. In the past two or three years Williams has increased reserves by 20% to 22%. The balance sheet is strong, with debt down from $12 billion to about $7 billion, a 40% drop over five years. They have about $1.1 billion of cash and equivalents.

Next, Hartford Financial Services . It was trading for 17.09 Friday [Jan. 2]. The range has been 85.11 to 4.16. How about that? The yield is a little under 8%. Book value is $41 a share. Earnings in 2007 were $8.25 a share. Recently Hartford raised its 2008 earnings estimate to $4.70 to $4.90 from about $4.30 to $4.50. I think they'll make better than $5 and maybe $6 a share in 2009. The company has given itself all kinds of flexibility.

How so?

MacAllaster: They raised a couple of billion dollars in Europe. They bought a savings bank in Florida. They got some money from the TARP. They won't have any financing problems. Hartford will be 200 years old in 2010. It has $350 billion of assets, and in five or 10 years will have a much bigger net worth than today. Meanwhile, you're buying it around four times earnings.

Delta Air Lines, my next pick, trades for 12.13. The range is 18.99 to 4. After merging with Northwest in 2008, it became the largest U.S. carrier. It is fresh out of bankruptcy court with a relatively clean balance sheet and about $35 billion of revenue. It is a speculation on continued low fuel prices. Delta should produce earnings of as much as $2-plus in 2009. Some energy hedges are working against it now, and in the last quarter of 2008, but that will end. In the next two or three years Delta could earn much more than $2 a share. Cash flow next year could be about $4 billion. The only thing is, if you're a long-term investor in airlines, you're bankrupt, so you have to buy this carefully.


Chris Casaburi
Zulauf: "Gold functions as a protection against your central bank doing stupid things."

Black: As Warren Buffett said, the Wright Brothers destroyed more capital than communism.

MacAllaster: Here are some one-liners: MetLife and Prudential Financial . MetLife is 36 a share; the range is 65 to 15. It yields a bit over 2%. Book value is $42 a share. The company raises the dividend every year. Any time you can buy MetLife under book value, you should.

Prudential is somewhat more speculative. It sells for 30.77. The range on the stock has been 92 to 13. Book is about $44 a share. Earnings for 2008 are estimated to be $3.50 a share. In '09 they could earn as much as $7. The dividend yield is 2%. In a few years this company, too, will be worth more.

Thank you, Archie. Felix?

Zulauf: Last year saw the most severe bear-market decline since 1931. The instant reaction is to be bullish after such a decline, but the situation is more complex. The watershed events of 2007 and '08 lead to a different world in many ways. The household sector is traumatized by a 20% drop in net worth, as the worst year prior to this saw a loss of just 5%. The corporate sector is traumatized by a slump in earnings, and refinancing problems. Thus, everyone will turn more cautious, not just for 12 months but several years. Deleveraging is a structural process, not a short-term process.

Fiscal policy and other interventions may stabilize the economy later in the year and into 2010, but economic growth will be anemic and disappointingly low once things start to improve. Less leverage means lower growth, lower profit margins, a lower return on equity, lower valuations and such. But the market is slow at pricing that in. During the energy crisis of the 1970s, it took the market six years to stop extrapolating 6% annual growth and get in line with reality.

We are still in a secular bear market that started in 2000 in the industrialized economies. It has several more years to run. This is a transition year after the first slump, and we will see some corrections to the upside.

Felix Zulauf's Picks

Investment 1/2/09 Price
Medium-term government paper blended with five-year investment-grade corporate bonds issued by companies in defensive industries, such as telecom, food and oil.
German government bonds
Gold* $875.40/ounce
Short the Hungarian forint against the euro €1=266.10 HUF
TRADING IDEAS (Ticker)**
Crude Oil $46.34/bbl
Energy Select Sector SPDR (XLE) 50.15
iShares MSCI Hong Kong Index (EWH) 10.79
iShares MSCI Singapore Index (EWS) 7.25

*Buy after price drops back to $600-$700 range.
**Buy after selloff to new lows.
Source: Bloomberg
We've just seen one.

Zulauf: The current rally will peter out sometime in the first quarter. It's the Obama hope rally. Obama is dangerous for the market in the sense that expectations that he can change the world are too high. He is a charismatic person, but a charismatic person with no track record. Eventually the market will grow disappointed that he can't change things as quickly and to the degree people hope.

The market will have a setback after this rally ends, with the next rally starting sometime in the second quarter. It will be more powerful and a bit more sustainable because some of the economic numbers will show positive momentum, and it will start from a new low. But you can't buy and hold equities for the long term. Investors will turn away from equities. They are fed up with negative returns over 10 years. In that period, as I said earlier today, risk was high and perceived risk was low. Now risk will be low, due in part to support from the world's central banks. But investors will perceive risk as high, and price financial assets accordingly.

Witmer: They already have.

Zulauf: In a few years' time there will be some fantastic long-term buying opportunities, but we aren't there yet. The Standard & Poor's 500 easily could fall into the 400 to 600 range over 2010-'11, after a bounce that takes it to 1,050 or so. But the upside is limited because the fundamentals aren't there.

Gabelli: So it's up 10% and down 50%.

Falling oil prices are central to what has happened in the markets, if not the economy. You're a commodities man in some ways. Where do you think oil is headed?

Zulauf: The price of oil has tumbled much more than I expected. I thought it might be cut in half in this cycle, which would have meant a price of around $75 a barrel, not $35-$40. Oil will bump along around $40 for a while, with rallies up to $70 or so. It will build a range for some years, until demand and supply get back into balance. So far, producers are behind in adjusting production to weak demand. Buy oil for a trade but not for an investment. Lower oil prices are one of the big pluses in the economic equation, because consumers will pay less for gasoline and fuel.

Is OPEC pretty much out of the picture?

Zulauf: It is cutting back. There was a struggle within OPEC [the Organization of Petroleum Exporting Countries]. The Russians didn't behave as the Saudis wanted. The Iranians didn't behave as the Saudis wanted. Now the Saudis are playing hardball with other OPEC members. But OPEC, as announced, will cut production. It isn't interested in having oil prices get too low or too high. It thinks a price of $60 a barrel or so is reasonable.

Gross: We always root for lower oil prices because they restore consumer purchasing power. But cheap oil also impacts oil-producing nations and the global economy.

Zulauf: It plays havoc with their budgets. The boom in the Middle East is over. Government finances in the region will go into deficit. These are not politically stable countries. A large part of the population in the region is dependent on government finances. A drop in oil prices could further destabilize the Middle East.

Cohen: Is there a policing mechanism to make sure OPEC members cut production? So far, it hasn't worked.

Zulauf: Swing producers like the Saudis can cut back as they bring other OPEC producers in line. But it takes time to cut production by three million or four million barrels.

Faber: Some people say they have to cut by seven million barrels.

Gabelli: Either way you have a demand problem, even as oil companies have invested in new production. Petrobras [ Petroleo Brasileiro ] has spent hugely on its new field off Brazil.

Zulauf: At current oil prices, you can forget it. A lot of projects around the world have been postponed or canceled altogether, and that's true in all commodities markets, including metals.

Gross: Does extracting oil from tar sands make economic sense, with oil at $45?

Zulauf: You need a price of $60. Getting back to equities, dividends will be cut in the next few years, but dividend yields will be higher than today, despite the cuts.

Zulauf: Investors should keep their powder dry. Sit in fixed income. Buy five-year investment-grade corporate bonds in less-risky industries that service daily necessities, such as telecoms, oil and food, and blend them with medium-term government bonds. Check company balance sheets. I wouldn't buy long-term government bonds, except maybe German bonds. My one recommendation for the longer term is physical gold. Consider the basic set-up: World economies are so weak that we are seeing government stimulation of historic proportions. At first this is deflationary, but it will become inflationary. Gold is the only currency that won't get devalued. It will be revalued.


Felix Zulauf, Founder and President of Zulauf Asset Management says that consumers have been traumatized by the huge loss in net worth, and can be expected to act conservatively even after the economy recovers. Mike Santoli reports at the Barron's Roundtable.

If the Fed's liabilities had to be covered in gold, it would sell for more than $6,000 an ounce. We aren't going back to the gold standard, but the markets won't trust the central banks anymore. Gold is in a very slow bull market. The year-end price has been higher each year since 2001. The gold market could have a shakeout in the next six months, and the price could fall back to $700 an ounce or below from today's $850. But two years from now it will be a lot higher. It is one of the few commodities that held up during the forced liquidation of almost everything else. We have talked about the risk of currency devaluation. If you were a citizen of Iceland and your currency went down by 50%, consider how gold performed in your currency. Gold functions as a protection against your central bank doing stupid things.

Schafer: Did gold hold up because it wasn't a part of leveraged structures?

Zulauf: To some degree. You don't own it in a leveraged way. It was helped by the forced liquidation of other things. There was some forced liquidation of Comex futures contracts, but at the same time there was a massive move into physical gold. Gold will stay in a bull market. It can't be manipulated like a currency you can keep printing.

What about central-bank sales of gold?

Zulauf: You can sell it, but unlike a currency, you can't make it out of thin air. You have to dig hard to get it out of the ground, and there is a limited quantity available. Historically, jewelry accounted for about 70% of the demand for gold. That will decline as hoarding increases.

