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And Alan greenspan using the words how almost every meeting that he has and Berknake and all the various Fed governors are all

Transcript (excuse the typos)


�.and Alan Greenspan using the words in almost every meeting that he has and Bernaike  and all the various Fed governors are all talking about it.  I mean, who would have thought this guy Alan Greenspan, that has been fighting inflation all of these years is now bringing interest rates down from 6.5% to 1% and he is still worried about deflation and now he is talking about bringing it down to 0%.  He is talking about buying longer-term dated instruments; he is talking about even (they joke about it, but still talk about it if they have to), helicopter reflaflation.  They threaten to drop money out of helicopters if they have to.  So, in my mind I think these people at the FED are scared to death.  Remember, Alan Greenspan could not control what took place on the way up.  As you recall, he gave his speech on �Irrational Exuberance� in December of 1996.  He could not control the market on the upside and I am sure that he cannot control it on the downside. He has tried, and you will be able to see examples throughout this presentation where we will talk about the problems that he has in controlling this deflation, (and also the impediments to monetary and fiscal policy).  We are going to get into all of these things. 


Let�s start with the bios of myself, and Marty Weiner, my partner.  You might just want to scan those.  You can see what we have done and one of the things that I would like to bring to your attention is that when it says that Mr. Minter was one of the founders of Comstock partners and he was involved with his prior partners.  You may know the names Stan Salvigsen or Mike Aronstein, my prior partners.  Stan Salvigsen  passed away of a heart disease in August of 1996.  His son happens to be in the audience here today.  Stan was just a terrific partner, a brilliant guy. I really, really miss him and Mike Aaronstein, who is also very bright decided to go into the commodity business in the mid 90s and now he is doing other things in Wall Street.  Marty Weiner does not make a whole lot of presentations.  He just stays at home and reads everything that you can read; and he is a brilliant guy and I love him as a partner and he helps me an awful lot in running these funds.


And now, �why are we bearish�?  My goal today is to try to convince you of two things. The first thing is that the financial mania that took place in the late 1990s was the greatest financial mania and the biggest stock market bubble in all of history.  And we are going to spend some time on the first couple slides on the financial mania where I�ll give you a couple of examples.  There are a probably a few examples that you can give me also on what happened to you in the stock market after the market eventually collapsed.  Then we are going to discuss the �cycle of deflation�, and impediments to monetary and fiscal policy.  Next, we are going to talk about the valuations, and excess ownership of the public and foreigners, and sentiment indicators.  And what we are going also do  (Scott Wilcox at my request-- I told him on virtually every slide that he can have an arrow drawn that shows how the time period coincides with the exact bear market bottom years that you have as one of your handouts). The years were 1920, 1932, 1949, 1974, and 1982 where you will see the arrow go down.  And what I want you to do is to understand what the conditions were during that period of time where we had a great bear market bottom.  I am also going to show you where we are today and try to make the case that we are not close to what looks like a great bear market bottom where stocks should be purchased.  I am also going to talk about the cycle of deflation.  Deflation is a very esoteric and difficult thing to discuss.  I am going to make a case for it. But in 45 minutes, I probably will not be able to convince you that deflation is the direction we are headed.  So I am going to go through those slides fairly quickly to get to the extreme valuations and show you what the valuations were at the market bottoms and where they are presently, and also the sentiment indications showing you where those sentiment indications were at those bear market bottoms and where they are presently. 


So let us get going with this.  This is the slide I am going to try to stick with the longest because this is the financial mania that I am referring to in the late 1990s.  This is the PE on the NASDAQ Composite.  I can just tell you that this starts in 1986 and the NASDAQ started trading in 1971.  The PE ratio ranged from 15-30 from �71-�91 and then it moved up and it started trading in a range from �91-�97 of approximately to 30-50 PE.  And then it broke out into the wildest bubble of all times and rose to a PE multiple of 245 times earnings.  I know that seems staggering but that is not the worst of it.  The worst of it that you see the line dropping (when the market dropped) from 245 times earnings to 210 times earning and then they discovered this corporate governance was just terrible.  As bad as it was, everyone had to clean up their income and balance sheets and in doing so it drove the NASDAQ to where they had more losses in the NASDAQ stocks than they had gains. So you see that spike going off the chart was the PE going to infinity.  Because that�s what happens when there are more losses than there are gains.  There is no PE, it is infinity.  So Ned Davis had to stop using this chart and replace it with the chart that he uses now that just shows the NASDAQ PE for only the companies that are profitable.   Because even right now the NASDAQ has an infinity PE and again, when that PE went to 245 times earnings it was because everyone was making so much money that they allowed companies to come up with pro forma earnings and operating earnings that were all ridiculous.  GAAP earnings, (we are going to get to the slide on that pretty soon), are the only earnings that mean anything.  Operating earnings exclude write-offs.  Why they allowed companies to report operating earnings continuously, quarter after quarter, year after year, while they write off the same things and allow them to be taken off the expense account is absurd, it�s absolutely ludicrous.  So when they were forced to have to report the GAAP earnings, that went to an infinity PE also.

