Welcome to the June 1991 issue of Investors Hotline. I'm Joe Bradley. Our release date is June the 7th, 1991. This month's lineup features two outstanding performers in the money management field. Elizabeth Bramwell is the asset manager for the Gabelli Growth Fund, rated one of the top performing funds in the country since its inception. For those who would care to take a little bit more perceived risk, not necessarily actual, we're pleased to present once again Jim Collins, who's the asset manager for Insight Capital, a company specializing in OTC stocks. Our maverick this month is technical analyst PQ Wall. His forecasts are so dramatic that some of his rivals may say that his name should be off the wall. Actually, the heart of the controversy may be his colorful way of expressing what a number of analysts are already saying in more sedate terms. But we'll leave the determination on the

[01:03]

validity of his forecast to you. Our final interview is with Nicholas Mikus, who's one of the nation's leading economists. His specialty is the Fed and how the Fed operates. Originally, I had intended to have a Fed official speak on the subject, but obtaining a frank and open discussion of these topics is rather difficult to achieve with someone who's currently in the hot seat. I'll keep working on it, and if we get the kind of information that we feel appropriate for presentation from a Fed official, we'll include him in the future. All in all, a very balanced issue, which is what we strive for every month. It's to the benefit of new subscribers who may feel uncertain about the diversity of opinions on markets and the economy right now to be patient and avoid acting until you've listened to enough diverse viewpoints to give you a level of comfort. As investment psychologist Van Tharp said in an Investor's Hotline interview, one of the

[02:06]

key aims of the successful investor is to understand the reasons why before acting. Therefore, be sure to allow enough time to accumulate sufficient objective information so that you'll be able to map out an investment plan to suit your own needs. Impulsive decisions are usually regretted and create unnecessary stress. Speaking of stress, as business or professional people and as active investors, we all go through periods where the normal stress levels turn into distress. One of our subscribers who is a specialist in the area of stress management has put together a rather intriguing self-help message that I thought would be a practical extension of our usual profit-oriented hot tip. Tim O'Brien is a fellow of the American Institute of Stress. He has practiced and taught the techniques he shares since 1975. A graduate of the University of

[03:10]

South Florida, he conducts professional seminars and facilitates both professional and corporate retreats. Tim, I understand you have some excellent ideas for subscribers to help reduce their stress in helping them to become better investors. What can you tell us? Well, many investors will diligently study to improve their trading skills and they'll spend thousands of dollars on their latest software, like your newsletter or the hotline or seminars in hopes of gaining a competitive edge. But then, how much good will all of these innovations be if stress keeps the investor from using them properly? In reality, it's our mind that makes all the final decisions. When it's calm and it's clear and focused, then we function better as investors. It's the root cause now of 80% of all primary healthcare, both mental and physical. For investors, the biggest causes of stress are time and performance demands, liability and risk exposure, and market and government uncertainty. Then, put on top of that regular causes like a poor diet or a lack of exercise and poor work habits, then it's easy to see why investing

[04:13]

sometimes can be so difficult, especially difficult over a long period of time. Many are probably not in agreement right now with what I've just said and they'll say, yeah, yeah, I agree with that, but what can I do about it? Am I a victim of my own occupation? Well, the answer is an emphatic no. Stress is a problem, but we as individuals don't have to be victims. Fortunately, there's many effective stress management and relaxation techniques an investor can use to control and remove the stress from their life. First, you need to learn a couple of effective physical techniques that will immediately give relief from the symptoms of stress like the headaches or a loss of concentration or becoming angry easy. You need to train yourself to use these techniques whenever you become conscious of stressful situations. Then, you want to learn some mental techniques that will release the underlying causes of stress. For nearly instant relief from stress, learn to breathe correctly. You use your diaphragm and you let your stomach move in and out and you keep your chest and your shoulders still. Stomach breathing lowers your pulse, it lowers your blood pressure, it can save up to five million breaths per year. Initially, when you're trying this, breathe slightly deeper and