Gross: How many years will it take for gold to double?

Zulauf: Two, but don't blame me if it takes three. If you're a little more adventurous, you can buy gold stocks, but put the core of your holding in physical gold. Gold-mining stocks have underperformed physical gold for more than a year, due to rising production costs. Production costs should decline slightly because of lower energy prices.

Fred recommended the Market Vectors Gold Miners ETF. Do you like it, too?

Zulauf: Yes. It is a diversified portfolio of major mining stocks. The total market capitalization of the industry is only $150 billion.

Last year I recommended shorting both sterling and the Swiss franc against the U.S. dollar. These trades worked well. Now short the Hungarian forint against the euro. All the Eastern European countries, excluding Russia, are running large current-account deficits. A current-account deficit is basically a loan from the outside world. In a credit crisis, credit gets pulled and the economy and currency adjust downward. Because all these countries want to join the European Union, they are all trying to defend their currencies.

Why pick on Hungary?

Zulauf: Among European countries, it has the largest percentage of public and private credit -- 57% -- denominated in foreign currencies, largely Swiss francs. That's public and private credit. Probably 70% of mortgages in Hungary are Swiss-franc denominated because of the interest-rate advantage. The Hungarian central bank is trying to defend the currency and doesn't want to devalue it, which would create more pain. They raised interest rates from 8% to 12% in the fall in the midst of the worst economic recession in modern times; rates are now down to 10%. When the pain eventually becomes too great, they will cut rates and the currency will decline.

The forint isn't in the worst shape, but it is the most liquid among Eastern European currencies. The currencies of the Baltic states and Romania are much worse fundamentally, but more difficult to trade. Hungary has made good progress since the Berlin Wall came down. Per capita income is about 70% of the average income in the European Union. The Hungarian economy was stabilized in the late 1990s and inflation brought under control. Short-term interest rates declined from 35% in the mid-1990s to a low of 6% by 2005. It has risen since, due to inflation. The currency has been stable since 2000 in a trading range against the euro.

What is the current exchange rate?

Zulauf: The forint has traded between HUF235 and HUF275 to the euro. The current price is HUF266. The forint could move out of its trading range in 2009. I would have recommended shorting the forint against the Swiss franc, but I have some concerns about the franc due to the banking situation in Switzerland.

Here are some trading ideas for '09: Trade beaten-down commodities like oil, which has a shot at rebounding to $70 or so, after which it will retreat. You can trade energy stocks, the big integrated oil companies, via the Energy Select Sector SPDR , or XLE. It sells for 50, and my expected 12-month range is 40 to 60. Oil has come down 75% from its high, and the XLE is down 60%.

Another good trade is Asian equities. Asia is in a severe recession that won't end for a while. But Asian stocks are cheap. They offer good dividend yields and are a good way to have a foot in these markets. Buy the iShares MSCI Hong Kong Index, or EWH. It is selling at 10.79, and I expect a range of 9 to 13-14. The iShares MSCI Singapore Index, or EWS, trades for 7.25.

What do you think of housing?

Zulauf: House prices in the U.S. will reach a low in 2010, some 10% to 15% below today's level. Housing in other nations, particularly in Europe, has much more downside. Prices in Spain or the U.K. could fall 30% from here. The housing bubble has been a global phenomenon, and it has involved leverage and low homeowners' equity not only in the U.S. Countries like Germany that didn't have a housing bubble are in better shape.


Pimco Founder and Co-Chief Investment Officer Bill Gross says the market shift from the familiar to a phenomenon of consumers rapidly switching gears from "Shop 'til You Drop" to "Save to the Grave." Mike Santoli reports from the Barron's Roundtable.

About 45% of U.S. home owners don't have a mortgage, which means 55% do. Almost half of those have no equity or negative equity in their homes. The National Association of Realtors' Affordability Index is a theoretical number, because the appetite to buy a house is so different now, even if you could afford it.

Gross: I agree but offer a counter-argument. To the extent that the 30-year mortgage rate acts as a discount-pricing mechanism, if you can bring it down to 4.5% to 4% to 3.5%, you have a theoretical basis for supporting housing.

The ITB, or iShares Dow Jones U.S. Home Construction index, is up 50% from the lows. What do you make of that?

Cohen: In the U.S., we are three years into the housing correction. The home-building stocks got very cheap.

Zulauf: When you go down 95%, it is easy to have a 50% bounce.

Thank you, Felix. Abby, let's hear more of your views.

Cohen: With regard to the economy, chances are we're seeing the worst numbers now on production and consumer demand. The official recession may be over before the end of 2009, but growth rates afterward will be sluggish. A good deal of this ugly scenario already has been priced into stocks. Using a dividend-discount model or a price-to-book-value basis, our sense is fair value for the S&P 500 may be 1,100 or 1,200 in 2009. There is notable upside, but that doesn't mean the market goes back to its highs. Because consensus earnings expectations are too high, the market may come under some pressure again. But in the next several months we expect share prices to be higher, not lower.


Chris Casaburi
Abby Cohen: "The official recession may be over before the end of 2010, but growth rates afterward will be sluggish."

What is your S&P earnings estimate?

Cohen: About $55. The '08 number was about the same. The consensus is about $10 higher than we are for 2009. S&P earnings could see some recovery in 2010.

Valuation isn't a timing device. Also, even though the market offers value, valuations across the market are uneven. In the past six months, better-quality names often went down more than lesser-quality names because they were easier to sell. As a consequence, we are looking primarily at larger-capitalization stocks for 2009. In addition, we're looking for companies with a domestic orientation. The U.S. moved into recession earlier than other countries, and we may move out of it earlier. The incoming Obama administration will provide greater detail shortly on plans that may be viewed as positive in terms of economic growth. These may focus in the short term not just on job creation but the prevention of additional job losses. The administration also will be working on things that have an impact two to three years out.

One peculiar thing in the markets last year was very high correlations. Everything was correlated to everything else. The single exception was U.S. Treasuries. Correlations will move lower this year, and differences in fundamental performance and valuation will come to the fore. That creates opportunities for security selection both in the equity and fixed-income markets. Finally, the public markets really took it on the chin in 2008 because they were open for business and that's where the liquidity was. There could be some big snap-backs.

Will there be more consolidation in banking and financial services?

Cohen: We are going to see consolidation in many industries. Companies with strong balance sheets will be in a much better position, regardless of industry. Even though the credit situation will be improving, there is still a lot of operating duress. Companies under duress could be involved in strategic mergers and acquisitions.

Abby Cohen's Picks

1/2/09 1/2/09
Corporate Bonds* Price Yield
BofA, 5.65% due 2018 $99.50 5.7%
JPMorgan 6%, due 2018 105.50 5.2
Travelers 5.75% due 2017 98.75 5.9
1/2/09
Company Ticker Price
Bank of America BAC $14.33
Duke Energy DUK 15.40
Wyeth WYE 38.39
ITT ITT 48.79
Applied Materials AMAT 10.67
Hess HES 57.25

*Prices/yields as of 1/5
Source: Bloomberg
Regarding specific ideas, I'll pick up where Bill left off in talking about distorted valuations in the fixed-income markets. There is general agreement around this table that U.S. Treasuries don't offer good value now. We would rather look at corporate bonds. I have three, all single-A-rated, all trading at significant spreads over Treasuries, all in financial services. Investors should stick with the senior securities within the capital structure. The Bank of America 5.65s of 2018 are trading at a [yield] spread of 325 basis points [3.25 percentage points] above Treasuries. The JPMorgan 6s of 2018 are selling at spread of 275 points over Treasuries. The Travelers' 5.75s of 2017 are selling at spread of 345 points.

Schafer: Treasuries have a negligible yield because they've become a safe haven. An analysis of yield spreads is less relevant than usual.

Cohen: My next comment was going to be that spreads are expected to narrow. That could occur as Treasury yields rise, and as the absolute yield on these securities falls. Not just the coupon but the potential of price appreciation is available here.

Bank of America common equity is interesting, as well, from a valuation perspective. It yields in excess of 15% because investors are nervous about it. The stock is down 65%. We all know about the banking sector's problems, and credit-cycle issues will take a while to play out. In Bank of America's case, there are three phases to the credit cycle. The first was problems related to mortgages and home equity. The bank had 43% of its loans in the housing sector. The next phase of concern will relate to construction and commercial lending, and the third phase to losses related to consumer loan books, such as credit cards. The bank has material consumer exposure and delinquencies are increasing, but it becomes a question of what is priced in.

Zulauf: Does it yield 15% after they cut the dividend?

Cohen: Yes, and they may cut it more. This is a controversial stock, and it is priced as one. [Note: According to government and company announcements Friday morning, Bank of America, which already has received $25 billion in TARP money, will get additional funding and a loss-sharing agreement on impaired assets because of problems at Merrill Lynch, which are worse than had been expected when BofA struck a deal last fall to acquire Merrill. As a result, BofA's capital position has been significantly weakened. Bank of America also is cutting its dividend to a penny a share. According to Abby, Goldman Sachs analysts say BofA may have other capital options available as it seeks to reduce leverage. It could reduce stakes it holds in other financial institutions, such as CCB, BlackRock or Itau. Pro forma tangible book value is about $10. Extensive government involvement likely will mean current shareholders aren't a top priority.]

