Saturday, February 28, 2009

Perlis Plantation Berhad (PPB) Update

I have featured both Wilmar and PPB a while back. It's time to do some updates.

Wilmar delivered superb results for FY 2008. Look at this table, you will be impressed.

Unlike other plantation stocks where you see earnings drop by almost 40-50% due to softer price, Wilmar was able to hold on to its profit. Why? Wilmar is a food processor and not a pure plantation stock. Yes they do have plantation contributing to their earnings but not substantial.

Consensus does not think Wilmar is able to sustain its earning for FY 2009, they are projecting downward between 30 - 40%. Net profit will come in between US 880 mln - US 1 billion. EPS will be in the range of US $ 0.14 - US $ 0.16. I can agree to the downward revision range but I may be able to agree to PE ratio which will depend on the mood of the Mr. Market. 8 - 9 X when Mr. Market sees the end of the world, 15 - 18 X when Mr. Market sees Nirvana is the only place to go. So, I am not going to talk about the target price then. What is more important is how this will impact PPB.

PPB fortune is heavily depending on Wilmar. In FY 2008, Wilmar contributed almost 67%(937 mln/1400 mln) of PPB profit before tax. Repeat - 67%!

Profit from PPB operations is very disappointing in Q4 ‘08 – almost breakeven, this is a sharp drop compared to a year ago which was about RM 70 mln. With more careful reading into their results, they written down about RM 67 mln related to diminution of investment and inventory, am I surprise? No. We got to be very careful during deflation/deleveraging environment if there are companies involved in commodity, carrying investment portfolio or goodwill in their balance sheet. Provision for Write off or outright write off is the order of the day. If we are invested in companies that thinly traded and play mainly by retail investor, as soon they see dramatic shrinkage impacted by write down, more likely than not, they will throw the baby out together with the bath water. Back to PPB, without this write down, profit from the operations is essentially flat.

For FY 2008, PPB delivered about RM 1.3 billion profit or EPS of RM 1.08/share. So, what is the prospect for FY 2009? Given the defensive nature of PPB core business, let’s say they can maintain RM 400 mln[pure PPB core businesses] plus RM 655 mln [from Wilmar]= RM 1.06 bln PBT, subtract some tax about RM 110 million will give us roughly RM 945 mln Net Income. EPS will be roughly about RM 0.80/share. Pick any PE ratio you want : 8X = RM 6.4, 10X = RM 8, 15X? = RM 12. Price range can swing wildly between RM 6.40 – RM 12.

Wilmar has not been paying a lot of dividend as they need cash for expansion, so it is unlikely that we can see real cash from Wilmar. It is however quite safe to conclude they will payout most of PPB businesses which could be in the range of RM 0.25 – RM 0.30/share. 2008 was an anomaly, they paid special dividend of RM 0.65/share – I don’t expect this to repeat. At the last quoted price of RM 9.70, DY is around 3%.

The trick is this: watch Mr. Market, take advantage of him and make sure we leave ourselves with some margin of safety – we will come out all right!

Watching the tape has kept me out of troubles since October but we have rode down together with our friendly neighborhood BEAR for quite a lot and for quite a while – I think we all will benefit more by spending time studying stocks again. To hell with the bear!

Thursday, February 26, 2009

Malayan United Industries ....... Headwinds ahead

Among my holdings, MUI is one of my most controversial picks. Betting on turnaround is one of the most challenging way of investing but can also be rewarding. This is what I called buy and forget - just keep the share certifcate under the bed and hoping it worth a lot more when you open it 5 - 10 years later. But it can also expire worthless like call warrant.

MUI posted positive profit from operations of 8 million in Q4 '08 compared to 54 million a year ago. I have been anticipating headwinds - this is confirmed by softer revenue, YoY softened by 15%. This plus higher expenses lead to much lower profit.

Incurred 57 mln losses in Q4 '08 mainly coming from exceptional items and finance charges. Bulk of exceptional items are related to bad debts provision, exchange rate loss and write down of investment value.

There is seems like not much improvement, is my almost a year old investment thesis still hold?

Earnings estimate is not meeting my original expectation, econmy has turned much worse compared to a year ago. Down cycle will have impact on retail and hotel business. My margin of safery is in their franchise. This is evident to me and a big relief to me when I saw Laura Ashley still posting positive results especially UK economy and British Pounds are crushing. MetroJaya has been differenting itself by focussing upper middle class segemnt - will have a good chance of not going into price war, but I still expect tough days ahead.

Debt has been cut to 668 mln from 900 mln, they show progress here. They still hold cash or equivalent of 703 mln, so they are in net cash position.

It could be tough to realize its property value due to very bad property market. So got to wait for a while to realize its worth close to about RM 0.57/share upon revaluation.

Laura Ashley market capitalization shed by almost 55% from a year ago. Ouuuuch!

With investors and speculators hiding under the rocks, share price will also be facing headwinds to climb upward. So what is my plan? With the share price cut by almost half over a year, I still have no plan to sell out my position yet. I still believe MUI worth more than my entry price of $ 0.28/share.

I have a small interest in this share, so beware of what I write, I can be bias.

Wednesday, February 25, 2009

Parkson Holding Berhad

(Click on image to enlarge)

Parkson revenue rising steadily over last eight quarters. Retailing business is seasonal - typically strongest in calender year festive seasons - end and begining of the year. Sales are typically the slowest during middle of the year. So, we need to be very careful not to annualize based on CY Q4 '08. All in all, the results came in within my expectations. DY is about 4.5% based on the quoted price of $ 3.30, selling roughly for 13X PE.

Profit from the operations has been stable and crawling upward slow and steady.

YoY revenue increase by 12% and net profit grew 19% (Q4 '08 133 min vs Q4 '07 112 mln) after adjusted the one-off gain 32 mln from the dilution of retail operations.

The biggest question is can Parkson increase/sustains its earnings due to the weaker consumer sentiments. The silver lining? They still plan to increase their China operations by opening 4 more stores(120,000 sq meter) in smaller cities in 2009, an increase total space of 16%.

Secondary concern is whether margin will be weakened by organizing more promotions or discounts to get people to spend.

When I was making comentary on Parkson Retail Group, I was saying it is a hold on the short term while it is a buy for those who have long term perspective. This is not a hedged opinion because it is really depend on individual choice. In the short term, the stock price might go side way for a period of time, those do not wish to tie up their money and has good skill of market timing may wish to hold and not buying till market sentiment to improve.