[05:17]

longer than normal to set this relaxing response in motion. Now, here's a very simple technique that'll probably make you laugh. Wiggle your toes consciously. We've got hundreds of nerve endings in our toes and wiggling them stimulates and relaxes them. Just do it for 30 seconds and then you pass judgment on it. Now, here's the last suggestion for the quick relief from stress. Keep an object on your desk or in your pocket or your purse that reminds you of something special and then when tension mounts, call a 60-second timeout and then look at that item. I've got a picture of a marlin I caught and released in Kona, Hawaii hanging on my wall. In fact, I'm looking at it right now. One look at it and I see and feel the boat and the water and the excitement of the catch. Relief from the symptoms of stress is good. However, releasing the cause is even better. My first suggestion is that you contact Dr. Van Tharp and take his investor's profile if you haven't already done this. This personal report will key you into your strengths and weaknesses as an investor or a money manager. Also, as investors, the market obviously at some point moves against us. How do you react to it? Have you ever become angry at the market or worried

[06:20]

about what it's going to do next? Begin to cultivate what I call Q-Tip. Q-T-I-P. And quit taking it personally. The market didn't crash on October 19th, 1987 just to ruin my wife's birthday. It just happened. And the government isn't out to get you when it changes its rules so often. It's out to get all of us. So relax. You've got a lot of company. Two extremely important factors at work here, Joe. First, science tells us that every single thought we have has a chemical consequence in our body. And secondly, optimists, those who explain setback in temporary, specific, and non-personal ways make better business people and investors. I call it our chemistry of choice. If you respond to recover from setback in a positive way, you'll produce powerful chemicals that strengthen your immune system. These chemicals make us stronger. If we respond negatively or recover slowly from setback, we fail more often and become sick more often than an optimist do. There's a pivotal book out right now by Dr. Martin Seligman called Learned Optimism that every investor and money

[07:21]

manager needs to read. It's a compendium book of 25 years of research concerning what psychologists call explanatory style. That's the way we speak to ourselves when we're under pressure. Now meditation is the strongest stress management and relaxation technique that you can practice. It quickly relieves the symptoms of stress. And then with steady, correct practice, the depth of relaxation attained improves our ability to make decisions and stay focused. Now here for the listeners is a simple meditation technique that they could start using today. You sit in a quiet place in a comfortable chair with your back straight and your hands on your knees. Take four or five long, slow breaths. Feel like you're breathing in relaxation and you're exhaling tension. Focus your attention on the tip of your nose and notice the coolness of your breath as you inhale. And as you exhale, listen to the sound of the word saw like sawing a board. This is an approximation of the sound that our breath makes as we exhale. Try this for about full 15 minutes with calm breathing and silent listening. Don't work at it or make it hard. Just watch the process as you inhale and exhale. Two

[08:24]

good books on meditation are The Relaxation Response by Dr. Herbert Benson of Harvard and An Easy Guide to Meditation by Roy Eugene Davis from CSA Press in Lakemont, Georgia. Now the goal of these suggestions is to encourage you, the listener, to take time to check the level and the effects of stress in your life and then to set up what I call a SMART program, a Personal Stress Management and Relaxation Technique program that fits both your body type and your lifestyle. There's one other book I'd like to recommend to everyone. It's called Perfect Health by Dr. Deepak Chopra. He's an endocrinologist from Massachusetts. It's a revolutionary approach to preventive medicine. Well, what I want to impress upon investors, hotline listeners most is that in recent years there have been actual quantum advances in both medicine and psychology. Those who take the time to learn this new science can gain up to a 10-year advantage over those who don't. And the listeners who fill that techno gap will greatly increase the odds that they'll live both long enough and well enough to fully enjoy the fruits of their investment labors. Tim O'Brien said that

[09:28]

he would be pleased to offer fellow investors, hotline subscribers, his three cassette set, Achieving the Dynamic Balance for $29.95. If interested, you may write to him at Multimedia Publications, 1294 Timberlane Road, Tallahassee, Florida, 32312 or phone 800-344-2429. And now let's turn to our first interview with Elizabeth Bramwell. Elizabeth Bramwell has had more than 20 years experience as an analyst portfolio manager. A graduate of Bryn Mawr College and Columbia Business School, she began her career with Morgan Guarantee. She then worked for the firm of William D. Witter Incorporated, where she was named an institutional all-star analyst and later was named vice president and investment research group head at

[10:31]