Duke Energy , an electric utility, offers good income potential. It yields about 6%. We're not expecting much if any earnings growth because of the weakness in the economy. We're forecasting GDP will fall 1.6% in 2009. On the other hand, with a 6% yield and long-term earnings growth of about 5%, Duke isn't a bad place to be. Along with some other utilities, Duke has been proactive about energy efficiency, sustainability and such. It may get some attention as a consequence, with a new administration coming to Washington and talking about the need for infrastructure spending, and a new national grid.

Roundtable Members:
FELIX ZULAUF, founder and president, Zulauf Asset Management, Zug, Switzerland;
MARIO GABELLI, chairman, Gamco Investors, Rye, N.Y.;
ARCHIE MACALLASTER, chairman, MacAllaster, Pitfield, MacKay, New York;
MERYL WITMER, general partner, Eagle Capital Partners, New York;
MARC FABER, managing director, Marc Faber Ltd., Hong Kong;
OSCAR SCHAFER, managing partner, O.S.S. Capital Management, New York;
FRED HICKEY, editor, The High-Tech Strategist, Nashua, N.H.;
SCOTT BLACK, founder and president, Delphi Management, Boston;
BILL GROSS, founder and co-chief investment officer, Pimco, Newport Beach, Calif.;
ABBY JOSEPH COHEN, senior investment strategist and president, Global Markets Institute, Goldman Sachs, New York.
What else looks good this year?

Cohen: Pharmaceutical companies are facing significant concerns about a lack of innovation and, at the same time, major patent expirations. There are also concerns about health-care reform and what it might mean for these companies. Wyeth is a good place to be in this industry. It has less exposure to patent expirations than other large U.S. pharma companies. It has a significant biotech initiative. The company's vaccine and biological division is growing at about a 20% annualized rate and generating strong cash flow. There is a potential for a dividend increase; the current yield is about 3%. The P/E is 10.3. The pharma industry could see consolidation. Given its biotechnology endeavors and strong cash flow, Wyeth might be an appealing candidate for some other companies.

Next, I've got some stocks that could benefit from a better economy. I began by saying we're in a recession, but the equity market is a discounting mechanism. At what point do we feel comfortable looking at these names? ITT looks appealing over a 12-month horizon because of its special products. It has a strong defense business, which will account for more than 50% of earnings. It is involved in aircraft avionics and such.

The water business is attractive. Longer term, the Obama administration may focus on the water and waste-water infrastructure in the U.S., and ITT is a leader in the category. Earnings could grow 10% to 12% long-term. The P/E is about 12 times earnings.

On this year's or next year's earnings?

Cohen: This year's. The yield is about 1.4%. To the extent that there is increased spending on defense and water infrastructure, ITT fits these themes. I'm sitting next to Fred, so I'd love to hear his comments on my next pick, Applied Materials . You have to believe in this case that the economy will turn up in 12 months. This is an early cyclical. The semiconductor-equipment industry doesn't look attractive right now. However, orders are likely to trough in the first half of 2009 and things will look better in the second half. The company has a backlog of $4.85 billion, including $1.5 billion in solar thin-film used on solar panels. The solar area was hyped a few years ago, and it could become more important now. With this backlog, there could be some cancellations.


Chris Casaburi
Stocks haven't hit a true bottom yet, say many Roundtable members, From left, Archie MacAllaster, Marc Faber, Abby Cohen, Scott Black and Fred Hickey.

Hickey: There will be a lot of cancellations.

Cohen: Applied has $4.2 billion of net cash, equal to 25% of its market cap of $13.7 billion. The yield is 2.4%.

Black: Even though Applied Materials is the big Kahuna in semi equipment, estimated earnings of 20 to 25 cents a share for this year aren't enough to justify an $8 or $9 stock in the short term.

Schafer: If you take out the cash, $9 is $7.

Cohen: This is a transition year. You have to look at 2010.

Hickey: It's too early. This is the biggest disaster we've seen, and we've seen a lot of disasters in the semiconductor market, particularly in the companies driving that backlog. Taiwanese DRAM and flash-memory makers are near-bankrupt. There is no cash available. Everyone is canceling everything. The turnaround might take well into 2010, and then you could lose market share.

Black: Applied Materials is a great company with great technology. There's just no customer demand to drive the stock.

Cohen: My final name is intended to be controversial. Assuming oil averages $45 a barrel this year and $70 next year, companies like Petrobras and Hess could benefit. Hess has demonstrated significant leverage in earnings and share-price performance to rising energy prices. At $45 a barrel there isn't much earnings growth. If crude goes higher, earnings growth could be significant. There isn't much of a yield -- 0.7% -- so it's really a play on higher oil. The stock has jumped to 57 from 50 in the past few days. Maybe the move is over and I should have pulled it from my picks folder, but if you see some light at the end of the tunnel in terms of economic activity and energy prices move up, Hess could do well.

Zulauf: Some European energy stocks offer fantastic yields, even if earnings go down. Italy's ENI [ENI.Italy] yields 8.5%, and the payout ratio is probably 30% or so. Royal Dutch Shell [RDS] is yielding 5.2%.

Cohen: The U.S. equivalents would be ExxonMobil [XOM] and some others. They performed well from the end of October through the middle of December. But if the economy starts looking better in the second half of this year, you want something more leveraged to the price of oil.

Thank you, Abby.

[cdrom]

BARRON'S COVER - Part 1



Hang on Tight!
By LAUREN R. RUBLIN

Our go-to group of investment experts sees tough times for the economy -- but good fortune for stockpickers. (2008 Roundtable Report Card and 2008 Mid-Year Roundtable Report Card)

ONCE UPON A TIME, WE LIVED IN A WORLD where asset-price inflation begat leverage, which begat more asset inflation, in a virtuous circle known as the great bull market. We bought bad art, good wine and vacation homes (many), and stocks "on the dips," which made us rich. And geniuses, of course.

Then the big, bad wolves -- greed and excess -- came and popped our bubble, and the markets', and all the pretty assets fell to earth. The fairy god-mother -- bearing a strange name for a godmother, Uncle Sam -- tried to clean up the mess with great gobs of money, but little success. The pain, suffering and deleveraging continued, inflation went bananas, everyone shopped at Wal-Mart and the Hamptons returned to scrub and sand. And no one lived happily ever after -- except for incredibly savvy stockpickers -- at least for a good five years. And that, kids, was the story they told at this year's Barron's Roundtable.

Oh, yes, the details: "They" are the 10 investment experts depicted here, who sat down with the editors of Barron's in New York on Jan. 5 to make sense of the epochal events in the economy and financial markets in 2008, predict what will happen in 2009 and share their investment ideas for the new year, which so far looks much like the old. The day was rife with history lessons and warnings -- and optimism, too, that those who find bargains amid the rubble will reap rich rewards. Or, as Meryl Witmer nicely put it, "It is an exciting time to be a stockpicker."

In the first installment of the 2009 Roundtable, you'll find the unabridged version of our little tale, as well as some first-rate stock picks from Meryl and Fred Hickey. The rest of this illustrious crew will share their wit and wisdom in Installments 2 and 3.

Meryl, general partner at New York's Eagle Capital Management and a value investor in the Buffett mold, brought four names to the 'Table -- an aluminum producer, a utility and two financials, as if she needed to burnish her credentials as a thoughtful contrarian. Fred, who edits the High-Tech Strategist newsletter in Nashua, N.H., made a compelling case for Microsoft and gold.

Want the details? Please read on.

Barron's: Let's forget about 2008 -- and that includes most of your stock picks. With the market down 36% from its highs, the government bailing out everything in sight and a new president coming to town, what is the outlook for 2009? Fred, tell us, please.

Hickey: The government can't cure a disease that has been more than a decade in the making. The U.S has built up gigantic financial imbalances, and debt levels the world has never seen. Massive increases in public debt and spending can't replace the lost private-sector debt and cutbacks in consumer spending, allowing us to go on our merry way. The stock market is experiencing a snap-back rally, similar to what we saw in 1930, after the Crash of 1929.

You don't look that old.

Hickey: I wasn't around. They had a name for it, the "little bull market." It came about after the Federal Reserve slashed interest rates to 3.5% from 6%, and later to 1.5%. President Hoover had ordered federal departments to speed up construction projects, and the state governments to expand public works projects. He went to Congress asking for a huge tax cut and a doubling of spending on public buildings, dams, highways and harbors. That sounds familiar. Hoover predicted the crisis would end in 60 days. He received widespread praise for his intervention.

We see where you're going, but what about today?

Hickey: The market has had its worst crash since the Great Depression, and a new president is promising to pull out all the stops. We'll have massive infrastructure spending on roads and bridges. We'll have more tax rebates, and the government has made bailout commitments of more than $8 billion to support various markets. It has bailed out almost the entire banking system.