However, those really do not really wish to time their purchase with precision and don't mind the price action going sideway or even going down, it is a buy at anytime i.e. long term buy.

A buy is a buy no ifs, buts. When to buy is an individual choice especially during this environment.

Two school of thoughts, Part II

Sorry for leaving yesterday post half hanging. Not that I am trying to look good and intelligent by fitting the story retrospectively after seeing how the market close. I believe the market has got to a point that seems to lose themselves - lost, literally lost. I have never see so many people thrashing Warren Buffet, Boone Pickens, Bill Miller, Jim Rogers, etc in the last so many years. Suddenly, it's like the death of gods, all has become atheist. I have never seen whatever techniques these investors deploy do not seems to work. You just name what ever model you can find - it does not seems to work. One word - frustrating.

Those who try to put up some positive encouragement look amateurish and foolish because market judge them by price of security. Warren Buffet who trying to put up his endorsement in GE by putting $ 5 Billion dollar when the price was around US $ 23/share, GE lost 60% of its value in less than six month. Was his faith shaken? He got the opportunity to get out twice around US $ 60 in American Express but saw the value dwindled by 80%.

Let's talk about the celebrated commodity guru - Jim Rogers - he has been very bullish on commodities but I believe he got thrashed too. He came out even last year because of he shorted USD/Japanese Yen and banking stocks and not making a killing in commodities, China or Taiwan. There are people begin to question whether he is making use of media to promote his personal interest.

The last batch who makes some money or lose lesser money was the technical group who are out of the market most of the time, when they put in some money to work - guess what - they lost almost 20% since they turned positive beginning of the year. Now that this group of people believe that since the market has retraced by 50%, it could retrace more. If DOW hits 5,000 marks, I do not know honestly what will be the state of the world. On the other hand, these guys are saying if you are dealing with people when irrational side hijack the brain, anything can happen.

Honestly, I do not what to do too except putting money to work at what ever target that make sense to me - very slowly. I believe I am going to do some remedial class this weekend - read chapter 8 and chapter 20 of The Intelligent Investor. Take care!

Tuesday, February 24, 2009

Two school of thoughts

(Click on image to enlarge)

There are two school of thoughts

(i) DJIA and S & P broke below 2002 low, so it is a matter of time other broader indexes like NYSE, Nasdaq and Wilshire 5000 will break down soon. The market self defeating mechanism will continue to feed onto itself. ( Seller )

(ii) There is no doubt that DJIA and S & P 500 broke below 2002 but other broader indexes held up well. This is getting closer to bottom once the nationalization fear priced in. (Buyer)

............................................. to be continued

Sunday, February 22, 2009

iCapital and F & N

Ever since F & N announced Coca-Cola will not renew their contract by 2010, F & N shed about 13% of its market capitalization. Whether that's justifiable or not, it has surely created short term uncertainty.
Fraser & Neave Holdings Bhd (F&N) remains confident of its future and expects to recoup its revenue loss from the termination of the Coca-Cola franchise business by launching more new products and venturing into export markets.

Group chief executive officer Tan Ang Meng views the termination of the franchise agreements as a short-term setback and sees vast opportunities for the food and beverage group as it is no longer restrained by the terms and conditions stipulated in the agreements.

Under the franchise agreements with Coca-Cola, F&N is unable to launch tea, coffee, water and energy drinks, export its own brands and open new manufacturing plants among others.

“We now have a whole new chapter open to us with the restrictions gone. With our financial strength and the diversity of our product mix, we are positive about our future,” he tells StarBizWeek in a telephone interview.

In a filing with Bursa Malaysia on Wednesday, F&N said Coca-Cola Co was not extending the bottling and distribution agreements with F&N when they expired on Jan 26, 2010.

Sales revenue of Coca-Cola Co products, mainly Coca-Cola and Sprite, amounted to RM421mil, or 35% of F&N’s soft drinks division’s revenue in FY08.

Tan says F&N will lose some 15 million cartons of drinks sales per year after the agreement expires, but one third would be mitigated by exports of 100Plus, Seasons and F&N drinks to Singapore. F&N’s agreement with Coca-Cola for the latter to produce and package 100Plus, Seasons and F&N drinks in Singapore will be terminated as well.

The management came out to clarify that they can replace those revenue and earning from Coca-Cola.

(Click here to read the rest)

Looking at their product mix in 1999 and 2008, I believe the management has credible claims they can find new sources of growth.

Since F & N contributed to about 8-9% of iCapital NAV[based on 2008 Annual report], is this a big concern? First, iCapital has changed it rating to hold in their newsletter. At least we know they will not increase more weightage. We must not assume that they are whole bunch of idiots and do nothing, they could even lighten up their holdings.

Secondly, worst case scenario, assuming F & N shed another 20% more market capitalization, estimated impact to iCapital NAV will be around 2-3%. Based on their 18 Feb 09 NAV of $ 1.55, we may take off another 0.05/share in the worst case scenario. iCapital will still pretty much selling at a discount based on the latest price of $ 1.43.

F & N losing its contract is unfortunate but it is not the end of the world.

Parkson Retail Group [HK 3368]

Parkson Retail Group Limited, a subsidiary of Parkson Holding Berhad released their 2008 results last Friday.

EPS growth was slowing down compared to past few years but still recorded a 24% growth - RMB 0.301(2008) vs. RMB 0.244 (2007). At HK 6.46, PE has come down to about 20X. Whether it is expensive or cheap, it will all depend on investors optimism. A very long term may find it cheap but a short term investor may find it expensive as they anticipate the market to mark down PE ratio to their earning. They may find it more expensive in relations to overall market PE(10-11X for H-Shares). DY is about 2.5%.

Looking at 1H and 2H 2008, their sales seems to stay flat even though the net profit has been well over 20-plus %, which is a very profitable business. The numbers for 1H/2H/Full Year (RMB million)

Sales 1,756/1,769/3,525
Net Profit 432/446/878

2009 likely to stay very challenging, most will be happy if they can deliver some growth or even flat earnings.

From Parkson Holding Berhad perspective, it is selling for about 13X PE. From short term perspective, it is fully valued. So, it's a hold if you may, but again from short term perspective and is a buy from long term perspective. Just my two cents.

