WASHINGTON, Dec. 22 (UPI) -- The performance over the last six months of the five existing Bear Food portfolios, stocks which I would expect to perform badly, has been outstanding. Unfortunately, it's been outstandingly good -- the average of all the portfolios is up 31.7 percent, compared with a rise of only 13.4 percent in the Standard and Poors 500 share index.
There's no question that 2003 has been a poor year for bears -- all three major stock market indices are up well over 20 percent. There are a number of good reasons for this. The Iraq war was completed (in terms of capturing Saddam Hussein and ending his regime) with fewer casualties than anybody outside the Pentagon had predicted, and without the terrorist/weapons of mass destruction outrages that many had expected. The Administration brought in an investor-friendly dividend tax cut, announced in January, and managed to have most of it enacted by June. The Federal Reserve moved from an easy money policy to an even easier money policy, and was rewarded by a tsunami of home mortgage refinancing, a surge in U.S. economic output and (so far) no immediately visible resurgence in inflation.
Nevertheless, as I have argued in several other columns, the position at the end of the year is fundamentally unsound. The twin U.S. deficits, of trade and budget, are unsustainable. Commopdity prices are sharply up and the dollar down, indicating an imminent resurgence in inflation. The U.S. savings rate is appallingly low, so that the country relies on foreign central banks to keep the merry-go-round going. The stock markets are at near record levels, in terms of earnings, yet the earnings themselves have record levels of "extraordinary items" that are taken below the line and ignored by analysts. Corporate governance has improved only modestly, and its biggest single defect, the non-expensing of stock options, has still not been addressed.
Taking this all into account, I am glad that the 15 "Bear Food' stocks have risen sharply during 2003; it indicates that most of them are indeed speculative and unsound, having benefited from a period of market irrationality second only to 1999. While my 3 year holding period for "Bear Food" expires for the first stocks next month, it must be clear that the onset of the recession and market correction I still fully expect has only been delayed by the extraordinary fiscal and monetary policies of the last 3 years, not eliminated altogether (and when it comes, I expect it to be accompanied by substantial inflation, which need not have been the case in 2001.) Hence, once the recession arrives, I fully expect most of the stocks to resume their downward momentum, and some of them to become true "Bear Food," falling 80 percent from their original recommended price.
In detail:
-- Cisco (January 2001, $34, now $23.97). The company is still not expensing stock options, and is devoting more than 100 percent of its earnings to buying back stock, to prop up the stock price and make management's stock options both more valuable and less dilutive. The stock is down 29.5 percent from my initial price; at some time within the next 3 years I fully expect it to hit the Bear Food target of $6.80, down 80 percent, which it just missed in the fall of 2002.
-- Marriott (January 2001, $46, now $46.17) I was far too early in looking for a downturn in real estate in general, although 2001-02 did see a downturn in office and commercial real estate. Low interest rates have helped to prop up Marriott, while the decline in travel after 9/11 has only modestly hurt it. Going forward, I expect it to decline once interest rates turn around properly, but probably not to Bear Food levels.
-- Goldman Sachs (January 2001, $105, now $97.94) The merger and acquisition business has more or less disappeared, but Goldman is still making money from two sources: the exceptional and prolonged spread between short term and long term interest rates, and proprietary trading. The latter is very low quality income, the former will disappear when interest rates turn up. Goldman's cost structure is still excessive, its corporate culture marred by 1990s greed. Bear Food, you'll see $21 per share within the next 3 years, probably amidst large losses and an accounting scandal.
-- Wal-Mart (December 2001, $57, now $52.90) At the end of 2001, I saw a decline in retail sales as the savings rate recovered to more normal levels. This hasn't happened yet; the mortgage refinancing avalanche allowed consumers to maintain and even increase spending. The poor Christmas sales figures now being reported suggest that this party's over. However, Wal-Mart remains a well run company, and will benefit from any move by belt-tightening consumers towards discount shopping. Probably not Bear Food within the next 3 years.
-- Home Depot (December 2001, $50, now $34.81.) My best pick, down 30 percent, which shows how poor my picks have been. Has been propped up by the huge ongoing housing boom, and yet it's still down 30 percent, while the market's down only 4.7 percent. Easy Bear Food as housing sales decline, hitting $10 well before December 2006.
-- E-Bay (December 2001, $32.50, split-adjusted, now $62.52.) Only my third worst pick, but it's a turkey, up 92 percent from the price when I picked it. Since it's dominant in an area of Internet commerce that's not going away, it probably won't make Bear Food from my original price ($6.50) though it might just do so ($12.50) from its current level.
-- DaimlerChrysler (June 2002, $50, now $45.78) has been propped up by continued strong consumer spending and fairly strong auto sales. Helped slightly by the decline in the dollar, which should allow U.S. domestic manufacturers to stem the flow of sales to imports. However, the strong euro won't help Mercedes. Probable Bear Food in a recession, as it's a highly cyclical industry, so could easily hit $10 at the bottom.
-- Fannie Mae (June 2002, $78.75, now $73.48) Has been propped up by a strong housing market, huge fees from mortgage refinancing, low short term interest rates and funny accounting. Looks like a disaster waiting to happen, should be easy Bear Food ($15.75) once interest rates rise, housing sales decline, and regulation of Fannie Mae and Freddie Mac tighten.
-- Berkshire Hathaway (June 2002, $77,000, now $82,900) Warren Buffett, the company's legendary CEO, is still in good health, but the company is still trading at twice net asset value. While Buffett's there, the company is well run, and therefore probably not Bear Food in spite of its stratospheric stock price.
-- Capital One (December 2002, $30.20, now $60.52) At the low end of the consumer credit business, which is why the stock was already somewhat depressed a year ago -- and why it has had an extremely successful 2003. All the reasons I thought it to be Bear Food last year are still true, once reality dawns; I even believe it to be Bear Food from its original $30.20, which at $6.04 would be down more than 90 percent from its current level.
-- Amazon.com (December 2002, $22.18, now $49.92) Still hasn't made a full year's profit, and now 125 percent above the level at which I looked at it. Almost certainly Bear Food from its present level ($9.98) but possibly not from its original level ($4.44) as the company has a genuinely viable business model, and just needs to focus its offering and crank up volume a bit.
-- Boeing (December 2002, $31.40, now $41.59.) Scandal, CEO resignation and the continued loss of market share. I'd say that made for pretty good Bear Food. Why the stock's up more than the market (32 percent versus 23 percent) is a complete mystery to me. Still Bear Food by December 2006, from either its original or current level, by which time it will probably be making huge losses and hemorrhaging cash.
-- Genentech (June 2003, $66.73, now $91.90) Genetic engineering. Overvalued, but when in its 23 year history hasn't this company been overvalued? Probably still Bear Food, at least from its current level, if only because biotech stocks have such high volatility.
-- Hovnanian (June 2003, $57.81, now $88.91) Homebuilder. Like Boeing, its rise is a mystery to me, since interest rates are up and home sales down in the last 6 months. Still Bear Food by 2006, from either its original or current level.
-- Sirius (June 2003, $1.95, now $2.19) Satellite radio company, now covering the NFL, but still in a barely profitable market niche, financed by endless debt offerings. Looks like Bear Food by 2006, and probably toast!
I'm not going to recommend any new Bear Food stocks, because my credibility as a stock analyst is probably at an all time low after 2003's events, and for those who still believe I may be right, 11 of the 15 companies above still look like Bear Food (down 80 percent in 3 years) at their current levels.
Happy munching! But have the poison antidotes ready!
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