The stock market has rallied about 20%, and could go up 40% or 50%, as the little bull market did. Then reality is going to set in -- the reality that the economy is terrible, the unemployment rate is going to rise, the Fed's policies are imprecise. The dollar could get killed sometime this year, causing all kinds of problems. We have a more protectionist Congress. Deficit spending is unlikely to work. In sum, we have a date with more traditional bear-market levels. You'll see the single-digit P/Es [price/earnings multiples] that were typical in 1982, '74 even 1930 and '32. The market will go down significantly, and then make a bottom.

Black: A lot of the stock market's performance will be contingent on public policy. The consumer is dead. There has been a paradigm shift. The savings rate is going up. People are terrified. It's like my parents' generation after the Depression. Gross private domestic investment won't go up, even if you give corporations tax incentives. There is too much idle capacity already. We can't meaningfully reduce the trade deficit because we don't manufacture enough goods that the rest of the world wants. That leaves government spending to create final demand for U.S. goods and services. Giving a tax cut to people who spend the money at Wal-Mart on products made in China isn't going to do it. Infrastructure and defense spending are the best way out of this mess because by law, defense goods must be made in the U.S. and we have depleted our conventional forces, whether it is tanks or helicopters. Also, cement, concrete and structural steel all are made in the U.S.

As for the market, the current 2009 earnings estimate for the Standard & Poor's 500 stock index is about $60. The market is trading for 15.5 times earnings. If Congress passes an infrastructure-spending bill and we spend between $750 billion to $1 trillion, that could provide enough boost for the economy to turn up by year end. We could be looking at $70 in S&P earnings for 2010, which suggests the S&P, now in the low-900s, could rally to between 980 and 1,050. But again, it is all contingent on good public policy. That's the only thing that will kick-start the economy in 2009.

Faber: There is no such thing as good public policy, certainly not in the U.S. The current crisis was produced largely by policy measures that led to the formation of Fannie Mae and Freddie Mac, and later the repeal of the Glass-Steagall Act, which had prohibited banks from owning brokers. It all led to increased leverage. Fed policy has been a disaster. Instead of smoothing markets, it has increased volatility. By cutting interest rates the Fed created bubbles -- in housing, in commodities. Now that the federal-funds rate has been slashed just about to zero, you're not getting anything for your money when you deposit it in the banking system and buy Treasury bills. There is no such thing as investment; everybody becomes a trader.

With a few exceptions, the U.S. doesn't produce anything. It is a consumption-led economy. When the economy expands, the U.S. imports from other countries, such as China, which increase industrial production and capital spending. From 2002 to 2007 the markets of emerging economies outperformed the U.S. But when the economy slowed in 2008, it was a catastrophe for these economies. They immediately cut spending and production, which affected demand for commodities. Last year, emerging markets were hit much harder than the U.S.

Cohen: The P/E ratio of the Chinese market was more than 50 times earnings at the end of 2007, so the issue isn't only fundamental demand but relative valuation.

Faber: I'm aware of that. I recommended shorting Chinese stocks last year. It would be best at this point for the U.S. to have 10% less consumption. It would make people save again and follow Christian principles of frugality and humility. I doubt it will happen, but it would be good for the U.S.

We've had history lessons, and now, religion lessons. What does any of this mean for 2009?

Faber: The U.S. economy fell off a cliff between October and December, and will stabilize at a lower level of activity. Some indicators may look better than expected, which will justify the present rally. Stocks already are up 25%. If they go up 50% from the Nov. 21 low of 741 on the S&P, you'll have the S&P at around 1,100. Afterward, reality will set in and in real terms the market will go much lower for much longer.

Around the world, governments are throwing money at the system to revitalize debt growth. When an economy is credit-addicted and debt growth slows, it is a catastrophe. With the Fed buying up everything and boosting the federal deficit, hyperinflation will be the result down the line. I am pleased that Barron's just wrote a cover story about the inflation in Treasury bonds ["Get Out Now!" Jan. 5]. This was the last bubble the Fed was able to inflate, aside from their egos.

[Laughter]

So, Marc, you're not too bullish this year.

Faber: Let's put it this way. A true market low will be lower, but in a hyperinflating economy, you can have nominal price gains while going lower in real, or inflation-adjusted, terms. Between the start of 2008 and November, almost every asset market collapsed, but the dollar was strong. After November the asset markets rebounded but the dollar went down again. There's an inverse correlation. Dollar weakness is a signal that the Fed has succeeded in pushing liquidity into the system. Some say the dollar will collapse this year, but collapse against what? The euro? The Russian ruble? These currencies are even weaker. In the very long run, each citizen must become his own central bank. Every responsible citizen must hold some physical gold, platinum and silver -- physically, not through derivatives.

Bill, what do you think?

Gross: For several years we have said we're in the midst of a generational change in the global economy and the financial complex. About two months ago Barton Biggs [a hedge-fund manager and former Roundtable member] said, "I'm a child of the bull market." He went on to explain that he'd been trained to buy the dips, because assets always eventually went up in price.

For the past 50 years asset inflation has been the context, the foundation of much of the economic growth in the United States and around the world. It led to additional leverage, which led to additional asset inflation. In the past 12 months the global economy and financial complex experienced a forced deleveraging. Assets deflated by $20 trillion to $30 trillion. We were all children of the bull market, but the bull market is over. Deleveraging will become the context for the next five to 10 years. It will lead to lower profit margins and higher interest rates.

And this year?

Gross: It depends in part on the extent to which governments can fill the hole left by deleveraging. Can they take us out of an illiquidity trap that is damaging not only to asset prices but the real economy? If so, there is hope for 2009. More likely, policy will come up short and we'll have a global recession, perhaps into 2010.

The important thing for investors is what happens in 2010, 2011 and 2012. We're setting up for a low equity returns, low economic growth, high real interest rates and 5% to 6% to 7% returns, at most, on all asset classes. The double-digit rebound typical after selloffs isn't going to happen.

Oscar, do you agree?

Schafer: I agree with a lot of what Bill says. The economy is experiencing a rain delay. Nothing is going to happen for a while. Although the government's spending efforts will help, they won't be enough to cure the two biggest problems. The first is housing. Unsold inventory of houses is more than a year's worth, and prices could go down another 10%-plus. Mortgages have been reduced and prices are down, but 68% of the public still owns a home, versus 64%, the historical trend. The mortgage-equity withdrawals of recent years are over. Consumers spend 14% of their after-tax income on housing, more than they pay for food. No matter what the government does, it may not help housing, and in turn, the consumer.

A stimulus package also wouldn't speak to the consumer's need to reduce debt. Just as "plastics" was the operative word in The Graduate, "leverage" will be the operative word for the next two to three years in the economy. The world is experiencing a giant margin call. The consumer is deleveraging and increasing his savings. The banks are deleveraging. Stories are rife that banks aren't lending, because they don't have sufficient capital. Further write-downs will continue to impair their capital. This credit contraction leads to a vicious cycle of companies doing poorly, layoffs increasing and foreclosures rising. The economy will be pretty punk into 2010.

Will the market follow the economy?

Schafer: The market may go up a little. Then it will test the November lows. The big story is 2010 and 2011. The averages won't do much, almost like in 1968-82.

How does that help the investor who wants to know what to do with his money in 2009? He can't wait until 2011.

Schafer: I can't help him. [Laughter] I don't know what the market is going to do in the next six to 12 months. It will be a stock-picker's market, but the averages won't rise more than 6% to 8% a year, dividends included. For the first time since 1941, the 10-year return on the S&P 500 is negative.

Hickey: It's hard to predict the market when you don't know what the Fed will do. The Fed has tripled the size of its balance sheet and is plowing ground we have never seen before. Here are my facsimiles of deutsche marks from Weimar Germany [holds up sheaf of papers]. They collapsed in value when Germany started printing money after World War I. It happened very quickly and it can happen again.

The Germans were successful at reflating. But they weren't successful in saving their economy. [Federal Reserve Chairman Ben] Bernanke is on record saying, "I will not make the mistakes of the 1930s. I will not make the mistakes of Japan in the 1990s." He is pushing the limit right now.

Gabelli: So you're saying he's going to make the mistake of the Weimar Republic?

Hickey: There is a possibility of that. Every month that there is a horrible employment, report the government prints more money.

Gabelli: It took Weimar Germany a brief time.

Faber: The worse the economy, the more they will print. It is like in Zimbabwe now, and Latin America in the 1980s. They had large deficits and printed money, and in local currency everything went up. But the currency collapsed.

Schafer: Isn't the federal government increasing its balance sheet to offset the private sector?

Gross: Exactly. The situation isn't similar. The Weimar Republic basically reflated to get out from under its wartime debts. Zimbabwe is a situation unto itself. In the U.S. there has been asset destruction in the trillions of dollars that has to be repaired. To say the Fed's balance sheet has expanded by a few trillion dollars and that this will create hyperinflation is a miscalculation.

Faber: I'm prepared to bet Bill that in 10 years the U.S. has very high inflation. With growing fiscal deficits that may reach as high as $2 trillion next year, it will be hard for the Fed to lift interest rates in real terms. Once they push up rates again, there will be another disaster.

Gross: Marc, you're smarter than that. You know that credit creation is at the heart of economic growth, and to the extent that credit creation has been thwarted, stultified, basically cut by 10% or 20%, economies can't grow.

Faber: The U.S. economy is credit-addicted. In a sound economy, debt growth doesn't exceed nominal GDP growth. Would you agree with that, or do you think debt should always grow at a faster pace than nominal GDP?

Gross: I'm with you there.

Faber: We come at this from different perspectives. You run a company that manages money, and I'm an outside observer of the U.S. financial scene, though I have to admit I bought some U.S. stocks for the first time in 30 years.

Abby, what do you think?

Cohen: First, it is important to recognize that we are not starting from a point of equilibrium, where the economy and the credit markets are working properly. Instead, the Federal Reserve is acting aggressively to provide liquidity not just to the U.S. economy but the global economy. I'm always amused when people, especially those based outside the United States, talk about the terrible U.S. consumer. I recognize the U.S. consumer is over his head in debt. But the impact is seen throughout the world because the U.S. is the world's largest importer. There will be significant consequences when U.S. consumers increase their savings rates rapidly, as they have done in recent months. This impacts other nations that have failed to do a good job of stimulating domestic demand. In many ways, the Fed is acting as the central bank to the global economy.

In 2010 the situation may move back to something more normal. Also, investors helped contribute to the situation we're now in. During several years of below-normal volatility in stock and fixed-income markets around the world, risk appetites reached extraordinary levels. Investors grew willing to take on risk without demanding appropriate levels of return. Some markets have now seen the inverse. There is a fear of illiquidity and risky assets. Thus, some valuation opportunities have been created, though I am not saying the entire market goes up, or goes up dramatically.

In other words, some stocks and bonds are cheap.

Cohen: In recent months, in addition to the rise in risk premiums in stocks and bonds, there has been a high correlation between different types of assets, and within asset classes. The one exception was U.S. Treasuries. Many investors were selling things largely on the basis of liquidity. If you needed to raise cash you sold what you could, including some securities that perhaps offer reasonably good value. Consequently, we enter 2009 with a real disequilibrium within individual asset categories. It gives careful investors an opportunity.

Gross: In a deleveraging process, investors are forced to sell almost everything. The asset of ultimate quality and liquidity -- Treasury bills -- becomes the recipient of demand. On the way down, the most risky and illiquid assets fall most. But even the most liquid, high-quality assets go down for awhile, until the government's checkbook can compensate.

Table: 2008 Roundtable Report Card
Cohen: I agree generally, but our work indicates some unusual things occurred in 2008. We put together a basket of securities heavily owned by hedge funds, and another of securities that weren't. The stocks owned by hedge funds went down 20 to 25 percentage points more than the others.

Schafer: Goldman Sachs did a great disservice to the hedge-fund business. People were shorting the basket of hedge-fund stocks. This caused heavily owned hedge-fund stocks to go down, creating bad performance for the funds, leading to redemptions and forced selling, a vicious cycle. In the past six months the fundamentals of many stocks have taken a back seat to who owned them. Long term, that isn't good.

Gabelli: That is her point. There are bargains around. Stocks fell below intrinsic value.

Cohen: In the search for liquidity, the funds sold simple assets traded in public markets, because the markets were open. The more liquid securities were the hardest hit. In 2009, investment vehicles that are more complex, highly structured and less liquid may not recover as quickly as those that are publicly traded.

How do you look at valuation, Abby?

Cohen: We use seven different models to evaluate the S&P 500, based on earnings, book value, cash flow and such. We also do detailed return-on-equity analysis. Using a composite of those models, we think fair value for the S&P 500 is somewhat above where the market stands now -- and we have one of the lowest earnings forecasts on Wall Street. We estimate the S&P will earn about $55 this year.

With all these models, why was your '08 forecast so far off?

Cohen: We anticipated a sluggish economy at the time of last year's Roundtable, but changed our forecast to a recession a few weeks later. We adjusted our S&P targets downward. We didn't see the liquidity crisis that developed in the summer.

Is anyone worried about deflation?

Zulauf: The whole process of deleveraging is deflationary. It will last several years. Where most economists will probably err is in how the corporate and household sectors react to this. They probably have built into their models expectations that private households and corporations react to fiscal stimulus as they always did. That is wrong. In previous deep recessions the household sector lost about 5% of its net worth. This time around, it has lost about 20%. Households will become much more cautious for years. Instead of spending, they will save.

There will be changes in the corporate sector, too. S&P earnings peaked at about $100 or so. This year they could slump to $20 or $40. The consensus estimates are way too optimistic. Much depends on whether the problems in the real economy hit the financial industry, causing it to relapse. The behavior and thinking of corporate executives will change dramatically. Companies will repair their balance sheets instead of spending and expanding, and that's why the deleveraging process will take years and years and years. Government and central-bank stimulus won't have the multiplier effects we used to see. Economic growth will be much lower in the next five or six years.

Table: 2008 Roundtable Midyear
And this year?

Zulauf: We are in a synchronized global slump. Peak to trough, U.S. GDP probably goes down by five percentage points.

Could it be worse than Japan?

Zulauf: It could be worse. Deleveraging usually means return on equity drops below previous cyclical lows. Return on equity for the corporate sector peaked around 15%-16%, and previous cyclical lows were about 8%-9%. ROE probably drops below that in this cycle, which will lead to much lower earnings. That feeds into valuations, which means stocks eventually will go much lower, to single-digit-type P/Es and high dividend yields.

In the past 10 or 20 years risk was high, but perceived risk was low. That is why everyone bought the dips and took on leverage. Now we are moving into a world where perceived risk is high but real risk will eventually turn out to be much lower. This will lead to a different valuation of equities and bonds. In two or three years there will be tremendous bargains in the market. But we are not there yet. We are in a structural bear market. This is a transitional year. We'll have bear-market rallies, and then go down more.

Gross: Typically we think of financial leverage, but corporations have been levered in two additional ways. The lower tax rates of the past 10 to 20 years have to [go] back up. Then there is operational leverage, which is no more obvious than in the auto industry. Corporations have been geared to a high level of global consumption, and now they must eliminate plant, labor and such. Based on tax, financial and operational leverage, the outlook for corporate profitability and profit margins isn't good.

Gabelli: Right after Christmas, layoffs will go up sharply.

Archie, you're usually optimistic.

MacAllaster: I can't believe you people can't find one good thing to say about the market, and at its low last year the market was down more than 50%. The bad news is in the market. Earnings are going to come down hard, but the market has come down even harder. Some bargains are out there, though they are hard to find because P/Es are difficult to determine. Still, a lot of companies are selling for well under book value, and some have high yields. The stock market is probably the place to be, particularly financials. Leverage is coming out of companies, and that will continue. But the process has created bargains.

The corporate bond market also is cheap. There are good bonds yielding 9% and 10%. That compares with 10-year government bonds, which yield 2% or 2.25%.

What do you think about bonds, Bill?

Gross: When we talk about the bond market we typically focus on Treasuries. At today's yields, don't touch them.
MacAllaster: And play the stock market in a conservative way. Don't buy stocks on margin. Keep some cash around, as I have. The Treasury secretary was right to bail out the banks first, though. They should go back to the old way of doing things -- lending money to people who are going to pay it back.

The old story in banking was three, six and three: Pay 3% on deposits, charge 6% on loans and hit the golf course at 3 p.m. Now it should be three, six and 20. Don't let anybody with a handicap under 20 get to be head of a bank.

Meryl, how does the market look to you?

Witmer: I agree that this is a stockpicker's market. There are some incredible values, and some incredibly overvalued shares.

Faber: What is overvalued?

Witmer: I have stocks at five times earnings, and then there is Amazon.com [ticker: AMZN] at around 40 times earnings. Amazon has an attractive business, but not that attractive. There is a real divergence in value. There are opportunities, as well, in the corporate-bond market -- first-mortgage bonds on baseload electric-utility companies, for instance, that were priced recently at 8%-8.5%. And this is five-year paper. That's a lot more than you can get in the government-bond market. Down the quality spectrum you'll find bonds yielding 14% and 15%. Let's say the underlying company goes into bankruptcy; you would be creating it at 30 cents on the dollar of replacement value. There are a lot of opportunities out there. It is an exciting time to be a stockpicker.

Mario, care to say something?

Gabelli: In 15 days we will have a new leader who is going to re-brand America. His first priority as CEO of the country is to create jobs and insure that no adult is left behind in this economic system.

The consumer is getting an enormous cash-flow benefit from lower oil prices. There are 240 million cars in the U.S. and 800 million in the world that are saving around $2.50 a gallon on gasoline. People with high credit scores and equity in their homes are saving money. The missing element is confidence. New tax laws are going to help with that. The working person is going to get a financial stimulus, and even under the most bearish scenarios 91% of those who can will be working in December 2009. You're going to see an investment-tax credit and a change in depreciation, encouraging small businesses to make capital investments. On Sept. 15 somebody shut off the lights for the business person. It has been hell since. We need to go from this hell for businesses to a kind of purgatory. More spending on investments and the possibility of a lower tax rate for corporations would send an interesting message to the business world.

That's nice, but what happens now?

Gabelli: Come April or May, the numbers will be a lot better than in the fourth quarter. Car dealers tell us they are starting to sell cars, but the buyers still need financing. Yes, unemployment is going to rise. But once a new president comes in and enacts fiscal stimulus and promises tax cuts, things will start changing. Once businesses see some stability, they can start planning and looking at cost efficiencies.