Saturday, February 21, 2009

Nationalize or not to nationalize?

Among noises over the last few days, it is seems that the topic of nationalization has the greatest impact to market movement. Over the last one to two weeks, gold price has been practically moving in an opposing locked step with financial stocks. Gold crossed $ 1,000 level at the peak of people dumping financial stocks. When White House trying to talk down the nationalization, financial stocks start to soar and gold price retreated. The market also U-turned from DJIA breaching 7,200 level.

Nationalization means the value of shareholders will go down to close to zero! That's why they are so afraid. Though some statements were helpful but the market is going to change their minds very soon because there has been no good answer given as of how they are going to fix the toxic assets if banks were to remain in private hands.

I am no expert in these stuffs, common sense tells me too many cooks spoil the broth. To have meaningful restructuring and forceful actions you must have only one BOSS. That leads to only two choices (1) GOOD BANK, BAD BANK OR (2) NATIONALIZATION. Other routes will only leave the market with long grief and in miseries.

Friday, February 20, 2009

Market Timer Guru Gave Up

(Click on image to enlarge)

Patience will be well rewarded.

DJIA broke new low. Most think if it does not bounce back tonight, it will trigger a wave of selling. Financials leading the way down. There were forced selling. You can see gold did not go up and gold mining stocks got slaughtered. Dow 6,000 ? S & P 666? If the wave of selling did come true, my dream to buy gold mining stocks will be fulfilled. Right here waiting, inside my shell!

Thursday, February 19, 2009

Plan to deploy RM $ 1,000 for China Fund

As you can see Shanghai market has been overbought, that's the reason why I am hiding in my turtle shell. If Hong Kong H Shares is looking to China market for leadership, my striking zone is the range of 2,000 +/- 5%.

Wednesday, February 18, 2009

Starry stary night

There were simply too many negative news spun off around the globe yesterday.

(i)Japan's GDP contraction was very severe.

Feb. 17 (Bloomberg) -- Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst.

Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.
(Click here to read more)

In desperate moment like this, the accused drunk Finance minister Nakagawa was asked to step down, certainly added to the dark clouds.

They were so pissed that they want hard assets. They knew gold is expensive and begin to chase for alternative cheaper metals - platinum for example.

Tokyo bullion dealers are reporting an unprecedented drought of platinum ingots and coins, blaming the economic downturn and dwindling faith in the Government for a rush by middle-class Japanese families to buy precious metal.

With dealers turning away would-be platinum customers for lack of stock, retail investment interest is turning towards the even rarer Canadian Maple Leaf palladium coin.

(Click here to read the rest)

(ii) Then we have European hard landing fear of banks exposing to emerging European economies defaults/write-down. Euro at 10-week low! Not a surprise to me but the market begin to pricing in risk.

(WSJ) NEW YORK -- The euro declined to a 10-week low versus the dollar Tuesday on concerns over the exposure of major European banks to emerging economies.

Depressed overall risk appetite also sent the euro lower against the safe-haven U.S. currency on a flight from risk. The Dow Jones Industrial Average closed down almost 300 points on the day.

The euro fell to $1.2563. It also slipped versus the safe-haven yen overnight to a session low of ¥115.65.

Tuesday afternoon in New York, the euro was at $1.2604 from $1.2797 late Monday, and the dollar was at ¥92.28 from ¥91.71, according to EBS. The euro was at ¥116.35 from ¥117.40. The U.K. pound was at $1.4260 from $1.4290, and the dollar was at 1.1676 Swiss francs from 1.1605 Swiss francs.

Moody's Investors Service Inc. published a report Tuesday warning that euro-zone banks with exposure to the Eastern European region may be downgraded, as these countries have now entered a "deep and long economic downturn, thus exposing West European banks' claims on East European institutions."

(iii) Overnight in the US, the news Warren Buffett reshuffled his portfolio. Trimmed some of defensive sectors ( Johnson and Johnson and P & G) to concentrate on fixed-income, mainly on preferred shares.

(Click here for the source)

The regional bank index ( KBW bank Index hit new low) signals they really think Geithner is very complacent and not addressing the bank toxic assets. The longer he plays the poker game, the market is going to think the problem is so big that it could not be solved. I was publishing the photos of happy faces just to poke fun - either they are really knowing what they are doing that they can sit back and relax or they are dead complacent. ( Ben seems to think he is done and off the hook, now it's Geithner turns)

Volatility is back, so be very careful on your bet sizing!

Tuesday, February 17, 2009

Ben is so happy

May 28, 2008 - DJIA 12,594

Sept 26, 2008 - DJIA 11,143

Feb 12, 2009 - 7,932

Uncle Ben, you look so happy. Are you done with bringing the market down?

Monday, February 16, 2009

Dealing with regrets

When I first mentioned about putting money into AmPrecious Metals Fund, a fund that investing in major gold mining corporations. The fund has shot up by almost 11% (NAV 2/1/09 0.7074 vs 13/2/09 0.7856). The immediate reaction was like ERGH!!!!!!!.......... big regret. If I am talking to my psychologist, I will tell him that (i) go and buy regardless of price or original thesis of delaying pruchase (ii) convince myself that my original thesis was wrong because the market told me so (iii) shun precious metals investment for the rest of my life.

I remember a movie line: it is not difficult to do the right thing but it is difficult to know what is right.

Blogging is good because it will force me to analyze my thoughts and emotions systematically to arrive at logical conclusion. My original thesis of waiting for a deep correction was gold was going up driven by fear and not by demand. If the fear disipates, the price can fall very quickly as they start chasing more risky assets. Most of the money flow into ETF which typically going long only which is Deja Vu, remember, speculative Index fund driving oil price higher(crap - many will protest). It may be hurting the commercial buyers to cover shorts but I am not sure who will the real winner, under this environment, I am not sure what will be the damage to the real demand in jewelry. It could be ugly if these long funds unwind.

I believe it will eventually soar but entry timing is very tricky. My regret will run deeper if I see the value of the fund continue to soar but sticking my original thesis - wait - for the price to come to me rather than chasing the price, is what my left brain is telling me now.

Sunday, February 15, 2009

China Exposure is a must. Part II

I'm writing my thoughts based on Turtle Portfolio perspective. How do I get China exposure? Since I'm facing budget constraint running this portfolio, unit trust will be a better route. There is no point of gambling on useless warrants on Bursa. I've looked at two funds from Public Mutual and 1 fund from OSK UOB.

1. China select fund.

The fund battered in 2008, loss of 47% vs. 45% of benchmark. Based on 31 December 2008, they have heavy exposure to financial, energy and telecommunications. The fund invested quite heavily with 14% cash left only. The fund suffers more than other because it was launched much earlier in July 2007 which I believe they are stuck with higher price stocks.

(Click on image to enlarge)

2. China Titan Fund

The fund launched in May 2008. It still has about 36% cash, it can afford to invest very slowly over a period of time. It has outperformed the benchmark by 12%, fund -25 vs benchmark -37% owing to higher level of cash. We can split hair saying the underlying stocks have performed much worse than benchmark but for consistency sake, let's use NAV or book value to evaluate its performance. This is a classic case that you outperform benchmark by simply doing nothing. Let's say a fund manager turn all the cash into gold(preserving wealth), can we also say the fund manager is not doing his/her job? The fund has a different strategy compared to China Select Fund, they have higher exposure in Taiwan and also European stocks that will benefits from China growth.

There are pro and cons in each fund. China Select might catch up much faster if China stocks are rising fast due China stock market recovery. China Titan fund will rise slower as a good chunk of Taiwanese and European stocks are tied to global equities sentiments. However, slow and steady will be more suitable for passive buy and hold investors.

If I want to be a bit more adventurous, I can play with concentration strategy, OSK-UOB Big Cap China Enterprise fund will be an interesting place to park money. 1-year NAV return is -25% with 16% cash, it's quite respectable. They bet pretty heavily on top 5 with almost 7.5% per position, it's quite aggressive by industry standard. The fund will do well during fast recovery but it may also fall hard when things fall apart.

Saturday, February 14, 2009

Attention to all(single) value investors

You know I'm up to something when I put up that title, right? Just to lighten things up - GBC(Geh Poh Chee)a bit. How is your Valentine's day? A little perspective from me. Value investors love bargain, if you are dating seriously, have you thought of getting married this year? Yeah, I mean getting married during recession. Double happiness(huat-huat) reasons:

1. 70% discount on dowry if you play your cards right.

2. 50% of your friends will not turn up - save you a lot XO & Hennessy.

3. Gold price is going to double(my conservative target, some says it will go up by 3X) when economy recover.

4. Value investors don't like competitions, the less people getting married, the more choices you have - your girl friend(fiancee) will have many beautiful gowns to choose. It's buyer's market.

5. Your saving is not going to produce great return during this bear market. This is probably a rational investment.

6. If you can time the arrival of your first born - most likely - recession will end by 2010. You will be less stressful to foot diaper and milk powder bills. I know you can do it because you are a great "market timer", in case you are wrong, your wide margin of safety will protect you - you are still way ahead of your peers.

7. A little stress test(during recesion) for both of you, just to check whether your "LOVE EQUITY" is well capitalized. Swearing in the name of God of this vow

to have and to hold from this day forward, for better or worse, for richer or poorer, in sickness and in health, to love and to cherish, until we are parted by death.

is one thing, but putting into practise is another. However, in case you run into trouble, you can tap into TARP while it is still available.

8. Why wait if you are truly, madly in love?

Happy Valentine's day!

China exposure is a must! Part I

I am one of China bulls. China is a must in my portfolio. That was one of the reasons I put Parkson in the portfolio. Some of us will have very sour taste for buying Chinese stocks too early in the last two years. It is like a cat got burnt sitting on a hot stove, it will never forget that experience and avoiding hot stove at all cost. But not me, I am maximum bullish China because:-

1. China is one of the best managed economy in the world. They are one of the better prepared for this downturn. They have been growing and growing at the level of 8-9% for the last 30 years.

2. Their top leadership committed to continue to reform. They are improving social safety net that will create security for its citizen to spend. They also try to narrow rural and urban income gap.

3. China is a high saver almost 50% vs American almost zero or negative. Their currencies will rise in the long term.

4. They valued education - you know what I mean. They are pushing and pushing for higher level of literacy. I believe it has reached almost 90%. Educatied society will demand progress.

5. Entrepreneurship is rising. They have dismantled the old State Owned Enterprise. Productivity is going remain high for years to come.

6. China consumption potential is not a fad. China has more than 170 cities with more than 1 million people. 400 million Chinese subscribe to mobile phones. Chinese is now account for almost 12% of world's luxury goods. Only 23 millions private cars in China, you can imagine the room for growth.

7. Their GDP per capita is still very low, only US $ 6,000(PPP).

8. Populations are young - median 33.6.

9. The valuation of the companies have reached to a very reasonable level. H Shares are selling around PE of 10-11X.

10. Both invisible(capitalism) and visible(Communism) hands are moving. They can implement things a lot faster. For example:-

Feb. 5 (Bloomberg) -- Industrial & Commercial Bank of China Ltd., the nation’s largest, said it offered 252.1 billion yuan ($36.9 billion) of new loans in January in response to the government’s stimulus plan to avert an economic slowdown.

The bank lent 69.3 billion yuan to power grid, railway, roads, and hydroelectric power projects, and 135 billion yuan in discounted bills to small and medium-sized companies, the Beijing-based firm said in an e-mailed statement, without giving comparisons. New loans to individuals, including mortgages, amounted to 16 billion yuan.

China dropped lending quotas and unveiled a 4 trillion yuan stimulus package in November to maintain economic growth and counter the global financial crisis. Banks have responded by raising lending targets and focusing on railways, roads, power grids and other infrastructure projects with stable returns.

Domestic banks offered a record 1.2 trillion yuan of new loans last month, representing almost a 50 percent gain from a year earlier, the China Securities Journal said yesterday.

ICBC aims to advance 530 billion yuan of new loans in 2009, about the same as last year, the 21st Century Business Herald reported today. The bank plans to complete 45 percent of the loan target in the first quarter.

ICBC attracted 271.2 billion yuan of deposits in January, equivalent to a quarter of the total increase in 2008, according to today’s statement.

See how fast things are moving when the removed the loan quota? I can tell you earning for Chinese banks will not slow down anytime soon.

12. People are still skeptical about China and market recovery. Now is one of the better time to invest slowly with dollar averaging strategy.

13. Honestly, Malaysia has disappointed me for a long time. Our politicians just can't get their acts right. I have been underweight Malaysia for a while.

I can go on and on and on .........

Wednesday, February 11, 2009

Turtle Investing Blog Turns 1

“Bull Markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”

- Sir John Templeton

My blog turns one year old tomorrow, still could not believe I've survived blogging for a year with the big bad bear starring at me everyday. I suppose blogging during bull run will be a lot more fun and look like a genius because any stock will go up. During bear market is different, if I am not careful, every stock mention will go down and it will go down a lot more and faster that you can imagine. But I like to blog during bear market because this extreme test is good for my soul.

I suppose my little Toast Master exercise has made me more confident than a year a ago. Thank you for listening to my mumbling about stock market, sometimes is not so clear - none of it's intended. I won't be publishing a few days as I will be out of pocket.

My two cents on what happened to the US market yesterday. I say that was a good stress test. Many were very disappointed with Geithner's plan but I doubt selling follow through can go on very far compared to fourth quarter 2008. The fear is simply not deep and wide. Number of new lows was only 58 while during the peak of panic selling was more like 2,500 stocks. Asian market started with some panic in the morning but managed to absorb selling relatively easier. More like excuse for correction in my opinion. See below on how hard short sellers have to work to find things to short. See you all soon. Take care.

Feb. 9 (Bloomberg) -- The biggest bears in U.S. stocks are losing their conviction after the steepest decline in the Standard & Poor’s 500 Index since the Great Depression.

The number of shares borrowed and sold short on the New York Stock Exchange fell 28 percent last month from the peak in July. Companies in the S&P 500 trade at the lowest multiples of earnings in 18 years. President Barack Obama is working with Congress on a spending and tax-cut plan of about $800 billion to revive the economy, and regulators are imposing stiffer oversight on speculators.

While Seabreeze Partners Management Inc.’s Douglas Kass and David Tice at Federated Investors Inc. say there’s still money to be made betting that food and computer makers will fall, even Marc Faber, who publishes the “Gloom, Boom & Doom Report,” abandoned his so-called short positions. Bill Fleckenstein, who warned of the housing bubble in 2005, closed his 13-year-old bear market fund and bought shares of Microsoft Corp.

“It’d be easier for me to find five stocks I think are going to go up than five stocks I think are going to go down,” said Fleckenstein, who is based in Seattle. “Being short right now just feels like the wrong strategy.”

Monday, February 9, 2009

If, trade you must.

If you must trade, here are some of my views:-

1. You must be well capitalized. A lot of people got into trouble when they are under-capitalized. What do I mean? If you have $ 2,000, you will have no choice but to use 50% of your capital i.e. $ 1,000 plus a minimum round trip of $ 28 transaction costs. If you happen to lose 25% based on your stop-loss, then you will lose $278. That means you are leaving yourself with $ 1,722 residual capital. However, if you have $ 50,000, you place the same $ 1,000 trade and assuming you have similar amount of $ 278 losses, you still have $ 47,722. A loss of $ 278 is only 0.5% of that $ 50,000 but 14% for a person with $ 2,000. Losing 13.9% of capital will put a lot of pressures on a lot of people. What most will do is to take more risk trying to recover the losses end up with more losses. A lot of people will turn $ 1 to $ 0.1. Now you should know why I did not recommend Turtle portfolio as a trading portfolio.

2. You must keep a separate account to tell yourself that you are trading. Give it a name - Profit Killing Turtle Portfolio for example. Set a fixed amount in trading portfolio. This will force you to account for P&L(Profit and Loss) for your trading activities. Prevent you try to pretend to be a long term investor when you lose money!

3. I like what BHC investment used to put up, Risk Awareness. When you trade, your time horizon is normally a lot shorter. 1 - 11.99 months. One of views expressed by Warren Buffett risk is tied to time horizon and not so much on volatility. He always says if you buy something today and expect something to go up tomorrow, then you have entered into a risky transaction. Things are a bit more random in the short term - I agree.

4. If you must trade, trade as infrequent as possible. 1 - 2 times/month. Why? High probability trade don't come very frequent, when it comes, you must swing your bat!

5. You must understand who is on the other side of your trade. Don't forget, a professional trader is an expert of reading into crowd psychology. He or she is reading your minds all the time, guessing what card you are holding. So be careful.

6. Most of traders have a unique set of system. In a low volatility environment, a lot of price actions are actually very beautiful, nice repeating pattern if you look at from different trading system perspective. Prices are being watch all the time. For example, when short moving average(7-day MA) cross over on long moving average(50-d MA), traders will start placing bets. Some will want to bet if price is 25% below 200-day MVA. Some will sell around 0.618 Fibo retracement because they know probability going beyond that is tough. Some will want ride based on wave length count, bet on wave 3 which typically has longest time of moving up. Etc.......Make sure you develop a system and stick to it. What differentiate a good trader and a hopeless trader is emotion discipline. If you are as cool as Obama - I think you should trade.

7. A trader will have to manage risk very carefully. They calculate risk-reward. They develop entry point based on all the factors in his favor and an exit plan. A good trader will always do a few things - set entry price target, stop-loss, they seldom worry about profit because profit will always take care by itself.

8. Setting stop-loss itself is an art. Let's pick an example Supermax. The stock has been on the downtrend for a long time but recently broken out from its downtrend. Most of the analysts think the stock worth between $ 1.50 - $ 2.50. So I just pick around $ 1.70 as an initial target(it also happens to be a 50% retracment between $2.68-$ 0.80). Stock will typically easily bounce back to around 0.618 Fibo, so expect very heavy profit taking around $ 1.35. Looking at RSI and slow stochastic, you might want to wait till it come back to at least neutral level. Around $ 0.96 - $ 0.97 will be a good entry target. Stop loss will be around 25% which is around $ 0.72 which also makes sense because the strong support is around $ 0.80, if the price managed to penetrate below $ 0.80 signals something has gone very wrong. You must get out!

(Click image to enlarge)

Why I pick all those prices? Because those prices are common reference by a lot of people. This will give me a feel of where people want to get in and out.

The fundamentalist will tell you Supermax is selling for very cheap among peers. Recent write-off of APLI will be the catalyst to let go the past bagage of a wrong acquisition. They are in a recession proof business, softening commodity prices, energy and weaker Ringgit should be in their favor. You see, you probably have to wait 1.5 years for things to develop to increase your probability of a winning trade.

9. Even you have a perfect trade set-up and a perfect plan, your profit will not be guarantee. All you plan will be screwed if KLCI goes down to 720. There are macro moods that beyond your control.

If trade you must, I wish you all the best.

Gold Calculator

I have been struggling to figure out the linkage between gold spot price which quoted in USD/troy ounce vs. gms/Ringgit. You can build this calculator by creating a spreadsheet. Obviously you need to consider exchange rate on the timing of gold purchase. Ringgit has strengthened a little bit against US Dollar last week. If the trend continues and gold price continue to correct, you are getting a better deal.

Hope this simple practical post will be useful to you.

Sunday, February 8, 2009

I heard you

Regular readers will know Turtle wears many hats - a small timer, a value investor, a speculator, a trader and the most important - a human. If you talked to your investment adviser they will bombard you with lectures you got to invest. Now is the best time. They will pull out charts to show you how cheap are equities, they can quote Warren Buffett, Jim Rogers and etc. This is the best time to put your money to work and bla...bla..bla. I know in the hearts of many, you're probably thinking --- I know but where the hell I got money??!?!? *#@xx. Some of you probably already on no pay leave or even out of job. Yes sir and madam - I heard you.

Let me assure you this, when I started, I started very small. It was so small that they(investment adviser, unit trust consultant, etc) think I was wasting their time. When I started blogging, I want to make sure I am accountable for what I write or share - that is why I created a Turtle porfolio to track the results over time. I can write all the wonderful things, at the end of the day, it's return that count.

I was limiting myself to $ 888/month which is an amount that could be tough for many but doable. I want to make sure I invest within constraints of majority of you. I want to limit myself further to share the struggles of many working Malaysians fighting recession, slow down or what ever they want to call it, I am going to cut 30% of that $ 888/month for next six month. We will review again to see how is the condition of the overall economy. So, Turtle portfolio will have $ 620 / month for the next six month.

When the going gets tough, tough get going. Just don't quit!

Saturday, February 7, 2009

Nice Movie

I sat down patiently in front of my computer yesterday, waited for the American unemployment data. Earlier of this week, I read some where on the Internet that big Wall Street firms advised their clients to sell ahead of this ugly report but I can't find that source again. I thought this must be very ugly - perhaps 8-9% and paving the way to go up all the way to more than 10% which is an absolutely critical psychological threshold that must not be broken. You just cannot let people see double digit unemployment because every spirit will be broken and everybody will throw in towels.

When it came in around 7.6%, I watched a bit more, switched off my computer and went to bed. You know what that mean, right? When I turned on my computer again this morning, I smiled because it must be a tough day for those to gamble it will go down.

All eyes will be on Obama now. I like the way he kicked butts on Thursday.

“I welcome this debate, but we are not going to get relief by turning back to the same policies that for the last eight years doubled the national debt and threw our economy into a tailspin,” said President Obama – sounding more like Candidate Obama than at any time since he took the oath of office less than a month ago.

"What do you think a stimulus is?" Obama asked incredulously. "It’s spending — that's the whole point! Seriously.”

“I found this national debt, doubled, wrapped in a big bow waiting for me as I stepped into the Oval Office.”

“Fired up?” he asked the Democratic lawmakers. “Ready to go!” a group of them shouted back.

Now that we have sparks, but do we have enough fuels for the rally? I listened to the market sound bites, most bets on two catalysts:-

1. China

2. Technology

If you look at the charts, you will noticed that Shanghai stock market appears to bottom out and staging a rally since December which led me post on Hong Kong bull run(I believe most will think I was a nut). I hear that noises from the US big players begin to talk more of this in the last few weeks. I hope China will be that leader to lead us out of this bear market. You can also see Emerging Market ETF outperformed the US market.

Secondly, over the last week or so, Nasdaq keep defying gravity when there were whole batches of bad news. Even Marc Faber started to talk favorably about Intel, Microsoft, Oracle and etc, wow, the very man shorted tech bubble falls in love with technology???!!!. George Soros also owns Nasdaq index but he jumped in much earlier.

The last one that I want talk about is earning. Most people look at how bad it falls. But I like to look at how fast and how high it can recover. If you look the chart, you will notice earning will double in a short time when it recovers but it also will crash much faster. The earning cycles have gone very erratic.

(click all images to enlarge)

Thursday, February 5, 2009

Buffett vs. The Rest of the world.

Buffetts says every time stock market capitalization moves up to almost twice of a country GDP - you are playing with fire. But when it moves to about 50-75% total market capitalization/GDP or GNP, it is a relatively safe bet.

When Buffett speaks, he meant what he said. He is really putting money where the mouth is. When he says he don't care about short term results, he mean it. He is putting money where he thinks they will give him long term results with big fat margin of safety. Swiss Re is bleeding but he is putting money into it and well compensated with 12% (convertible notes) return as long as Swiss Re does not go out of business. He also put money into Harley Davidson and collecting nice 15% return. I am keep adding Berkshire Hathaway B position to my pesonal International Portfolio as I don't think a small guy like me will get favorable terms like this. This is one of the best places to pool resources - this is a strategy what I called - riding on Giant not behind the Giant.

By the way before I sign off, it appears that bull is leading at the moment during the last two days fight despite of dismay hints of weak employment data. I will buy some Coke and potato chips for tonight "show down movie". Have a nice day.

Feb. 5 (Bloomberg) -- Swiss Reinsurance Co., the world’s second-biggest reinsurer, turned to Warren Buffett’s Berkshire Hathaway Inc. for 3 billion Swiss francs ($2.6 billion) to shore up capital depleted by record losses.

Swiss Re fell as much as 18 percent after posting a 2008 loss of about 1 billion francs and announcing plans to cut the dividend. The Zurich-based company also will disband its financial-markets unit and may seek more capital. Berkshire’s investment may give it a stake of more than 20 percent as Swiss Re struggles to keep its credit rating.

“Both the magnitude of the additional writedowns and the resulting need to raise capital are outside of our expectations,” Standard & Poor’s Ratings Services said today in a statement following Swiss Re’s announcement. The ratings company said it may lower Swiss Re’s long-term credit ratings from AA-. “We currently do not expect to lower the ratings by more than one notch.”