Bankers Trust Company. She was a limited partner with a private hedge fund before joining Gabelli & Company as director of research in 1985. Mrs. Bramwell wrote the investment policy for the original Gabelli Growth Fund Prospectus and has managed the fund since its inception in April of 87. In three years, the fund has grown to 295-plus million in assets and 30,000-plus subscribers. Through December 1990, the fund has appreciated 81.7% cumulatively. For the three-year period ending December 1990, the average total return of 24.1 made Gabelli Growth Fund the top-ranked growth fund for that period by Morningstar Mutual Fund values. It is also ranked as a top performer by CDA Technology Rating Services. Hi Elizabeth. Hi Joe, how are you? Fine, how are you doing? Elizabeth, what do you do

[11:38]

differently or better than most of your colleagues that you attribute your superior performance? Well, I think, Joe, that my background has been in research. I started off at Morgan Guarantee back in late 1967 and I was exposed to a fundamental research approach. And then I worked for a hedge fund for a period of time and there we focused more on the macro picture, interest rates, inflation, and so forth. And I think one of the advantages of a hedge fund is you learn to be unsentimental about stocks. Since I've been with Mario, I've been exposed to a private market value approach. You know, what would an informed businessman pay for a given company? It's not that one method is any better than the other two, it's that I think that one can basically adapt to all three and they each have their place and hopefully by putting them all together one can come out with something even better. Do you feel that one approach is better than another dependent upon the economic environment or do all three work if you stick at it? I think all three are very

[12:40]

important. I do start with a macroeconomic view and I do have an economic outlook on the economy, on interest rates, political trends, taxes, and so forth. But then I really do look at stocks from the bottom up, looking at basically the printed material from companies, the annual reports, the quarterly statements. How would you characterize your style of investing? Is it model day after any one? I think generally the style is eclectic and it comes from basically having been exposed and involved in three different methodologies here. But you know I read everything from Forbes to Prevention Magazine to the C.A.R. Club bulletins. I know that you prefer unrestricted bylaws. What type of flexibility do you feel is important as a money manager? In my past experience having arbitrary structure can often impede decisions. Generally I want to be fully invested in an equity fund but yet there are times where hopefully some common sense would be useful. The other

[13:41]

thing is that I don't particularly want to be limited by the capitalization of a company and say well I won't buy any stocks that are under 100 million in cap. You know an example of that would be that I started looking at Medical Care International back in 1985-86 and the stock was around five at that time and you know under a hundred million market cap. If I'd had a threshold of a hundred million market cap I never would have really looked at the company. And that stock is now over 50 today. You were heavily in cash at the end of 1990 and also just before the crash. Were you expecting a repeat performance at the end of 1990? Is that why you were so heavily in cash? The reasons for being in cash were quite different. The fund got started in April 87. Interest rates went up in August and the P ratio went up quite a bit also and if you look back on it you'll see that there really was a spike in the relationship, this is one thing that I do use, relationship between the long-term bond rate and a reciprocal P-E ratio on the market. So the market declined I think in 87 in October was largely driven by the proposed tax changes plus

[14:44]

high interest rates and it was not driven by changes in the economy. The economy was quite strong. The fund benefited by being 41% in cash on October 19th in 87 and then buying stocks where the fundamentals were still very much intact and which were really distressed, particularly there was a lot of IPOs that were really stressed out. Things like A&W Brands would have been an example of that. What was that ratio that you said you used, P-E ratio to long-term interest rates was it? Well yeah that has proved to be a one indicator in the last year or so. In the 1980s there's a fairly good correlation between the long-term bond rate and the reciprocal P-E ratio, in other words the earnings yield ratio. Although it does move around, generally I would say it's been in about the 1.2, 1.4 relationship. Whereas you go back to August of 87, it went up to I believe somewhere around 1.8, really spiked. It's not as

[15:45]

significant I don't think as it once was. The market still looks relatively attractive to me in that context. But I think there are other things that come into play here now that interest rates are down at just say 5.4% When you expect that there is a high degree of market risk and you think that the market in general might be taking a dive and taking the good stocks along with it, do you prefer going into more defensive stocks or going into cash under those circumstances? Oh I think the first step is to be in cash and then to redeploy it. There's also a very good argument for buying and holding as let's say would have been a major plus say between December and March of this year. This fund has not been so large that it cannot move in and out of things with some ability. It is widely diversified. There are approximately 150 stocks in it. After having gone through that fourth quarter of 87, there was a certain learning experience of not having gigantic positions in small cap stocks. So I would feel very uncomfortable holding 100,000 shares of something