As far as corporate earnings go, an enormous tsunami hit the economic world. It is no different than labor strikes in the 1960s. When the steelworkers struck, did you base stock multiples on the absence of earnings, or step back and ask what normalized earnings would be over an economic cycle. And shouldn't the P/E multiple expand to account for depressed earnings?

Is this a good year to buy stocks?

Gabelli: I'm going back to what I think will work: POSP. Plain old stock-picking. It will be a good trading market. The markets won't do much more than 5% up or 5% down, but there are plenty of opportunities for financial engineering and value enhancement -- buying and selling, spinning off companies, selling divisions.

Cohen: This will be an interesting year for consolidation in a number of industries. Some companies are under distress because of balance sheets. Others in the same industry have had more financial success.

Gabelli: The natural-gas industry is one example.

Cohen: To the extent there are good opportunities from a valuation perspective, M&A [mergers and acquisitions] could perk up.

Gabelli: Contrary to the conventional thinking that companies don't have liquidity and won't do deals, there will be substantial activity by corporate buyers. But private-equity is handcuffed. Buying and selling businesses and spinning off of divisions will allow capital to flow to where returns are highest, even with an administration that will take a different approach [than the Bush administration] to antitrust issues.

It is going to be harder to borrow money to buy businesses.

Gabelli: It won't be harder for Johnson & Johnson [JNJ], but it will be harder for Steve Schwarzman [CEO of the private-equity firm Blackstone Group (BX).]

Now that we've solved the problems of the economy and the market, let's move on to your picks for '09. Meryl?

Witmer: I have four. Two are asset-heavy, and two are financials. Kaiser Aluminum sells for 23.50 a share. It has 20 million shares. Kaiser's main business is rolling high-quality, heat-treated plate and sheet aluminum used in the aerospace and defense industries and in general engineering. It also produces forged aluminum products for industrial and automotive uses.

How big is the automotive business?

Witmer: It represents about 8% of revenue. Auto-related profits will be down this year, but that will be manageable. The company has gained market share. Except for an insignificant subsidiary, Kaiser doesn't take on price risk in aluminum. It converts aluminum into usable form for customers and hedges out the metal-price risk. Demand for aluminum plate in the aerospace industry is driven partly by airplane growth, but more by the new monolithic construction of aircraft parts.

Monolithic construction involves carving shapes from steel plate. This has created a sea change in demand for Kaiser's product. The benefit for the airlines is lighter, stronger aircraft. Kaiser is paid by the pound, and producing monolithic parts often requires multiples of the actual weight because as much as 90% of the plate ends up on the machine-shop floor as waste. Kaiser has the only mill with excess capacity, so it will be the major beneficiary of the trend. An expansion project started a few months ago.

Kaiser spent some time in bankruptcy court. How is the balance sheet today?

Witmer: It's strong. Kaiser has $50 million of debt. Book value is $950 million, or $47 a share, twice the stock price. About $16 of book is a tax asset allowing the company to pay no tax on earnings for many years. I put a multiple on taxable earnings and add back the value of the NOLs [net operating losses on which tax credits are based]. The company probably earned about $3.50 a share in 2008, similar to 2007. This year is tricky because they are moving around some plant, and spending a little money to make the forged-aluminum business more efficient. They think they'll be able to put some competitors out of business by becoming the low-cost producer. This business makes no money. If they shut it down there will be a cost. If they lower their costs, it will add significantly to earnings.

How much of their defense business is vulnerable to changes in Pentagon priorities? There is talk of shutting or replacing programs.

Witmer: A major product for them is the plate to protect people in military transport vehicles. That's a growing business as vehicles are sent to Afghanistan. It has made up for some weaknesses in other areas. The airplane build that is ramping up will take up almost all their capacity in monolithic construction.

Schafer: Despite the oil-price decline, have there been any cancellations of aircraft?

Witmer: There are cancellations, but there are fill-ins from the large waiting list. In 2010, earnings could grow from around $3.50 to as high as $6 a share.

Do they supply parts for corporate jets?

Witmer: They do, although this business is small. There are a lot of orders outstanding from airlines, and a lot of planes getting built are using a lot more product from Kaiser. The company will be in the sweet spot for years to come. Let's say they make $5 a share and trade for 10 times earnings. Add back the value of the tax assets and you get a target price of more than $60. Kaiser has a market capitalization of $500 million. Their rolling mill alone, not including other assets, would cost $1.5 billion to replace. The company is selling at a huge discount to replacement value.

My next pick is an electric utility, Allegheny Energy . It trades for $34 a share. Allegheny operates in Pennsylvania, West Virginia, Virginia and Maryland. Its terrific CEO, Paul Evanson, took Allegheny from the brink of bankruptcy in 2003 to investment grade as of May 2007. The company's generation capacity consists of 48 million megawatt hours, sold to 1.6 million customers. Its plants are mainly coal-fired, and its new scrubbers should be in service by the end of 2009, giving it relatively clean electricity production. It is worth owning some electric-utility assets, especially with the focus on electric-powered cars.

Allegheny could earn about $2.20 to $2.30 a share in 2008, so on the face of it, it's not cheap. But a series of events should take place in the next three years that have earnings progressing to $2.90 in '09, $3.60 in 2010 and $5 to $6 in 2011. The events are largely locked in: agreed-to rate increases in Pennsylvania and Virginia and a guaranteed return on its investment in a transmission line that links its western Pennsylvania capacity to power-deficient suburban Washington, D.C.

Gabelli: The grid system Obama is planning will help all the utilities.

Witmer: And create jobs. Allegheny had a lot of trouble getting this transmission line through. In the end, the unions talked to the governors of the states involved about the jobs it would create. In 2011 the electricity Allegheny generates in Pennsylvania will start selling at market rates, which accounts for the large range of my earnings estimates for that year. The stock could trade for a minimum of 10 to 11 times earnings at that point, giving us a two-year target of 50 to 60 a share. The dividend yield is a relatively modest 1.7%, but the company should be able to increase it.

Most of Allegheny's production will move to market rate, except in West Virginia. In Pennsylvania they get 7 cents per kilowatt hour, which is very low. In New York utilities get 13 to 14 cents. They cut a deal years ago to bring rates up to market over time, and the benefits are finally kicking in. They are installing the scrubbers this year. After that, in 2010, the cash starts coming in.

And your financial picks?

Witmer: Assurant is a diversified insurance company. It trades for 30 a share and has 118 million shares outstanding. Its premier business is creditor-placed insurance policies. It is hired by mortgage-servicing companies to monitor homeowner compliance with home-insurance payments. If those payments stop, Assurant places a policy that is billed to the home owner, but whose payment is guaranteed by the mortgage servicer. The rate is about the same as what the homeowner was paying, but the policy insures only the home, not its contents. It is a relatively lucrative contract.

Its home-insurance business has benefited from the current environment. If people aren't making their mortgage payments, they likely aren't making their insurance payments, either. This business has a combined expense ratio of 70%. In other words, it has 30% margins, due to surging business from the housing crisis. Assurant is implementing a similar program with auto insurers, which has good growth potential.

What are the other business lines?

Witmer: It issues warranty-service contracts on appliances, consumer electronics and the like, another attractive business. It also has a nice employee-benefit business, which focuses on helping small and mid-sized businesses provide insurance for employees. It has a health-insurance business for individuals and small businesses.

Trailing earnings per share is more than $6, so the stock trades for less than five times earnings. Even if you take out what may be excess earnings from the home-insurance business, which we estimate would bring earnings down to $4.25, the stock trades for seven times earnings. But the high level of earnings could persist for many years. Plus, Assurant has other growth initiatives, such as the auto business, and some international opportunities. Book value was more than $31 a share as of Sept. 30, after taking write-downs on the portfolio. Assurant traded above 70 per share in the past, but 50 is a reasonable target in the next year or so.

Archie, do you know this company?

MacAllaster: Not well. There are a lot of low P/Es among insurance companies. Some even sell for under book.

Witmer: Assurant's book value is solid. It owns high-quality corporate bonds. My final pick is Discover Financial, the credit- and debit-card company spun out of Morgan Stanley [MS] in June 2007. It trades for 9.50.

It has a lot of things going against it.

Witmer: That's why the price is low. The company has about the most conservative management in the industry, and has managed its capital well. Discover wisely stopped adding cardholders aggressively in California and Florida years ago, unlike other card issuers. Another lender really should buy this for its ability to assess risk.

Discover has its own credit-card network, like Visa [V] and American Express [AXP]. It has made great strides in getting more acceptance at retailers. It also has a consumer-credit-card lending portfolio and a nice debit-card network. It has a solid balance sheet, with equity to managed assets of 11%. Managed assets include credit-card debt both on the books and securitized.

How has the loss experience been?

Witmer: Better than competitors. Tangible book value at the end of the Nov. 30 quarter was $11 per share. The company also won a large antitrust settlement from Visa and MasterCard [MA] that will add about $2 to book value. The stock is trading for 75% of adjusted tangible book. It's not news to anyone that they will have some credit losses. But with a loan portfolio of about $50 billion and net interest income of $4.4 billion, there is room to fund write-offs. We adjust the quarterly provision for loan losses on the income statement to the amount that Discover actually charges off. The company has been building its loan- loss reserve and taking reserves well in excess of its charge-offs. You need to make this adjustment to get apples to apples comparisons over the quarters.

