A Barron´s interview with Bearing Asset Management´s Kevin Duffy and Bill Laggner, via Lew Rockwell:
“Do you see the S&P 500 retesting its lows of this year?
Duffy: It’s difficult to know. It depends on how much money gets printed. In real terms, can we get cut in half from here? We think so. S&P earnings are distorted because of accounting changes for banks and brokers; if banks were marked to market, S&P earnings next year could fall to $45 a share. Bullish sentiment is rivaling the 2007 top, and volatility has fallen dramatically. We like the VXX, an exchange-traded note that’s based on S&P 500 short-term volatility as measured by the VIX index. It’s down 67% this year, and fits into the whole idea that complacency is very high.
Indeed. Are there any sectors of the market that you do find attractive?
Duffy: We are long consumer staples, discount retailers and pharmaceuticals. One way to participate is through the Gabelli Healthcare & Wellness Trust [ticker: GRX]. It holds roughly half health care and half global consumer brands in high-quality names like Danone [DA], Nestlé [NSRGY] and CVS Caremark [CVS]. It trades at a 20% discount to net asset value, though it has a fairly high expense ratio of 2.16%. If you look at Big Pharma, during the tech-stock and growth bubble of 2000, these companies traded as growth stocks, with an enterprise value to annual research and development spending of about 50 times. Today they’re trading at 10 to 15 times. We like fallen growth stocks that are cheap, like Wal-Mart Stores [WMT]. The stock has gone nowhere in the last decade, but gross profits have grown 2.7 times.
What are your other themes?
Laggner: We are heavily short Japanese and U.S. government long-term bonds.”
and
“We’re essentially short the political economy, and the most politically connected firm is Goldman Sachs [GS]“
My Comment
Duffy and Laggner’s Bearing Asset Mgt., a well-reputed Houston (now, Dallas-based) firm, is going out on a limb here, advocating a Goldman short.
Mind you, it´s a strategy I fully support and have supported.
On the other hand, never underestimate the reach of Government Sachs, as some wit dubs it.
Let me explain.
Over the last few years, I´ve read reams of market history — ¨Den of Thieves” (James Stewart), “Liar´s Poker” (Michael Lewis), “The Smartest Guys in the Room” (Bethany McLean), and Nick Leeson´s “How I Brought Down Barings Bank,” among scores of books. Everyone from Jagdish Bhagwati and Deepak Lal to Robert Shiller, Nicholas Taleb, and Niall Ferguson. From Paul Krugman, John Galbraith and Gabriel Kolko to Tom Woods and Murray Rothbard. From academic papers to partisan polemicists.
[You´ll find a few of those books in a recent Huff Po list, called 8 books that predicted the financial crisis. Actually, the books don´t predict what happened, but they certainly clue you into the dangers lurking in the system. I´ll post on the list separately. Here, I just want to acknowledge that it´s a good list, although highly political].
My point is, if you´d wanted to look under the hood of Wall Street, those books would have showed you where to look.
So why didn´t people look? Or when they looked, why did they miss the ticking time-bomb inside and fixate on the nuts and bolts?
How did that happen?
Journalists who were paid mega bucks to write about the markets; people who grew up in New York and Washington DC with every access to the major players; people who occupy the highest positions in journalism, bar none, whose opinions set the tone of world opinion, of academic opinion, of history; people who have Pulitzer prizes under their belt.
Why did these people fail in their role?
Or is their role quite different from what the public understands? In other words, did they do just what some of them were meant to do and is it we who are fools for believing the mythology of the media about itself?
Think about it.
Which brings me back to Duffy and Laggner.
Short Goldman by all means. But just remember who´s backing the other side of the trade.