[16:47]

with a market cap under 100 million. It's unlikely I would do that. So the fund is structured with a lot of large liquid stocks plus even more small stocks and a lot of small bets. I'd like to go back a step. We talked about the 87 market and having cash and the 90-91 market. The difference really was that the economy at the end of 1990 was beginning to really spiral down. Retail sales declined even on a unit basis which was something that hadn't happened before for a very long time. We had a real plummeting of consumer confidence. We had the military risk. The thing that was so wonderful really was that we had such a fast military victory first in the airstrikes and then in the ground war with such a small loss of life. We also had the shorts being run in that period of time. The military success with the airstrikes was so fast that those who were short because the economy was so, the outlook was so uncertain and negative, really had to cover very quickly. And then the unemployment

[17:49]

numbers came out which were quite negative. And the Fed dropped the discount rate immediately thereafter. I think if it hadn't done that, the market may indeed have gone down after those unemployment numbers. And then the ground war was very successful and we've had another drop in the discount rate again. What convinces you to go to cash and convinces you that there is a period of high risk where you would employ some of the techniques that you learned when you were with the hedge fund? Well, if I saw interest rates going up, you know, that would change the valuation on the market. And generally speaking, I think at this point that the Fed will keep interest rates down here for a period of time so that they can reliquify the banking system and the corporate and consumer America. I think this will spill over and has already spilled over to the rest of the world. It takes the pressure off the rest of the world to raise rates which in itself is significant. We've seen that the U.S. debts are actually growing geometrically, exponentially. We've had banking problems. We've had the the S&L

[18:49]

crisis. As a matter of fact, the economist Al Malabro of the Wall Street Journal has a couple of books out on it so that we have got to, as a nation, start living within our means. The dollar is going to continue to decline unless we do this and we're going to pay the piper. It's a question of when. How do you feel about things like that as a money manager? To the extent the Fed can, I think they're going to, I think interest rates are going to stay down in this level and so time will help a lot of situations. Do you think we can gradually get out of the problems? Yes, I do. Of course there are always possibilities of financial accidents. What about the the global boom that many foresee? Well, it's already starting. It's a question of timing on it. How does this factor into your investment strategy? One of the strategies of the fund has been to invest in multinational companies. So I like companies that are diversified, that have strategic management thinking, and have products that can sell around the world and

[19:52]

play into improving the standards of living around the world. So it really starts with basic products like soap and toothpaste. I like companies like Colgate, Procter & Gamble, 3M, CPC International. I think at the moment, there's a bias towards an upmarket because now the T-bill rates at 5.4% and money market funds yielding 6%, that the investor who's been used to simply, you know, collecting the interest income or dividend income is going to have to think twice. I mean, he's used to getting 7 or 8 percent here. And so now there were 200 basis points lower today than we were a year ago. I think there's going to be an active effort to try to recapture some of those returns. Some of that money is going to go to intermediate notes. Some of it may go into the long-term bond market, and some will go into equities. Generally speaking, the growth stocks are more attractive in a combination of, say, low growth and yield stocks at this point in time. So that even if you have a utility growing, let's say, 5% and with a 6% yield of 11%, I still think you'd be

[20:54]

better off with a 20% growth rate. Speaking of the interest rate, there's a disparity between the long-term rates and short-term rates, pretty widespread. And also there's a fairly good spread between U.S. long-term rates and the long-term rates of many other foreign nations. Why do you think that there's such a differential there? I suspect that as we go out over the next few months, that people are going to move money out of money market funds into longer-term notes, which will bring those rates down as more supply is directed to them. So interest rates longer term are likely to come down. One of the possibilities here, too, is that people will take some of the money that they've been collecting interest on in their money market funds and maybe pay back some of the principal on their mortgages. That could happen. That will reliquefy the system. Interest rates overseas, well, interest rates overseas are tending to come down a bit here. And there are economies that slow down, which will take some of the pressure off of interest rates. The military victory was very significant to the United States. There are not that many countries that can not