Adjusting for all one-time items, we get annualized earning power of $1.80 to $2 a share consistently over the past eight quarters. The stock is trading at about five times our view of earnings and at a significant discount to book value.

What are they going to report this year?

Witmer: There is noise in the numbers, and they are building reserves. They could earn $1.70 to $2 a share, excluding one-time stuff. As the U.S. consumer continues righting his balance sheet, Discover will trade closer to 15 to 20 a share.

Black: What is the growth in receivables year to year, and what is the delinquency rate as a percentage of the portfolio?

Witmer: Receivables growth is about 5% to 6%, and the delinquency rate is 4.56% of managed loans. Next year delinquencies could rise toward 6%, but their net yield spread is about 8.5%, so they'll still have income.

No short-sale recommendations? Amazon.com sounds tempting.

Witmer: No shorts. The irrational can get more irrational still, though Amazon is a good company.

Fred, you must be shorting something.

Hickey: I'm not, for the first time in years. I've been riding the gold bull market, which has gone up for eight years, and staying out of technology. Tech has been killed. Nine years later, the Nasdaq is 70% below its March 2000 peak. Many top tech com- panies -- Microsoft , Dell [DELL], Intel [INTC] -- are at 1998 levels. Most of the damage has been done. My put options on Research In Motion [RIMM] and Amazon.com worked fabulously last year. I got rid of my puts in the fall and started buying tech stocks, though I plan to sell them after the Obama inauguration. But some names you could hold through the end of the year. Microsoft is one. At 20, it is lower than 10 years ago, when the company did $12 billion in revenue. Now it does $60 billion.

Witmer: Same market cap?

Hickey: The market cap is similar because they have been buying back shares to offset the dilution due to stock options. The dividend yield is 2.7%. The trailing P/E is 10, something you've never seen for Microsoft. Operating cash flow is $19 billion a year. Gross margins are 81%, which gives them a lot of flexibility to offset any weakness in the top line. As the economy weakens, Microsoft is able to cut costs.

The market misperceives Microsoft. Its most visible part -- PC [personal computer] operating systems -- is shrinking. Windows is just 28% of sales. Less visible, and growing rapidly, is the server and tools business, at 23% of its revenue, up 17% in the latest quarter. The SQL server database business is gaining market share, and a new virtualization product, Hyper-V, is one of the hottest technologies in the market. The real jewel is the business division, which now contributes a third of revenue. It grew 20% in the quarter. This is Office and SharePoint, a content-management product, and Unified Communications. Information Week called SharePoint a juggernaut. Companies like Pfizer use it to develop wikis and blogs. Microsoft is making a lot of money as a pick and shovel provider to the industry.

Gabelli: Why was the case made that they needed Yahoo! [YHOO]?

Hickey: They want to be in the search business. Luckily they didn't get it at the price they first offered, but [CEO Steve] Ballmer is on record saying he'd like to buy Yahoo!'s search-advertising business.

MacAllaster: How would you compare Google [GOOG] to Microsoft?

Hickey: Google's stock went from 700 to 300. Even so, I would rather own Microsoft. The stock could go back up to 30 within a year, though it depends if the market makes a bottom in the fall.

Schafer: What about technology generally?

Hickey: It's a cyclical business, and today it is a part of everyone's life. It is very much exposed to the decline in consumer and business spending. Lots of hardware companies are in trouble. Too many semiconductor companies are still being propped up. There will be a lot of consolidation, and bankruptcies.That's why you want to buy cash-flow-generating businesses.

My second pick is Cadence Design Systems . It fell 80% last year. The company has been around a long time. It is No. 2 in software used to design and develop semiconductors and electronic systems. Competitors are Mentor Graphics [MENT] and Synopsys [SNPS]. Cadence sells for under 4 a share. The company had a revenue-recognition problem and several top executives left, including the CEO. There was a failed attempt to take over Mentor. The company looks to be in disarray, but as with Microsoft, it has lots of flexibility. Gross margins are 78%. Cadence recently announced a significant cost-reduction program, including a 12% cut in its workforce. Up until 2008 it was profitable. Now it's a matter of right-sizing the company, reducing expenses. The stock hasn't been this low since 1994. Five officers and directors bought stock in December, including the interim CEO and CFO, who bought 100,000 shares each.The market cap is around $1 billion. Conservatively, revenue will be about $850 million this year, including $500 million in recurring maintenance and service revenue. The forecast for product revenue is small. There is more cash than debt: $560 million, versus $500 million in convertible notes that aren't due until 2011 and 2013. The stock could double.

MacAllaster: How could they lose money when gross margins are 78%?

Hickey: That's why the CEO is gone.

Gabelli: Why did they go after Mentor?

Hickey: I suspect they were trying to mask revenue deterioration. When things get desperate, companies typically do things like try to buy other companies.

On to gold. You have to protect yourself against potential hyperinflation. All the central banks are printing money now. The bull market in gold was rather orderly for the first eight years. We haven't seen the blow-off phase you get in all bull markets. That's coming. In dollar terms, gold was up 5% or so last year. In Indian rupees it was up nearly 30%. The price of almost all other commodities collapsed. I own bullion, the gold ETF [ SPDR Gold Shares (GLD)], some gold stocks and coins. I couldn't get them as the year progressed because demand was so great. But my first pick today is Market Vectors Gold Miners, an ETF. It sells for 32 and mirrors the NYSE Arca Gold Miners Index, a modified market-capitalization-weighted index of publicly traded gold companies. The top five components are Barrick Gold [ABX], Goldcorp [GG], Newmont Mining [NEM], Kinross Gold [KGC] and Agnico-Eagle Mines [AEM].

How has it performed?

Hickey: The ETF dropped 26% last year, so while gold held up, the stocks didn't do as well. One reason is that oil prices were so high; oil is a key component in production costs. Now crude is falling, which will be a help to gold miners in 2009. The fund has $2 billion in assets. It has been around since 2006, and the expense ratio is 0.55%. It gives you broad exposure to the gold-stock business.

My second gold pick is Agnico-Eagle Mines . It fell about 6% last year, so it did relatively well. It trades for 51. Not every stock fell in the 1930s, either. Homestake Mining went from 65 a share in 1929 to 500 in 1935. It had two things going for it: rising production and an increase in the price of gold, against a devalued dollar.

Zulauf: The U.S. was on the gold standard. It devalued the dollar and revalued gold relative to the dollar, and the price went up to 35 an ounce from 28.

Hickey: Gold could go to $2,000 an ounce this year, or next. The Fed is going to pump all kinds of money into the economy and it won't help. It won't get to corporations or the consumer. But it might get to gold and cause yet another bubble. Gold is one of the few assets that has performed well. And, there is a tremendous shortage of physical gold. In times of turmoil it is a classic hedge against inflation.

Gabelli: People withdraw their cash from banks and buy safes and guns and gold.

Zulauf: You can't get a safe at a Swiss bank anymore because they are all rented out.

MacAllaster: Agnico-Eagle doesn't make much money and pays almost no dividend. It earned more than a dollar a share in 2006 and '07. Earnings were cut in half in 2008 because one mine produces zinc and the price of zinc collapsed. The real kicker is that Agnico will quadruple production, from 300,000 ounces in 2008 to 1.2 million ounces in 2010. Capital expenditures will decline to $146 million by 2010 from $900 million in 2008. They have five new mines, in Canada, Mexico and Finland, countries with low political risk. Production costs are around $300 an ounce.

Zuluaf: The industry's break-even is about $430 an ounce. There is a limited amount of gold in the earth's crust, and most of it is in politically unstable places. It is cheaper to buy mining stocks than build new mines.Hickey: Very few gold miners will grow production or earnings this year and next. Agnico's earnings are going up by orders of magnitude. They'll do 40 or 50 cents this year, and $2 to $5 when the new mines come on. Because there is excitement about this company, they were able to do a stock offering in December. There are still a lot of momentum investors. This stock will have momentum.

I also own PowerShares DB Agriculture Fund, an ETF and another play on inflation protection. Assets are equal-weighted among four commodities: wheat, corn, soybeans and sugar. The index is rebalanced every November to maintain the weighting. The management fee is 0.75 basis points [three-fourths of a percentage point].

Gross: It's not worth 75 basis points.

Hickey: It is hard for retail investors to buy futures. It is worth it to them to pay professional managers. The DBA sells for 26 a share. It was down 21% last year.

If you buy this now, when do you sell?

Hickey: After commodities double. Farmers in Brazil and Argentina are having credit problems. They can't buy fertilizer and tractors. Argentina's wheat output may be down 37% this year. There are issues of supply and demand.

My last pick is the iShares FTSE/Xinhua China 25 ETF, which Marc shorted last year. Chinese stocks plummeted 65% in 2008. The bubble burst and they are in a major bear market. This index holds 25 of the largest-cap stocks in China. The fund's top holdings are China Mobile [CHL], China Life Insurance [LFC], Industrial and Commercial Bank of China [349.Hong Kong] and PetroChina [PTR]. This is the most liquid China ETF, with $6 billion of assets. The current price is $31. The average P/E ratio of the stocks is 11.9, and price to book value is 1.7 times. The management fee is 0.74 basis points and the dividend yield is about 2%. As the world emerges from recession, I want to be invested in China. Unlike the West, it isn't burdened by massive debts.

Zulauf: You don't know that yet. There is a dramatic real-estate overhang, and it was all financed by Chinese banks.

Hickey: There may be more problems coming, but the Chinese pay cash for cars. They have $2 trillion of reserves. There is more opportunity there for growth.

Faber: The Chinese economy is in a recession. Emerging markets will have bad economies for some time. But they are reasonably attractive on the basis of valuation.

Zulauf: The Chinese have this mix of a command economy and a capitalist system. It has advantages over our system of free markets and socialism. They are much better at setting long-term goals.

Faber: Asian and Arab countries also have a different concept of time and endurance. Nobody has talked about today's horrendous geopolitical situation. There is a huge mess in Afghanistan, Pakistan, India. The Chinese and Russians won't send divisions with tanks to attack U.S. troops in Afghanistan, but they are very good at channeling weapons into the area.

Hickey: Good reasons to own gold and food.

Faber: I would also consider owning defense-related stocks. There is a transition of power in the world, and countries like China and India are becoming more important. This will lead to tremendous tensions.

Zulauf: China's big mistake was gearing almost all of its manufacturing base to the industrialized economy. In the next 10 years it will try and probably succeed at developing more domestic demand. Many countries that have been dependent on the U.S. consumer are realizing they have to change and go their own way. In the next decade you will see different blocs building. This isn't good for the world.

Faber: The U.S. had a credit bubble. China had an oversupply bubble and an investment bubble. Suddenly the exports aren't there, so there's a double whammy.

Cohen: China's stimulus plan looks a lot like what we expect the Obama administration to put forward. The Chinese are worried about unemployment because thousands of factories have been closed in the Pearl River Delta. They have a shortage of infrastructure. There is a green orientation -- a focus on being more energy-efficient. One big difference is that the long-term focus of government policy here will be raising the savings rate. In China it will be pushing the savings rate down.

Hickey: Here's another difference: They can afford the stimulus plan, and we can't.

Thanks, Fred.

[JDUB]

I can relate to being busy. I appreciate you being open to at least listen. If you happen to think of someone who may be able to help, please send them my way.


John

[SWFfileMan]

JDUB.... I understand. I'm afraid that as tied up as I am and as much as I'm needed within the immediate social outreach I'm involved in, I won't be able to help. It sounds like there is much more on your table than I can begin to touch. I design flash educational interfaces that have me burning both ends of my candle. Excel had a minor adjustment on an existing jpeg he needed help with and I was happy to help. As much as I like to help people with graphics, this is much more involved and beyond my immediate focus right now. I wish you the best of luck in finding help and hope you have a wonderful Easter holiday weekend.

[JDUB]

Enough history, here is what I have in mind. I need a CT10 logo, to put on a website, maybe for t-shirts to giveaway, etc, although very soon, my show is set for expansion and I am hoping to get away from the countdown format and change the name. (Maybe The Turning Point) I had thought about calling myself Turning Point Ministries, but Greg said that was already taken. I may end up needing a CT10 logo if the station wants the show to remain that name. I also will need a logo for my ministry, once I get a concrete name. I am actually out of work so funds are very low, but I do have some cds I could send you if you help me with these projects.


John

[JDUB]

Alright, I will try to keep this as short as possible, but I have been known to have a problem with that. Here is a letter that I sent out to all the churches in my area explaining what happened.


Dear Pastor/Youth Pastor
I am writing to share what God has so powerfully done in my life and the impact that it can have on the lost in Southern Illinois. Several months ago, God told me to contact the program director at WCIL-FM and inquire about doing a Christian radio show on Sunday night. WCIL-FM is a non-Christian radio station. I have to admit that I did not respond right away, but at the Men’s rally at First Baptist Church in April, God told me again, a little louder this time to contact this man. I went home and sent an email to the program director that night. The next morning, I awoke to find this in my inbox:
Hi John,
I actually have thought often about it, I also am a Christian with a love for contemporary Christian Music, which is what I listen to alot the time myself, Newsboys, Jeremy Camp, Zoegirl, 3rd Day, etc. I actually have been trying to carry a show called the top 22, a Christian countdown show before Dawson on Sunday and have been talking to the
company that produces the show about carrying it. I do not know if you remember it, but we did have a show on through the eighties and early nineties called "Jesus Solid Rock" with Jerry Bryant that was local. I would always be interested especially with the popularity of Contemporary Christian music right now and the music is very good. If
you have any specific ideas let me know maybe we could work something out, I would like to do it as well, let's talk
Have a Blessed day,
Jon

Needless to say I was floored. I sat in awe of God’s power. I am told that this time slot reaches an average of 20,000 listeners!! Well, after a several months, CT 10 (Christian Top 10) made its debut on Sunday Nov. 11th. On WCIL-FM 101.5. I am on weekly from 8pm-9pm, (for now)

Other than sharing this wonderful news, there are some things that I would like to ask of you. First of all, please pray for me. Pray that I will be willing and able to take this wherever God leads. Pray for the un-churched, un-saved listeners. Pray that the music played will touch hearts and stir change in these folks. Another thing I need is for Christians to support the show. Please tell your congregation, esp your youth about the show and encourage them to listen. Please contact the Program Director ([e-mail]), or call the River Radio Group(985-4843), and tell him that you like the show, or at least are pleased with his decision to put a Christian music show on his station. I was told from the start that my time could be expanded to 2 or 3 hours from the current 1 hour in time. This would just be an even more unreal opportunity to reach the lost and hurting in Southern Illinois!! Also, I want to mention the sponsor of my show, Handfuls on Purpose. They are a Christian Bookstore and Church Supply store located across from the old hospital in Marion.(997-3507) Although they told me that they frankly didn’t think that they would see much if any business from the sponsorship, they did it anyway because they wanted to see the show happen. Wow! What if all Christians would act for the good of the Kingdom and not worry about what was in it for them. I feel they need to be supported in their business efforts. Folks need to go in and thank them for helping to get the show on the air and we need to spend our money in there as well. It is going to take the above support from my fellow Christians to help grow this ministry in the coming months. I believe that God has big plans for the ministry and am very excited to see where he leads. If you have any announcements of upcoming events, esp youth events, or any comments please contact me at [e-mail]. I will pass along as many as I can on the air. I thank you for your time.


Enough for this post,

John

[JDUB]

This is a great idea. Here is a post that Greg of At The Gate posted about my show.

Posted by: excel
In reply to: JDUB who wrote msg# 4566 Date:3/9/2008 7:40:31 PM
Post #of 4772

Father, may it never be said of us that having come to an open door, we closed it; having come to a lighted candle, we quenched it; having heard the voice of Heaven speak saying I still do miracles we don't take the time to lift the people up that are involved, so that the miracle doesn't become void.



I'd really appreciate you all lifting John up who because of his stepping out in faith is lifting God up Sunday nights from 8p-9p central on the radio at a non Christian station!
You can stream it from their site.
http://cilfm.com/home.php
He has emailed me his show and I have listened to it.
I fully support this.

Please read - http://investorshub.advfn.com/boards/read_msg.asp?message_id=27079493
Then come back for rest of this post.

Here is your chance to lift Jesus and Brother John Woods up at the same time. As you read once again the Christian Community is asleep at the wheel. Here we have a man who stepped out in faith contacting a non-Christian radio station and a MIRACLE occurred!

What has the Christian community response been to that miracle?
Two people have responded.

Please lets not let satan have his way.
He doesn't want this music on that station.
Everything was going his way.

Let's show that station from all over the US up into Canada that we are thankful for them playing music that lifts up the name of Jesus!
Do your part.

I'm so tired of watching good ministries have ZIP support from the churches. Guess what people? Where there is two or more gathered here together every day there is church right here on this board. Lets support this by doing our part letting the people know.

Unlike the churches there we need to WALK the TALK that is placed on this board.
Come on people RISE UP! Lets do it together!
If we do my bet is God is going to honor this movement and shortly John will be given more hours to lift up the name of the great I AM!

Let them know you are thankful and will listen on Sunday nights!
Let the sponsor know if you ever drive through there you will stop by. Just DO IT!

When I talked to the lady at the book store who is sponsoring this she just was full of joy. I think that call made her day. They aren't going to make money from sponsoring the radio show. They knew that going into it. What they also knew is they have a passion for the lost. Show them you are thankful for them. Share God's love through you to them.

Sponsor of show is a Christian Bookstore and Church Supply
http://www.handfulsonpurpose.com/
Handfuls on Purpose 618-997-3507
Or email them at [e-mail]

Contact Program Director Jonny Quest - [e-mail]

River Radio Group that owns the station 618-985-4843


I will split up the posts so it won't all run together,

John

[SWFfileMan]

I'm here if you need me if you can't PM

[december]

Market is looking for a bottom ..... 9500???