 

  I want to continue telling you other stories about this bubble that really did hurt us a lot.  We lost a lot of money shorting stocks throughout the bubble when stocks got outrageously overvalued.  I�ll give you an example: Internet Capital Group is an Internet incubator company and CMGI did the same thing, they bought a portfolio of Internet stocks, most of them were not earning money.  They were in business to give them advice before they went public.  Those two companies (when Internet Capital Group was trading at 212 and CMGI was trading 263) each of these companies were worth 60 billion dollars.  Now, that is a 120 billion dollars combined.  Now they are worth almost nothing because one of them is trading at around 50 cents and the other is trading around $1.50.  But those two companies with $120 billion in market capitalization were greater than the total capitalization combined  (added together) of Alcoa, AT&T, Honeywell, Eastman Kodak, International Paper, and General Motors.  Plus if you add to that, because that is about 90 billion dollars worth of market cap another 30 billion then you equate to the two companies Internet Capital GROUP and CMGI. 

 

Another example would be Priceline.  Priceline is a company that a bunch of us just could have gotten together and called the airlines and asked if we could just sell (over the internet) seats that you haven�t sold.  And then we will sell them cheaply,  but better than you can sell them and its going be a great deal for you because you are going to fill up the planes.  And this company traded at equivalent price of 990 dollars.  At 990 dollars, Priceline, that had no aircraft, no pilots, no maintenance personnel, no stewardesses, nothing except a bunch of people answering the phones and buying tickets for people over the Internet.  That company was worth more than the entire airline industry put together.

 

 This bubble was not confined to NASDAQ companies.  Lucent was trading at 270 billion dollars and its now trading $1.70 and it is worth 8 billion dollars. EMC had a value of 250 billion dollars at the peak and it is now 22 billion dollars.  I really could go on and on. Yahoo is another great story.  JDS Uniphase traded at 214 billion dollars at the peak and is now 4.5 billion dollars.  Yahoo, when they were added to the S&P in 2000, rose in one day from 175 dollars per share to 250 dollars per share just because they were added to the Standard & Poors 500.  Now we shorted Yahoo at that price, and we very rarely short stocks that are making new highs.  We typically wait for a company to rollover (and then test the high again) before rolling over and going down through the low that they made.  But this was just so absurd that we had to short Yahoo when that took place.  I can probably go through more stories but I think we spent enough time on that chart and we have to get to other things. 

                                       

The main thing that I want to convince you of is that this was the greatest financial bubble of all time, much greater than 1929, much greater than anything, even Tulip mania, because tulip mania was so small relative to this.  Let me see also, at the peak when the NASDAQ  was 245 times earnings, it had 6.7 trillion dollars worth of market cap and then it went down to 3 trillion at the brink.  I know I went to a speech in Princeton where Paul Krugman was giving a talk. And I went there because he wrote the book �Depression Economics� that was sitting right by my bedside when I attended the talk.  But, when he gave the talk, he sounded like a conventional economist and that everything was fine and we do not have anything to worry about-- like Japan.  And I had to stand up and I argued with him for about 15 minutes.  I said I think you should go back and have reprints made of that book and that was right after the break.  This was right after the break, in late 2000, and he just thought the break was a correction. And now he sounds more bearish than we do when you see his articles in the New York Times.

 

 This was a true mania and if we are right and it is and was as bad as I am saying, you would logically think that the market would eventually trade at a major market low like those dates that you have in the handout.  Now lets keep going, and this next chart is a logarithmic chart showing the Dow Jones in 1929 with the inverted V, and you see it now with just the small correction  relative to 1929 and if you think about it a very, very slight recession.  It was the mildest recession in history from March 2001 to November 2001.  And I guess I�m saying to myself: Is that all there is to that?  Can we have a financial bubble as bad as I described and then have the mildest recession in history and then have the stock market go down where hardly anyone got hurt except in the NASDAQ stocks?  I don�t think so. I think it�s going to be a lot worse. And we�ll go through other things to show this.

