Legendary investment manager Felix Zulauf seems to share the turnips outlook. A May trough followed by a good summer rally.
From Alan Abelson's column today
TO GET A DIFFERENT SLANT ON THE WAY the world's turning, we decided to go to Europe -- and old Europe, at that (forgive us, Mr. Rumsfeld) -- but only telephonically. We buzzed our old friend and treasured Roundtable member, Felix Zulauf, in Switzerland. Felix runs a group of hedge funds, all called Zulauf Europe Fund something or other, so as to ensure he'll always remember their names.
Our real reason for calling Felix, apart from hearing his dulcet voice, is that he has been simply terrific on the global economy and markets, as any reader who perused his commentary these past few years, or studied the record of his picks and pans, must attest. It goes virtually without saying that he has been bearish and short. Well, it emerges, he's still bearish and still short. But he's bearish in the sense that he believes we haven't hit the bottom of this secular bear market and he's short stocks only for the next few weeks. He expects the makings of a turn in May and a pretty good summer rally, and he fully intends to change his investment stance to take advantage of that rally.
Although viscerally a long-term investor, Felix has shortened his horizons considerably to match the volatile and twitchy nature of the current market. To position for the next bear-market rally, he intends to load up on European stocks. Not for any parochial reasons, we hasten to add, but because the European markets are down two-thirds on average from their highs, tangibly more than the S&P or the Dow, so he feels they have much more potential pop than do our markets. "Every dog," he laughs, "must have its day."
Felix notes, moreover, that there has been some serious capitulative selling in Europe. In particular, major insurance companies have been cleaning out equities from their portfolios with a vengeance, taking down that portion of their assets from a typical 40% to as low as 3% or even zero. That has resulted in a kind of sellers' fatigue, creating a highly favorable environment for the sort of rally he envisions. And, obviously, providing a fortuitous chance to play that rally with stocks picked up on the cheap.
While he doesn't blink the possibility that sentiment could get a charge from the end of the war in Iraq and that lower oil prices will help fuel some temporary improvement, he remains steadfastly negative on the economic outlook for both Europe and the U.S. Corporate profits, he observes, as a percentage of GDP are very depressed in North America, Europe and Japan. In order for these economies to improve meaningfully, companies must start to achieve a level of profitability that induces them to invest in capital equipment, which then ineluctably would lead to a step-up in employment, income and consumption. None of which seems immediately in the cards.
This country's leading export, Felix quips rather mordantly, is jobs, and that's true of the developed economies generally. Nor is he especially sanguine that lower interest rates will lift Europe out of its economic funk, citing the mournful experience on that score of the U.S and Japan. As to a shot-in-the-arm from fiscal policy, he notes that Japan has tried thattack for 10 years and has nothing to show for it but a spectacularly swollen government debt, now weighing in at 150% of GDP.
Felix sees the "convergence" between two different economic worlds -- one, led by China, featuring low costs and low regulation, the other, high-cost and highly regulated, like ours and Western Europe -- as the major problem for all industrialized countries. As "more and more goods are produced in the low-cost world," he reflects, "the old world loses profits, jobs and income." Which makes it "virtually impossible under these circumstances for economies to re-enter a normal business-cycle expansion as we know it, as the necessary preconditions are and will be lacking."
With 2004 an election year, it's a cinch that Washington will pull out all the stops to get the economy up and moving again. Such an all-court press to stimulate demand here, says Felix, paradoxically will do wonders for the emerging economies, but only further worsen our already horrendous trade and current-account deficits. Indeed, he calculates, the current-account deficit could rise from the present 5% to a formidable 7% of GDP. That would mean "the world would have to buy between $2 billion and $3 billion a day" to keep the dollar stable in the foreign-exchange markets.
Sooner or later, he speculates, the faith of foreigners who hold somewhere between $7 trillion and $9 trillion worth of our assets will be sorely tried. And should that faith weaken, the consequences could be serious, indeed: a collapse in the dollar, a rise in interest rates and recession. In case you're wondering, it could all begin to happen next year.
You'd never know from any of this what a truly delightful, entertaining and, yes, cheering fellow Felix is in person.
AI