[21:55]

only defend themselves, but also others. And so in a time of uncertainty and so forth, I think the dollar has re-established itself in part as a currency, a haven in uncertain times. On the other hand, I think maybe most of this correction has occurred rather than not. At this point in time, more of it's behind us than in front. Now, if you were to park your money right now for long-term gains between putting it in the long-term rates of the United States government versus, let's say, Germany or some country that has a fairly strong currency... I would generally tend to favor the U.S. dollar. Germany's economy and export economy is closely tied to the USSR. Political uncertainty in the USSR is not a positive for Germany. Now, let's turn to the stocks more specifically. That's your forte. What do you think are the best types of stocks for the nineties and also the best sectors? I continue to like companies with a broad international exposure. So it would still be things like CPC International, which

[23:02]

happens to be the largest holding here with a little over 4%. Say, I like Pepsi, for example. But I think they have a lot of vehicles here for expansion into other geographical markets, plus a variety of new products and menu formats and so forth. I like companies like Colgate, the Procter & Gamble. I like companies that can enhance productivity. Things like 3M or Illinois Toolworks would be examples of that. I think the area of medical care is going to be in the news a great deal. I like companies like Johnson & Johnson, Bristol-Myers that have very strong research pipelines. Medical care internationally, it's really a domestic chain of freestanding surgical centers. I'll have to ask the one. They have international on their name. It's really funny. There are a number of new advancements, technological advances that make doing surgeries in a day as opposed to doing it in such a way that you'd have to stay in a hospital for a week or so.

[24:06]

Medical care was one of the highest performing areas for 1990. Do you still think that is one of the prime sectors for the next year or two? I think it's going to be a major area and we're going to be reading more and more about what are we going to do to contain medical costs. There's a lot of things going on here. I think the industry is generically attractive. However, I think we have to keep an eye on what Congress may propose. What do you think are some of the most important gauges to determine the relative value between growth stocks? What do you look for? I think at this point in time that with interest rates where they are and the assumption that they're going to hold in this general area for a period of time, one should be relating the P ratios to the growth rates. Now, one can discount the growth rates and it's been a period of time since we've been, the stocks have been selling at one times the growth rates. Broadly speaking, what type of growth are you looking for

[25:07]

the market for the next 12 months? I'm really looking at individual stocks relative to growth rates at this point in time. I'm assuming, however, that there's an acceleration in the rate of earnings gain from the first quarter on, which may mean in the second quarter that there'll be a lesser decline in earnings for the S&P 500 and that we were going to round the bottom with maybe flattish earnings in the third quarter and then accelerating going up from there. The comparisons get a lot easier fourth quarter to fourth quarter simply by comparison because last year's fourth quarter was so awful and so that's a big plus. So I'm looking for the overall market to show a rate of gain in the rate of gain or, you know, the second derivative. I think the 1990s might be a period where we really have some, you know, tremendous large new companies and so, yes, I think one should keep one's eye out for potential, you know, elephants. I'm about 5% in cash at the moment. I think that's been happening to the market for the last few months. There's been a tremendous issuance of IPOs, initial

[26:10]

public offerings, secondary stock offerings, and a lot of money, I think, has actually come out of the large cap into smaller caps or into the IPOs. Generally speaking, when you're buying a stock, do you figure that it's got the potential to at least double or triple or you certainly don't buy something that you're only going to figure you could make 30 or 50 percent, do you? 30% is okay. Really? In the next year, yes. Am I going to hold it for a couple of years? I think it, yeah, no, I would say what depends on the point in the market here. Let's just say, you know, interest rates hold where they are. I don't want to buy something at a multiple beyond its growth rate. Staying with companies that are, you know, growing 15 to 20 percent is better than taking the profit. You have to have an alternative and putting it into T-bills isn't going to do it for you. Another thing, I guess, in terms of the economy and reason for, you know, being obedient about it is that a lot of money has been raised in this new issue market for the last couple of months, and that money is being raised for research and

[27:12]

development of new products. It's being raised to build new plants and equipment, and all of this is going to create new jobs, and there's a multiplier effect that comes from that. Generally speaking, the empirical evidence is that small companies are the ones that create jobs. It's not necessarily the large companies, and so that's a tremendous, powerful force that hasn't really been implemented. Those companies that have, you know, raised money would tend to be the best companies because they would be the easiest things for the investment bankers to market. We haven't talked about IPOs, but there's certainly been a number of biotech stocks. Do you have any favorites? Here, I think diversification is important. Chirons, GenZones, