Eric Gillin, Chris Edmonds and guests Robert Hagstrom, Tony Dwyer and Ted Bridges chatted on Yahoo!, Sept. 20, at 5 p.m. EDT. To hear the transcript, click here.
It is Thursday. It is 5 o'clock. Welcome to
Martini Chat. Myname is Eric Gillin and I'm your host, joined here, as always, with
columnist Chris Edmonds.
He'll be helming the rest of the show thisweek, taking your questions with a slew of special guests. Our topic is highin everyone's minds this week -- the aftermath of the World Trade Centerattacks.
But before we get to your questions for our guests, or the day's issues,we're going to raise a glass. It's time for a toast.
New York City is the only American city to have ever been walled. In the1650s, Peter Stuyvesant, the Dutch governor of the area, sunk massive16-foot logs into the surf along the Atlantic Ocean to ward off the threatof seagoing invaders.
When the British finally captured the Dutch colony,they wanted to use a stubby east-west cowlick behind the downtown wall fortroop movements, but the citizens wanted to build a financial district.
They prevailed. They created Wall Street.
From the very beginning, Wall Street was a stubborn place for courageousfolks, unbowed by threats -- both active and idle. Its history is packedwith tough people who act boldly in crisis.
People like John Pierpont Morgan, who single-handedly bailed out theAmerican economy after the panic of 1893. People like William Crapo Durant,who lost control of General Motors two years after founding it in 1908, thenstarted up Chevrolet, all before returning to helm GM in 1915.
People like Paul Volcker, who hiked interest rates and broke inflation's back like twigsacross a knee during a very tense 1979.
Wall Street is resilient, not because of the strength and power that comeswith capital. Wall Street is tough as hell because of the people here, whonever take a break, who begin their careers toiling for 18-hour stretches,who do not quit, even after the bell has rung.
Take away computers, turn theclock back a century and those bowler-clad and corset-strung masses are thesame courageous and indefeasible crowd that returned to Wall Street onMonday.
And there have been explosions on Wall Street before. Not on Tuesday's scaleand devastation, but it was devastating for the era and people returned thevery next day.
The date --
Sept. 16, 1920 . The time -- lunch hour.
Wall Street was teeming with people close to noon that day. But out ofnowhere, the financial district was shattered when a horse-drawn carriagepacked with explosives detonated, blowing a six-story-high fireball skyward.
At least 30 people were killed and a hundred others were injured as deadlyshrapnel flew into crowds. Windows exploded all over the immediate area.Bedlam reigned.
The next day. Chaos. Acrid smoke. A pervasive stench of destruction.
But people came back to continue their important work. As they did this pastMonday, too.
They fled jaw-cracking din and chaos, then returned to an eerily silent warzone. Free movement was restricted -- not that anyone felt like walking pastthe smoldering hulk of the former World Trade Center, as impossibly massivein death as it was in life.
Military personnel checked identification wherepushcart vendors sold knishes.
Although the streets were scrubbed clean, Wall Street's shattered psychecould not be. The Twin Towers' shadow was replaced by a fear that wateredeyes, choked throats and constantly reminded -- something horrifyinghappened here.
But Wall Street is not just concrete or cement or cobblestone. This streetis also made of humans. And the fabric of humanity that floods this area isstronger than its steel.
Unlike steel, these people flow around trouble.They cope with extreme pressure. They bend instead of breaking. They do notmelt in heat.
Be it ocean, British rule, inflation, depression, panic, explosion -- thepeople who work here do not give in. And I salute that fighting spirit asmuch as I mourn the people we've lost.
It's not some miracle, though. It's the only way Wall Street has ever known.
Joining me now is Robert Hagstrom, portfolio manager of the Legg Mason Focus Trust and author of
The Essential Buffett: Timeless Principles for the New Economy
, published by John Wiley & Sons.
He is also the author of
Latticework: The New Investing
published by Texere. Hagstrom joins us from his offices outside of Philadelphia.
Robert, welcome to
Martini Chat. Thanks for joining us.
Chris, thanks for having me back. Always nice to be with you.
What a week. I want to focus on the Buffett investment discipline and what your study of Buffett suggests as to how people of his bent react to these events, but first, where were you and what were your impressions when you first learned of the tragedy?
I was in San Antonio on my way to see a client when I heard of the first explosion in a cab. My reaction was this was going to be serious and very bad -- both as an historical event and for the economy and markets.
You don't see something like this happen without a real shake to the psyche. While we knew it would impact the markets, we had no idea how long it would take to open the markets.
We also had no idea the aviation system would come to a grinding halt. We ended up renting a car and driving back from San Antonio to Philadelphia. That was a long trip.
You and your colleague, Bill Miller -- the manager of the Legg Mason Value Trust -- have spent a great deal of time in the last week looking at history and what it tells you about investor and market reaction in times of crisis.
What does history tell you about the road ahead for the markets?
If you go back to the turn of the century and look at military, political and international events you find exactly what you think you would find initially. The market serves as a discounting mechanism to reflect the uncertainties of events. That is very rational. What is enlightening and hopeful is that 6-12 months following the intervening event, markets tend to go much higher -- they trade even higher than levels before the event. That reaction seems almost universal.
Let's turn to Warren Buffett, a man you have chronicled now in three books, really the definitive treatises on the Oracle of Omaha. I found it a bit incongruous that on
Sunday night Buffett seemed to suggest it was business as usual, only to turn around on Monday and decide to cancel his tender for Finova bonds. Buffett once said, "It's better to be approximately right than absolutely wrong." It seems with such steep declines in the market that there are lots of ways to be approximately right. What does history tell you about Buffett's actions in times of crisis and uncertainty?
That's a great question and the answer is surprising. It does not appear that Warren strikes during market panics, which I found personally surprising. After all, there is a lot of mispricing in events like this as investors scurry to get out.
You can look at three recent events -- granted they aren't the same magnitude -- to see Warren's reaction in market panics: the market collapse of 1987, the Gulf War in 1991 and the Asian financial crisis in 1998. In all three he was not a major buyer. Granted, in 1998 he did take a look at the Long Term Capital Management, but he really made no moves during each crisis. We are trying to absorb what that means.
The question is, of course, why? Why doesn't he take advantage of the opportunities? After all, from our purview, there are countless numbers of high quality, great businesses that you think he would like to buy but appears to have no appetite to grab.
The best explanation is that Warren likes to buy certainty at a discount. Hence, large market contractions associated with economic and global uncertainty doesn't create a perfect equation for him. That's a possible explanation.
It doesn't appear that Buffett is in the market buying in any significant way. Is that a sign of his continued concern about values or does it represent a real change in Berkshire's focus -- where the focus is no longer on a portfolio of common stocks but, rather, on a stable of operating companies that contribute to Berkshire's bottom line. Is it fair to say that Buffett's relevance to the stock market is waning?
All three are correct. Valuation -- given his outlook for the economy -- may still be too high for his taste, especially if he still thinks growth rates will continue to slow.
Second, I believe that Berkshire has changed its strategy of allocating capital. Warren is now more interested in purchasing entire companies instead of harboring billions of dollars to purchase minority positions in large-cap companies. Warren has indicated he is frustrated in his ability to influence companies when he is a minority shareholder, especially in the area of capital allocation, which is so important to him. He has had little impact in moving Coke, Gillette and American Express in his direction.
That said, is Warren relevant to today's stock pickers? To those who want to mimic his stock picks, his relevance is much less than it once was. It's hard to be a copycat when there is nothing to copy. However, from the "principles" perspective -- the use of Buffett's methodology and disciplines to choose stocks -- he is still very relevant. There is little difference in the principles he uses to scout company purchases compared to those used to select stocks he might invest in. The intellectual process is the same.
A final Berkshire question. You have sold a large portion of your Berkshire holdings. What's your thinking there?
First, it is not a reflection on Warren or the admiration we have for Berkshire. The reason we sold Berkshire was we followed his investment principles. To beat your benchmarks you have to buy companies that have an economic return slightly better than your benchmark. Warren has confessed that Berkshire will be a very average performer. As our calculations of Berkshire's fair value suggest it is at or near that level, it would be very hard to outperform our benchmark with a sizable position in Berkshire, hence we have sold a portion of our position.
So, where do we go from here? What would you key on to determine the future direction of the equity markets?
I think you have to get on the other side of the psychological barrier that is distracting investors from making rational decisions. The market is overdiscounting a very, very difficult market for a multiyear period. If you look at the market value of great, large-cap companies, you see pricing that suggests almost negative growth over multiple years. You have to understand that and be ready to assess whether you agree.
Even with a very difficult political, economic and military environment in the next several quarters, we will begin to return to a sense of normalcy and the markets will react to that. When, I'm not entirely sure, but it will occur far sooner than the market seems to suggest right now.
Remember -- and this is a grim comparison, but it is also hopeful -- England has experienced its fair share of terrorism like frequent bombings in shopping centers, and the country adjusted and learned to cope. And, their markets didn't quit. In fact, their markets continued to move higher.
This was horrific and that can't be diminished. But, terrorism didn't just show up yesterday. Countries have learned to adapt. Terror will be a fact of the day, but we have seemed to move past it and carry on with economic plans. The U.K. is a good example of that.
Now it's time for Yi Ping with the news. She's in our Wall Street newsroom. Yi Ping, how did it go today?
Yi Ping Ho:
Stocks closed sharply lower today as steep declines overseas and growing concerns about the U.S. economy took their toll.
Yi Ping Ho:
Blue-chips and tech stocks tried repeatedly to mount minor rallies during the session, but sellers easily carried the day. The Dow Jones Industrial Average closed down 383 points, or 4.4%, to 8376, while the Nasdaq fell 57 points, or 3.7%, to 1471. The S&P 500 lost 32 points, or 3.1%, to 984.
Yi Ping Ho:
The pessimism was sown early when the government said new housing starts fell 7% in August to their lowest level in almost a year. A report on new unemployment claims was inconclusive, as many jobless people were thought to have stayed at home during last week's events.
Yi Ping Ho:
But investors weren't consoled by calming words from Fed Chairman Alan Greenspan, who said he expected the economy to bounce back after the initial pain caused by the terrorist attacks.
Yi Ping Ho:
Bad news continued to plague the airline industry. Both United and American Airlines said they were cutting 20,000 jobs, one day after Boeing said it might slash 30,000. In all, the airline industry has laid out plans to cut 100,000 jobs in the face of flagging demand.
Yi Ping Ho:
Technology shares were also feeling heat after Applied Materials said it would cut about 10% of its work force because of a slumping semiconductor industry. And Federal Express, citing a decline in demand among its high-technology customers, said third-quarter sales fell 36% from a year ago.
Yi Ping Ho:
Walt Disney was a big loser on the Dow after saying it had agreed to buy back 50 million shares from existing holders at a discount to the market price.
Yi Ping Ho:
Goldman Sachs said it planned to make an even bigger purchase of Disney stock -- up to 90 million shares -- from the same sellers and then resell it in the market later.
Yi Ping Ho:
Meanwhile, the dollar took a plunge against the yen amid confusion over the Bank of Japan's efforts to support the buck. Rumors circulated on trading desks that the bank was once again trying to keep the yen from strengthening to the point of hurting exports. But after a bank official denied the intervention, the dollar dropped sharply.
Thank you, Yi Ping. Tomorrow could be an interesting day with President Bush speaking tonight.
Joining me now to discuss the markets and where we go from here are two Wall Street veterans and familiar names to
readers. Tony Dwyer is Chief Market Strategist at Kirlin Securities in New York. Tony is a regular contributor to
With us from Omaha, Neb., is Ted Bridges, Chief Market Strategist at Bridges Investment Counsel and portfolio manager of the Bridges Investment Fund. Ted has been a guest in
weekend Streetside Chat feature as well as a regular source for our staff.
Tony and Ted, welcome to
Martini Chat and thanks for being with us.
Good to be with you, Chris.
Chris, nice to be here.
Ted, let me begin with you. While you have clients all over the country, your geographic focus is the Midwest. What has investor reaction been like in the Heartland?
My take is that it has been relatively muted relative to what you see in New York. Our phones have been relatively quiet. There hasn't been a lot of panic.
But, that isn't to say there isn't concern and frustration. Yet, I have yet to sense fear, panic or capitulation, at least from the people I am talking to in the Midwest.
Tony, in your morning note to clients and in a column on
Wednesday, you talked about the range of emotions that seems to be gripping investors and, in many cases, what appears to be paralysis.
As someone who has been on the Street for some time, how do you avoid or overcome the emotions of a situation like this and take advantage of what appears to be a very oversold market?
I don't think people can so quickly overcome the emotion. The question is when everyone will get through this. That has been the problem the last three days. It will continue to be a very difficult trading environment because the rules we have become used to just don't work.
We have a lot of healing to do.
Ted, let's turn to the economy where the forecasts range from uncertain at best to a deep recession at their gloomiest. What's your outlook and how does that impact your current investment decisions?
The trend in the foreseeable future is for flat to worsening numbers. However, since we tend to take a pretty long-term view, we would view the economy as something where time will become our ally.
Comparisons will begin to flatten out and you will begin to see recovery. That said, much of what drove the longer-than-expected and stronger-than-expected growth in technology and telecom isn't likely to repeat itself. So, when we turn the corner, the turn may not be as strong as some people expect.
Tony, one critical aspect of any economic recovery --in fact, before Tuesday, some suggested the only reason we had avoided recession to date was consumer resilience. Now, last Tuesday's terror looks to have rattled a very fragile confidence. What impact does a flailing consumer have on the equity markets?