 

  This is the �cycle of deflation� that you all have in front of you (the second handout).  The reason I want you to have this is because I am going to be showing charts from here on out that describe each stage of this �cycle of deflation�.  It starts with investment and moves on to over-investment and excess debt.  I�ll show you charts on this and then charts depicting weakness of pricing power and devaluation --where we devalue the dollar first and the other countries followed behind us. 

 

Here is the chart of the excess debt.  As you can see, in 1929 the debt was 265% of GDP.  Presently it�s 302% of GDP.  There is 32.3 trillion dollars of debt and 10.7 trillion of GDP.  No one ever thought we would achieve the excess levels of debt that we achieved in 1929 and now we have gone above that by a substantial amount.  And we are just setting up for deflation-- we have a bubble bursting, we have excess debt, and here we have the excess capacity. 

 

Look at that capacity growth.  The scale to look at is on the left hand side.  That other scale was showing another chart that was showing the capacity utilization that is 74.3 percent right now.  It is very difficult for me to imagine right now that capital investment can take place when capacity utilization is still 74.3 percent.  Anyway you can see the capacity growth and you can see how it�s declined. And there is not going to be a whole lot of plant additions we don�t think for some time. 

 

Here is the weakness of pricing patterns; the best way to describe that is through profit margins.  As you can see, the profit margins were dropping throughout the period of time.

 

  Here is where we talk about the devaluation, the way you try to control the currency is through interest rates typically.  Sometimes you intervene in the currency markets, but what the normal step is to try to reduce your interest rates.  Remember what Greenspan did in 2001, he reduced rates 11 times, now what we�re trying to show here is that in 2002 how everyone followed us.  We only reduced rates once in 2002, it was 50 basis points and once so far in 2003.  Why everyone thinks this thirteenth rate reduction is so important, (this one quarter percent rate reduction to 1 percent) that is so important that its going to turn the economy around is beyond me.  But they do.  I can tell you because this is on the website.  You can see the chart on it and an interview by me on CNBC, where Consuela Mack shows a clip of me being interviewed on CNBC on April 18th of 2001 and on that day Alan Greenspan tried to jumpstart the economy.  He reduced interest rates by 50 basis points.  By doing that, the stock market was up 500 points.  I was sitting in the green room at CNBC and they had so much going on, and everyone was so excited.  They said that if you would rather not go on we�d prefer that because there are so many people we want to interview to talk about what Greenspan just did.  It was just terrific, we are all so happy. Do you really want to go on?  I said yes, I came all the way here and I want to go on.  If you want to ask me questions about Greenspan, if you want to scrap the whole interview we were going to do, and ask me questions about Greenspan, that is fine with me. And that�s what they wanted to do so, I responded by saying the first 3 cuts did not work, this 50 basis point cut that surprised the market  (and I know the market is up 500 points right now) is not going to work either. And remember they cut it another 6 times that year and they cut it one more time last year and then this year.  And these are the competitive devaluations; you see that whole cycle of deflation is falling into place. 

 

The next part of the cycle is going to be protectionism and tariffs.  And even now you can see protectionisms and tariffs.  The steel tariff we imposed that the WTO deemed illegal and now Japan is trying to do some things that are increasing the tariffs on beef from 38% to 50%.  So you are starting to see some of that now.  That�s the next step then there is beggar my neighbor policies, then debt contractions and bankruptcies and that is the way the whole cycle has to end if we are right. 

 

This next chart is the special report that is also on our website.  What we show here are all or the inflations followed by deflations for 200 years.  You can see the debt cones on the bottom.  In the past every time we had the inflations and disinflations, there was tremendous debt accumulation.  We will go through all the numbers, you can see the number in the 1929 crash was 192 billion dollars and that was when it was 265 percent of GDP and it went down to 168 billion dollars in the deflation.  Presently, as we stated before, there is 32 trillion in debt right now.  We think that is just about the limit.  The people that are bearish, that are inflationists, have to believe that the debt will go from 32 trillion to a much higher level because that�s the only way we can have inflation.  Even though inflation is our second highest probability we think it is going to be hard to get inflation out of this. It is hard to solve a debt problem with more debt.  But even if we do get it, remember our main case is that if we short the market, we are going to win either way because Greenspan is in a box.