Chief Executive Officer Jacques Aigrain is abandoning his attempt to increase profit by trading securities such as credit- default swaps. The foray led to writedowns of 6 billion francs last year, depleted shareholder equity and took two-thirds off the insurer’s market value in 2008. Swiss Re became the world’s biggest reinsurer after buying GE Insurance Solutions in 2005 and now has only one third the market value of Munich Re.

While the 2008 results are disappointing, Buffett’s decision to increase his investment in Swiss Re “is a testament to the strength of our franchise,” Aigrain said. “The contacts were extremely recent, and the solutions were developed in an extremely short time-frame, leading to a signing of our agreement during the night,” Aigrain told reporters today.

Worst Performer

Swiss Re fell 15 percent to 25.76 francs at 12:40 p.m. in Zurich, valuing the company at 9.1 billion francs. The stock has plunged 49 percent in 2009, making it the worst performer in the 35-member Bloomberg Europe 500 Insurance Index as investors anticipated the writedowns.

While Swiss Re said it has more capital than regulators require, it needed at least 1.5 billion francs on Dec. 31 to keep its credit rating. The company plans to get approval to sell as much as 2 billion francs of additional stock, it said.

Swiss Re’s shareholder equity was less than 20 billion francs as of Dec. 31, down from almost 32 billion francs at the end of 2007, it said. Still, the company said it doesn’t expect to need government assistance, Aigrain said.

“We have never been contacted, nor contacted the national bank or government,” he told reporters.

‘Perpetual’ Payments

Berkshire Hathaway’s latest investment comes in the form of convertible notes paying a 12 percent coupon, Swiss Re said. Berkshire can convert them to Swiss Re shares after three years at a price of 25 francs apiece or continue to receive “perpetual” payments of 12 percent a year.

“The terms of the Berkshire capital raising indicate a cautious view on the potential for other risks in the balance sheet,” said Tim Dawson, an analyst at Helvea in Geneva who has a “neutral” rating on the company. “Clearly there were market concerns.”

Buffett bought 3 percent of Swiss Re in January 2008, ceding 20 percent of its property and casualty business to Berkshire Hathaway over five years to free up capital.

“I’m very impressed by Jacques Aigrain and his management team,” Buffett, 78, said in the statement.

General Electric Co. and Goldman Sachs Group Inc. were among the companies that went to Buffett in the last year after the global credit crunch cut off their access to funding.


Buffett’s investment vehicle bought $5 billion of preferred stock in Goldman Sachs in September. It pays a 10 percent divided and can be converted to common stock at any time at a 10 percent premium. The Omaha, Nebraska-based company also received warrants to buy $5 billion of common stock at any time until 2013.

The Swiss company has been plagued by losses on contracts sold to protect clients against declines in fixed-income securities after the worst U.S. housing market since the Great Depression sparked a global credit crunch.

The company is now disbanding its financial markets unit as part of the “derisking” strategy, Swiss Re said. Remaining assets will be split between the asset-management division and a new “legacy” unit to hold the company’s credit-default swaps, which provide guarantees against corporate bond defaults.

Aigrain ramped up Swiss Re’s sales and trading of securities in 2006 and 2007, when the reinsurance business was trying to cope with stagnant premiums. While the strategy boosted profit in 2006, the credit crunch and rising bond defaults forced record writedowns in 2008. About a third of Swiss Re’s mark downs last year were tied to credit default swaps, it said.

‘Only Reinsurance’

“Our business is reinsurance risk in all and any form, but only reinsurance risk,” Aigrain said on the conference call. “All activities not strictly related to that are in runoff.”

The financial-markets unit cut 40 jobs worldwide between the end of 2007 and Oct. 31, 2008, Swiss Re said. It also eliminated 80 technology jobs.

“You can never rule out job cuts,” Chief Financial Officer George Quinn said on the conference call. “The firm has significant scope to improve its cost base.”

Swiss Re is reviewing its target of 14 percent return on equity, Quinn said. The revisions will “take account of improvements in reinsurance and expected lower returns on capital,” he said.

The Swiss Exchange said yesterday it is probing what Swiss Re told analysts, investors and the press about its risks. Chairman Peter Forstmoser said in July 2008 he didn’t expect additional writedowns at Swiss Re, according to Handelszeitung.

Feb. 4 (Bloomberg) -- Warren Buffett, the billionaire who’s poured cash into some of the biggest U.S. brands including Coca- Cola Co. and Mars Inc., agreed to buy $300 million of debt issued by motorcycle-maker Harley-Davidson Inc.

Berkshire Hathaway Inc., the insurer run by Buffett based in Omaha, Nebraska, will add Harley-Davidson’s senior unsecured notes -- and their 15 percent annual interest payment -- to his collection of at least $85 billion in corporate debt and stock. The deal, announced by Milwaukee-based Harley-Davidson today in a statement, is one of a half-dozen since the start of 2008 in which Buffett has made a new investment in a U.S. business icon.

Buffett, 78, has said he prefers investing in firms with a powerful competitive advantage such as a well-known brand. With the global credit crunch cutting off other sources of cash, Berkshire can demand interest rates of 10 percent or more. His company committed $6.5 billion in April to help Mars buy chewing gum maker Wm. Wrigley Jr. Co., and $8 billion for preferred shares of General Electric Co. and Goldman Sachs Group Inc.

“It’s a classic Buffett move,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the Web site. “He’s getting a very attractive yield from a great business that, in this environment, probably would have a very hard time finding financing anywhere else. He’s like an oasis in the desert for them.”

Neither Harley Chief Executive Officer Jim Ziemer or Tom Bergmann, the company’s chief financial officer, were immediately available to discuss Berkshire’s investment, which may be used to help customers finance their purchases.

Stock Jumps

“To our knowledge, this is Berkshire’s first significant involvement with the company,” Harley spokesman Bob Klein said in an interview.

The stock -- traded under the ticker HOG after the nickname used by riders -- rose 16 percent in New York Stock Exchange composite trading, mirroring the movement of companies including General Electric and Kraft Foods Inc. that jumped after winning Buffett’s endorsement.

Harley gained $1.87 to $13.73 at 4:15 p.m. and rose as much as 23 percent during the session, its biggest advance since October, 1987. The motorcycle maker has lost about two-thirds of its market value in the past year. Berkshire, the most expensive stock on the Big Board, added 1.2 percent to $90,500.