It has a tremendous near-term impact. The increased pace of layoffs increases the fear of financial insecurity That creates a very difficult environment for not only the consumer but also for the investor.
And, that also suggests that while we will have an oversold rally at some point, it will also be met with a very large supply of stock.
Ted, has this week's selloff created any specific opportunities where you are putting money to work?
We think this is the third, and likely, last phase in the current bear market. The first phase was March 2000 to early summer. The second phase was late August 2000 through April 4, 2001, the lows everyone talked about until this week. This phase probably began in early June and will run its course. We are in the late innings of this bear market -- the 7th or 8th I would expect.
Our game plan is to be pretty stock-specific and go with opportunities where we see them. We want to find opportunities that might be created in the final portion of the decline. We know we won't pick the bottom perfectly and we will have to ride through maybe lower lows, but we want names that will provide relative performance over the next 3-5 years.
We are focused on financial service companies like Capital One, advertising and media companies like Omnicom, business services like Westell and, in technology, names like Flextronics. We also like retailers over the long term, although we realize there will be short-term difficulties. We would focus on brand names like Home Depot and Gap. Also, Wal-Mart makes some sense looking at three years, but it could get uglier before it gets better.
This is beginning to feel like a once in a five- or 10-year opportunity to pick up some great companies at very reasonable prices.
What would you avoid?
Our focus is on good companies and bad stocks. So we would avoid good stocks of bad companies. Those are companies that may have performed very well in the past year because of capital flows and short-term valuation but have less than great long-term historical performances as businesses.
The toy companies jump to mind like Mattel and Hasbro. Some manufacturing companies also fall into that category.
Tony, where do you see opportunities in this market?
I think the opportunities are largely index-related, instead of picking sector or securities. This is a business of educated guesses and the current circumstances are unprecedented, which makes individual picks nearly impossible.
Ultimately, the government's
interjection will benefit the economy and the consumer, but there is absolutely no precedent when that will take place or where -- in what stocks or sectors -- it will be seen.
Areas to avoid?
You want to avoid the areas -- from an investment standpoint -- that will meet the most supply in a rally. That would include technology, airlines, insurance and some of the financials. They will see the greatest oversold bounce but will see the greatest supply of stock when the rally comes.
Let's take some questions from our listeners and readers. Laura, what do you have for Tony and Ted?
What would occur in the U.S. market if there were an attack on U.S. or U.K. soil?
It's already started on U.S. soil.
Any likelihood that President G.W. Bush's comments regarding financial stimulus will impact the market in either direction tomorrow?
Tony, could Bush rally the market?
I think he could rally the market if it's a moving speech. We are going to respond, we are going to respond in a serious way. We are going to protect the country. But there is a lot of selling pressure.
Do you think he has it in him?
I do. You have to look at what he's been though, like everyone else. He has a lot of courage.
I'd echo Tony's comment. I've been pretty impressed with the general tenor of the leaders' comments. I was in N.Y. when the tragedy occurred. I was so amazed and impressed with Giuliani. He did a great job. In investing, your success is a bet on management. Bush has very good management team. I think over time that will act to stabilize the market.
Tony, as the major indices drip lower, what positive catalysts do you see on the horizon, beyond just being extremely oversold?
I think time is the investors number one ally. Every day, every quarter that goes by gets you further away from the very, very difficult earnings comparisons from last year. Time is on our side at this point.
This is educated guessing. This is unprecedented stuff. What I'm looking to is the fact that the physical stimulus is so massive that at some point -- I don't know when it is -- but when it happens, the force will be powerful.
Tony, you mentioned today that the market might be primed for a reflex rally. When do you think this might take place? Also, do you think we can rally back to where we were on the Nasdaq before the attacks - 1700?
I think we can. Right now the volatility index has been up above 40, it's coming soon. You have to be very careful. You've got to be wrong for awhile to be willing to be right. In mid-March if you bought the Nasdaq at 1900, you felt like a fool for two weeks. It went to 1638. Two months later, it was at 2300. You had to be wrong dramatically before you could be right.
Our wars in the past had a beginning, an objective -- geographic and an end. How well do you think the market will take a war that does not have discrete battles or an obvious end?
No question about it. This feels a lot like October of 1990. A lot of uncertainty. In 1991 we were pretty quickly able to ascertain how the war was going. The problem this time around is the going in feels the same, but coming out is going to be a lot more difficult to measure progress. That takes you back to time horizons. Investors need to look at time horizons and companies. People will become disenchanted. That will really challenge the ability of the Bush administration to keep things together.
Thanks to you and to all of my guests for joining us today.
TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.