 

 Now, in order to find the possible catalysts to this deflation the thing to look for is where the banks are loaning the money.  Now this chart shows another form of debt, (the 32 trillion dollars was financial and non-financial debt), this chart shows the composition of domestic non-financial debt (about $20 trillion).  Mortgages are 41% of domestic non-financial debt.  That is about 8 trillion dollars and what typically goes on with banks is that every place they loan money they get destroyed, especially when they all try to do it together.  They did this with lesser-developed countries (the LDCS) in the early 1970s. They did it again with farmland in the late 1970s, and they did it with oil in the 1980s.  The thing about farmland was the spread back then, it was the price of real estate farmland, and the crops that you can grow and sell.  They just saw the farmland kept going up and they didn�t care how wide the spread got. And when it gets too wide it collapses-- and then they did the same thing with oil in the early 80s and did it with the LBOS in the late 1980s.

 

They just constantly make mistakes, and now this chart shows there are two types of bank loans.  The top slide is real estate loans; the bottom slide is commercial and industrial loans.  You can see the decline there. When you see a spread like this you also have  to worry about the collateral behind the loans and real estate happens to be the main collateral behind these loans.  This is all explained in the �special report� on our home page. 

 

Lets go to some cartoons to lighten things up.

 

PERSON:  One of the reasons I am here is the great calls made in Barron�s was by Comstock on real estate.

 

MINTER:  We are making the same call for about the same reasons.  It was a 1988 article in Barron�s where they had on the cover a house falling off a cliff, at that time real estate really did collapse in 1989 and 1990.  Of course there were certain areas it still went up for a while (e.g. in California in 1989), when it crashed all over the country we got so many letters complaining that we caused the crash.  And that was absurd�the market is too large for one prediction to affect it. 

 

Here now we have a gentleman standing at the edge of a building worried about the spreading deflation, the record trade deficit, and stock market bubble.  Then you have the policeman saying don�t worry because Greenspan will solve all these problems.  And then you have another guy saying, �I think that is Alan Greenspan�.  The point we are trying to make is that it didn�t say stock market bubble bursting.  This cartoon was up in 1999 and 2000.  We posted the cartoon a few times knowing that everyone thought Greenspan would be able to control the mania.  Fiscal and monetary policy is not going to work.  It did not work 2 years ago and it didn�t work last year and we don�t think it will work this year.  It might help a little bit in the third quarter, but we think it�s going to fail again.  Everything is still working for the deflationary case. 

 

The next cartoon was put up in October of 2001 when interest rates were 2%.  We knew people would start worrying about him having only 200 basis points left and now he only has a 100 basis points left.  And now you hear what he is saying about the 100 basis points.  They are starting to talk about all kinds of crazy things, the helicopter, buying of long-term treasuries.  They are in a box.  There is nothing they can do. 

 

Next, is a perfect example of greenspeak. Here is Bagdad Bob (the Iraq Minister of Communications),�The dollar is mighty, we have full control of the account deficit we are healthy to have so much debt. The infidels of deflation will die against the wall. The louts of Dow Jones will succumb to our stimulus package�.  And you have Greenspan behind him saying, �They are not buying it Saeed, sack them with another rate cut.� 

 

Let me try to explain to you the difference between a typical business cycle and this business cycle.  These two slides you are going to see in a row are a typical business cycle where demand exceeds supply, inflations rises, the Fed increases interest rates, demand decreases, and inventories build.  With interest rates increasing, housing starts drop, auto sales drop, consumer spending drops, business capital spending dries up.  After the recession ends the process works in reverse.  Interest rates are lowered and housing starts, auto sales increase, and consumer spending increases.  This is how you get a self-sustained economic recovery. 

 

Presently, does anyone think that housing starts, auto sales or consumer spending went down this time?  Because they didn�t.  Let me show you the difference about what is going on right now and let me make this other point about impediments to monetary and fiscal policy.  Marty and I have heard the expression in the past: �don�t fight the FED�.  We did know that there were 20 monetary easing periods since 1915 and the stock market was up 12 months later every time except two.  Since it didn�t work after this easing , it will be only the second time it hasn�t worked in that period and the only other time was after the easing in 1929.  But we were convinced that it would be just like the 1929 scenario. 

 

Now let�s take a look at some of the things we were talking about: consumer spending, housing starts.  Look at the pink shaded line; every time you had a recession you had real personal expenditures decline substantially, below zero.  From that you get that thrust when you lower interest rates and that�s how you get the economic rebound.  Take a look at every single period in the past and then take a look at the current period.  Did that ever go below zero?  No. 

 

And you have the same situation with housing starts.  Look at the fluctuations and how they go down and drop below zero. The rate of change goes below zero in every recession and then they have this thrust up.  That is what you need: the thrust up.  And you cannot get a thrust up if you have no down swing.  You have a slight down swing below zero in housing but its very small.  And you don�t have the conditions that are receptive to monetary and fiscal policy.  And here you have another reason for the economy not being receptive to monetary and fiscal policy -- money velocity.  Look at the M2 velocity and the M3 velocity.  The chart of M3 velocity Ned Davis is going to have to make another chart since it is about to go down lower than the scale.  Now here we have past economic�..

 

Audience: Why is M3 velocity declining?

 

Minter: Remember when Greenspan talked in front of the Congressional Committee?  Congress believes Greenspan has the answer.  So he said, �Don�t worry. If we start to run out of ammo we are going to buy the long bond.�  Congress believed that by buying the long bond, that would be the answer to everything.  Do you not think Japan bought the long bond?  They bought everything, equities as well as the long bond.  The point is that they should have asked him, by buying any treasuries they are pushing money in the banking system but you have to be able to do the second step.  It is pushing on a string! Pushing money into the banking system and pushing it out to investment spending are two different things.  You can�t depend upon on consumers going into their net worth and into debt to buy autos with 0% financing to get economic growth.  You need the businesses to borrow and build plants and hire employees.  And have the employees spend out of their personal disposable income.  That is how you have a self-sustaining economic recovery.  If you can�t stimulate this constructive borrowing for investment purposes, you will not be able to expand the M2 and M3 velocities.

 

 

Now take a look at these past recoveries. This is the average of the last five post WWII expansions.  This is employment, look at what employment does typically, it�s the top line and then look at the 1991 expansion that is the red line.  Remember when they called that expansion, the jobless recovery.  What do you think this is, if that is the jobless recovery.  The current expansion is down there with the dark blue line.

 

 Next you have industrial production, the top line is the average of the last five post WWII expansions. The bottom line is current expansion in industrial production.  You can see that there is a major difference here.  Why other economists don�t point out these things, I don�t know.  I am not an economist, but these are just very persuasive.

 

Let�s look at the index of leading economic indicators.  Remember on CNBC when they talked about how this is the third month in a row with increased leading economic indicators.  But just take a look at how flat that line is up there.  The three increases were about 1/10th of a percent.

 

And now we are getting to the best and easiest part, that last part is pretty esoteric.  This is the part that has got to be persuasive.  This is the Standard & Poor�s price earnings ratio.  We went into why the gaap earnings are the only things to look at.  Take a look at this period of time when you see the bubble and where we got slaughtered versus the range of 10-20 PE�s all the way throughout history.  10 PE�s are cheap, 20 is expensive.  All of sudden it goes to 40, it went to 40 during the bubble and now its only at 30.  The point is-- that can you really believe we can start a new bull market at 30 PE when you look at the start of every other bull market starting below a 10 P/E.  First let me show you the chart when the PE is expensive. 

 

Audience: Question (inaudible)  But something like does the market have to crash or can we muddle through until the earnings catch up?

 

That is absolutely the case, we really do not know which way. Remember Japan went though a rough time and is still going through one.  It is possible that scenario could take place or it is going to crack substantially. I am leaning to this market crashing pretty substantially and probably pretty soon.  I think this trading range of 965-1015 on the S&P, I don�t think its going to break through that 1015.   But as you know anything can happen and it could stay in that trading range for a long period of time until earnings catch up.  But I can tell you its not going to be a pretty picture even if it did just muddle through for years.

 

The next chart shows dividend yields all of sudden going to 1% killing people like me in the bubble who really studied the long term financial history, then take a look at the expensive to 1%.  Guess where the arrows come in�32, 49, 74, and 82.

 

 Lets keep going.  This is price to book value, it always went from one to two.  One was cheap, while two was expensive.  All of sudden it goes to 7, now its at 4.2.  There is only one line here because it only goes back to 79.  It was about 6 percent in 82. 

 

Here is the S&P industrial price to cash flow, look where the lines come in.  They are all around four times cash flow and look where it got to, at twenty times cash flow. 

 

Here is the S&P industrial average price to sales ratio.  Look where they come in, again this is 74 and 82. 

 

Now we are looking at something that I�m obsessed with.  Every single month that the equity mutual fund purchases come out they email me from the ICI and I put that in the excel spread sheet.  Just take a look at that enormous red blob of purchases.  Right over here, that�s all through the 90s.  Picture this, the purchase of equity mutual funds throughout the 90s.  Now when you have a bad market you usually lose these people.  Look at the 70s when the market went down 50% you had liquidation for a decade and then in �87 you have liquidation for a couple years.  Here, you do see some liquidation, but since the bear market started we have still accumulated 209 billion dollars of equity mutual funds.  Now if I included 2000-20003, it would be 300 something billion dollars.  I had to take out the 140 billion in January, February, and March of 2000 because that was still in the bubble years.  So, unless you get liquidation by these equity fund shareholders, you will not get a major market bottom.

 

 And you can say the thing with foreigners.  This is the foreign accumulation and it�s not just equities. There are other problems we are not discussing today such as unfunded  pension funds and companies funding their pension funds with their own stock.  The budget deficit, the current account deficit, and low savings rates.  All imbalances from the bubble, but there is not enough time to talk them.  This thing is a disastrous situation.  People think it�s not really bad, we buy a Lexus, we buy the Stoli vodka, so its going overseas, but then circles back here where and they buy our debt and equities.  They are taking our income to buy the Stoli and they are coming back by us being a debtor to them. They own 33 percent of our Treasuries, they own 14% of agencies, 14% of equities, 21% of corporate debt.  This cannot continue.  This is a very bad situation.  Before it is over, you are going to have liquidation by the foreigners like you�ve always had. 

 

Here are  the different sentiment indicators and we got� all you can say here is mutual fund cash asset ratio its now 4.6%.

 

Audience: That would mean a weak dollar?

 

Minter: Yes

 

Audience: That would also mean gold would do well?

 

Minter: Well it could very easily do well.  We are one of the few bears that are not gold bugs. We have a small position in Newmont because we are not sure how it�s going to perform in this environment. Typically gold does do well when the dollar goes down.  But gold, I�m not sure, is going to act so well in deflation because in deflation you want to sell everything you can possibly sell to pay down debt.  So we are watching it carefully.  If it was really going to be an inflationary problem I would think that gold would be over 400 dollars/oz. now, it started down in 1980 from $870.  We are watching it and we have a small position.  There is a chance gold can do very well in deflationary times, which I am sure you are aware of.  Everyone points to the 1929 period.  Here is actually what happens in that 1929 period.  Homestake Mining collapsed with market and came roaring back.  But you have to remember that they had a fixed price of gold at 26 dollars an ounce and then they went to 35 dollars an ounce. So we think that might be an unusual situation.  We know that there are a whole lot of people that email us all the time.  We get an email about gold at least every day and we know to be watching it carefully. There is a possibility that we will own a substantial position in gold before this is over.  At one time, Comstock owned 2 percent of all the gold stocks in the world.  But right now we have a very small position in gold, but are watching it. 

 

Here is the cash to asset ratio, again it is 4.6%.  Where was it during those major bear market bottoms? Take a look- 11-12%.  I am trying to show you the absolute best periods of time to invest (major market bottoms). That other period of time where you see the cash to asset ratio at about 13% was in the bear market of the early 1990s.  I just don�t consider that one of the main bear market lows so that�s why that�s not highlighted.

 

 The sentiment indicators we�ll go through quickly.  You have the VIX in and the VXN in complacent territory. 

 

Here you have the bulls and bears by investor�s intelligence.  This comes out in Investors Business Daily every Wednesday. Take a look at where it is now.  The bulls are at 60%, the bears are at 20%.  The bulls are actually 56% and the bears are 20%.  Lets take a look at where they were at the major bear market bottoms.  You got to have the bulls way down there lower than 30% and you have to have the bears up there in the 55% area.

 

  Here you have investment clubs, the investment clubs with 37,000 at the peak are 25,000 now.  Where were they at major lows.  Major low in 1982, there were 4,000-investment clubs. Remember what happens, they argue with each other and break up.  That is what happens in bear markets.  Let us point to this 1974 bear market low.  There are 8,000 investment clubs. Remember we still have 25,000 and I think that number is going to go down.

 

 Here are charts that show that bear market rallies are typical.  I had to put these two charts in because when I knew I was going to be talking here we had quite a rally.  And I wanted to make sure I showed you what was typical in these major bear markets. 

 

And now take a look at the Nikkei.  When it first broke, I went down about 60% and then it traded in a trading range for eight years from about 14000-22000 and then it broke finally again and went to 7600 and now it�s about 9300.

 

 Here is the stair step decline of the Dow Jones in 1929. I mean you get these bear market rallies, what you have to do with them. What we do with them-- is if they break out of a trading range to the upside we will get out of the way. What we�ve learned from the bubble is that anything can take place.  So any stock that you have that breaks out that we are short, we�ll cover it.  And we will probably replace it because its unlimited liability.  If we short the S&P futures and it breaks out, we will cover some of those and then try to buy some puts to have at least limited liability. So that�s the way our thinking is and we think that this breakout above 965 was a significant one. We think the trading range of 1015-965 is going to be broken on the downside through the 965.

 

That is the presentation; this is the way the Comstock Capital Value fund is positioned now.  Its 92 % leveraged against the S&P and the Comstock Strategy Fund is 53% leveraged against the S&P.  The Strategy Fund is just a much more conservative fund.

 

Questions:

 

Audience: Where does the money go?  If the stock market goes down, what takes place?

 

I�m sorry to say it vanishes. It just plain goes to money heaven.  Instead of having to flee to some other place or some other area to go up.  I mean homes can come down, the stock market can come down, bonds can do poorly.  And these are things you might have to do.  I do them.  I have substantial amount of money with very sophisticated hedge funds operators.  I have money with the guy that does dispersions with options.  It�s a very sophisticated technique to where he buys straddle on the individual companies within an index, say a brokerage index hoping that some of them will go up and some of them will go down.  And then he�ll short the straddle on the index.  There are techniques like this, I believe a good technique for my sons that are in this business is combining our fund with other mutual funds and see how the Sharpe ratio works. And see if it brings the Sharpe ratio up and standard deviation down so these people won�t get hurt as badly because that really is a way of having a hedge fund.  And if you don�t have a couple million dollars this is a way of actually running a hedge fund.  Having a fund like ours combined with another long fund.  Let me take your question.

 

Audience: Why are you 90% in bills, rather than only 4% in bonds?  What do you see happening to the 10-year bond, were you surprised with the rallies?

 

Minter:   We have a more significant position in the Strategy Fund in bonds than in Capital Value.  Capital Value, when you see those bills, it is very misleading to think we have all that money in bills. We do--but understand that we have puts and sell stocks short that generates cash and that cash goes into bills.  We have diversified since the last time you have seen the fund to where we have more Euros.  We�ve always had some, and now we own the new Zealand dollar and Australian dollar.  We do have more of the shorter term issues because we are worried about that same thing we are talking about: foreigners liquidating and getting hurt on two sides, both on dollars and the bonds.  But we still have some bonds because we think there is a high probability that we can, with the bonds, do well if we have the deflation.  Remember the inflation is the second highest probability, and we are watching that, where we will have the liquidate the bonds right away if it were headed into inflation

 

Audience: Explain some of your short ideas?

 

Minter: We don�t really like to go into names.  I can tell you we were short a whole lot of financial stocks.  We think that brokers, banks like Melon that own mutual fund companies, State Street, a lot of technology companies.  This rally is based around such flimsy fundamentals if you take this rally and say which stocks are performing the best. And you take a look to see if they are earning money or not earning money.  The stocks that are earning no money are up about 100% and the stocks that are earning money are up about 40% in this tech area.  And we short those techs, like an Intel, and then Intel breaks out.  Intel is absurd, they are not growing, they are earning the same thing, quarter after quarter.  They come in at 7 billion dollars of revenue and they always adjust it to a little under 7 billion dollars just before the report and it just never grows --and neither does Cisco.  The PE�s on these stocks are trading as if they are growing.  We don�t like technology, we don�t like semi conductors, we don�t like semi conductor manufacturers, and the equipment makers.  But when they break out we will cover them and then buy puts on them so we have at least a limited liability.  It is unlimited liability that we are concerned with, and we are not going to sit there and fight that bubble ever again.  I can tell you that much.

 

Audience:  How long do you think the bear rally will last?

 

Minter:  I think it is going to end very, very soon.  I think it may have already ended.  The S&P 500  went to 1015 in the new trading range. I don�t think it will go above that.  There is a possibility it will muddle through and stay in that trading range or even break out of that trading range, anything can happen.  It can break out and go to 1015 to 1050 but we don�t think that will happen.  We think what is taking place right now is a mini-situation of the maxi-bubble that took place in 1996-99.  And we just think that the only reason it won�t occur again is because too many people got hurt so badly that we aren�t going to get those guys again.  That�s why we don�t think its possible to have another maxi-bubble again.

 

Audience:  How spirited are your discussions with Mario Gabelli? Second, you can get Ned Davis research to positive, does that help you in the coloring of your portfolio?  Clearly you got the macro picture where he agrees with you in the long term but he�s been very right in the short term.

 

Minter:  The spirited debate with Mario Gabelli really mostly comes in board meetings.  He hears this whole thing, he doesn�t really argue with me.  I believe he is pretty sympathetic to this case but it is hard to say.  I have to give him credit for buying us at a time when everyone else that wanted to buy us wouldn�t let us run the money.  At least he let us run the money and leaves us alone.  He doesn�t argue with us, he hears us and I do think he is sympathetic and he does think it is logical.  He has never said to me that is crazy what are you saying. 

 

The answer to the Ned Davis is we like Ned Davis, we use him for his data.  We don�t use the charts like S199 that show buy and sell points, we don�t look at those.  We don�t care what he�s saying on the market because we have our own feelings.  We use him for his data.  We think he has the best databank in the world. We love using his databank.  I have called him to collaborate on certain things like Limbo Limbo (on our website) and he thinks that�s making a market call, he doesn�t like to do that.  If you go into our website and look at Limbo Limbo, How Low Can It Go?,  We are just saying to you: look at all those metrics there are 5 metrics there, take a look at the history.  If you are a new paradigm guy or new era guy and think that worst is over, or the worst that will happen is that the metrics will go down to the old highs then you can say that�s where the market will stop-- at the old highs.  If you are someone who is not as bearish as I am you may believe it can go down to normal valuations.  I happen to think it will eventually trade at the valuation levels of those major market lows that we discussed throughout the presentation. 

 

Audience: Catalyst?

 

Minter:  I think the catalyst is going to be real estate.  That�s my best guess, but it could be anything like a big accident.  Real estate could be the thing.

 

Ned Davis is also running a fund for Mario Gabelli. 

 

Audience:  I agree that the debt to GDP buckled, there has to be a regression, but I still have no strong feel on whether it will be because of nominal GDP growth, inflationary GDP growth or the contraction in debt by voluntary repayment.  Have you looked at that?

 

Minter:  That�s part of the impediments to monetary and fiscal policy.  I just don�t think the government can pull that off.  It�s just too difficult for them to pull it off.  Imagine what we�ve done, eleven cuts in 2001.  You don�t think he was pulling out all the ammunition.  Think about that surprise cut.  Do you know how desperate that was.  He is panicking, he was making absolutely sure he jumpstarted the economy and it didn�t work.  And then the other six cuts did not work.  Last years cut didn�t work.  If people don�t think he�s running out of ammo now they have to be crazy.

 

Audience:  Back to the philosophy chart, if the FED prints the dollar someone has to borrow it before it enters the system, right?

 

Minter: No it actually enters in the reserve system of the banks.  But to get the accelerator and the velocity going you�ve got to have people borrowing it and spending it in ways to generate a self sustained economy..  The only way you can do that is to build plant, hire people, pay people, let them spend money from their disposable personal income.  And that�s the bottom line, and that�s going to be hard to do.

 

Audience:  What can we do�.(inaudible)?  The question was close to �what would you do differently than what the administration is doing now to solve the problems you envision�?

 

Minter:  Well I thought about that a lot. The problem is what we�ve done. That cycle of deflation doesn�t change.  We put everything in place during the bubble part of the cycle of deflation.  We have got all these dislocations caused by the bubble.  You get yourself in a real mess when you have a bubble generated through excess debt and excess credit, that�s when you have a problem.  That problem is only going to be resolved when you get into the ending part of the �cycle of deflation�.  And all Greenspan and those guys are doing is postponing it.  Look at the foreclosures; they are at record levels in homes right now.  Delinquencies are bad and they are almost at records but �foreclosures� that is kicking people out of the house.  The banks hate to do it.  The bank takes over and sells it to someone else.  The paperwork is enormous, it takes months and they have already started it.   There are problems that are unsolvable once you make a terrible mistake.  And I think that Greenspan gave up and went along with everything after he gave the speech about �Irrational Exuberance� in December of 1996.  And he should have realized that since he couldn�t contain the bubble, why didn�t he have enough sense to retire before he had to prevent the down side of the bubble. 

 

Audience: Should Greenspan not have lowered rates?

 

Minter: No, he had to do all the things that he did.  The problem was he probably should have tried to not let the bubble get as big as it got.  Remember that bubble-- it was astounding.  He should have raised margin rates during that bubble. Now that it has happened, I feel so sorry for these Treasury Secretaries trying to get people optimistic and making them look like fools.  Look at all these problems.  Think about this current account deficit.  The Chinese, they have tied their currency it to our dollar. Their labor costs are a dollar an hour, ours are 26 dollars an hour, Germany�s are 30 dollars an hour.  What is going to happen, the standard of living in China is going to go up a lot.  They are going to want the Chinese to delink their currency with the dollar.  Look at their situation.  Do you want that to happen?  If I were running in China I wouldn�t.  Look at Japan when they had 300 yen to the dollar in the 1970s, now they are trying to get it down again, in 1995 it was 80 and now its 119.  It is going slowly, everyone is going to want to debase their currency in order to sell the goods they sell at home abroad.  That �cycle of deflation� is going to play out.  Thank you.