The company is the world’s largest seller of cruisers, or motorcycles designed for leisure riding, that come equipped with chrome exhaust pipes and 1950s styling. The power of its brand also allows it to sell T-shirts and memorabilia, and a chain of restaurants carries the Harley-Davidson name.

Harley’s Moat

“Possessing a powerful worldwide brand is essential for sustained success” in some lines of business, Buffett wrote in his annual letter to shareholders last year, explaining his preference for companies with a “moat” protecting them from competitors. “Long-term competitive advantage in a stable industry is what we seek.”

Ziemer has said the motorcycle maker, founded in 1903 by William Harley and brothers Arthur, Walter and William Davidson, is “fiercely protective” of its brand. In the 1990s Harley unsuccessfully tried to trademark the sound of its V-Twin engines, described in an application as a “syncopated rumbling exhaust” that sounded like “potato” repeated quickly.

Davis Selected Advisers LP, the largest holder of Harley- Davidson stock, also committed to buy $300 million of debt. The firm’s Chris Davis declined to comment. Buffett, who is Berkshire’s chairman and chief executive officer, didn’t respond to a request left with assistant Carrie Kizer.

Corporate Debt

Buffett is adding holdings of fixed-income securities to help deploy more than $30 billion in Berkshire’s cash. The firm held about $9.7 billion in corporate debt and redeemable preferred stock at its insurance units as of Sept. 30, an increase of 61 percent from a year earlier. In November, Buffett agreed to buy $300 million in debt from USG Corp., North America’s largest maker of gypsum wallboard.

“He’s got cash coming in faster than most people would have a ready place to put it.” said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “This economy is certainly providing him with opportunities,”

Average yields on corporate bonds with BBB ratings jumped to 9 percent yesterday from 6.1 percent a year ago, according to Merrill Lynch & Co.’s U.S. Corporates, BBB Rated index. They reached a 17-year high of 10.2 percent on Oct. 31 as a global credit crisis made buyers of corporate debt scarce.

Harley said Jan. 23 fourth-quarter profit fell 58 percent due to weaker demand for its motorcycles. The net income of $77.8 million, or 34 cents a share, was the lowest quarterly profit in nine years.

Fat Boy

Sales for the maker of Fat Boy and other cruisers fell in 2008 as the U.S. economy slowed and access to consumer credit tightened. List prices for Harleys range from $6,999 to $35,499.

Harley is working to cut 1,100 jobs and close three plants to save at least $60 million a year. About 70 percent of the firings will take place this year and the rest in 2010, the company said.

“Buffett looks beyond the quarterly earnings report,” Fuller said. “When he invests in a company, it’s a way for shareholders to know that they’ll make it through. It’s a real pat on the back for Harley-Davidson, and a sign that he thinks they’ll be around for another 100 years.”

Wednesday, February 4, 2009

Dow Theory sell signal?

I hope you had a good read on my yesterday post - the article was so long that it took me at least 3 times to reread it. Good stuffs.

The market is expecting a big show down between bull and bear this Friday. It will the day of announcement of unemployment data. If the data is a lot less worse, it will squeeze out short sellers. If the data is a lot more worse like shooting beyond 8%, most guys will scream through the roof - SELL. Most expect it to be around 7.5%. I will sit very tight for these few days or reduce positions because it is going to be very volatile.

Just to share with you what I saw - market timers begin to throw in a towel - is a good sign.

$INDU 7,936.83, -64.03, -0.8%) and the Dow Jones Transportation Average ($TRAN:Dow Jones Transportation Average $TRAN 2,908.67, -57.02, -1.9%) broke below their respective Jan. 20 lows. In the case of the Dow Transports, furthermore, Monday's closing represents a new closing low for the bear market that began 18 months ago.

The Dow Theory is the oldest stock-market-timing system in widespread use today. Its author was William Peter Hamilton, who introduced it in a series of editorials in The Wall Street Journal over the first three decades of the past century.
Hamilton argued that it is bullish if both the Dow Industrials and the Dow Transports jointly reach significant new highs. Similarly, the market is likely to continue falling if both Averages jointly reach significant new lows. Potential turning points are signaled when only one of the two Averages reaches a new high or a new low--"non-confirmations" in Dow Theory parlance.

It is just this sort of non-confirmation on which at least some Dow Theorists were recently pinning their bullish hopes. Last Friday, when the Dow Transports fell below their Jan. 20 low, the Dow Industrials did not.

This non-confirmation lasted just one market session, however, and was eliminated on Monday. After the close, Jack Schannep, editor of, wrote to subscribers: "Yes, today the Dow Jones Industrials and the Transports closed below the January lows. That is a Dow Theory Sell signal ... Therefore, I suggest lightening up."

Also bearish is Richard Moroney, editor of Dow Theory Forecasts, the second of the three Dow Theory newsletters I monitor. However, on his interpretation the Dow Theory turned bearish at the end of t September; he did not feel as though Monday's action merited any special communication to his subscribers.

To be sure, careful followers of the Dow averages will note that there is an additional non-confirmation in the charts that might have bullish significance: Though the Dow Transports have broken below their Nov. 20 lows, the Dow Industrials remain nearly 400 points above their low of that day.

Interestingly, however, the editor of only one of the Dow Theory newsletters I track is placing much importance on whether the Dow Industrials remain above their Nov. 20 low. He is Richard Russell, editor of Dow Theory Letters.

Russell says that he won't turn bearish on the stock market's major trend "unless or until the Dow [Industrials] violates its Nov. 20 closing of 7,552.29, thereby confirming the Transport action ... I [therefore] decided to hold off on placing the bear on the site until we receive a bearish confirmation by the Industrial Average."
Russell's refusal to declare the Dow Theory as outright bearish is not much for the bulls to hang their hats on, however. Russell wrote Monday night that he wasn't turning officially bearish "despite the fact that I don't like the market action."

2009 Barron's Roundtable: Rocky Road

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.

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.

Q: 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 a 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.

Q: 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.

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.

Q: 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.

Q: 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].

Q: 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.

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.

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.

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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

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.

Q: 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.

Q: 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.

Q: 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.

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.

Q: 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.

Q: 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.

Q: 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 interset-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.

Q: 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.

Q: 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.

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.

Q: 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.

Q: 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.

Q: 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.

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.

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.

Q: 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.

Q: 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.

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.

Q: Thank you, Abby.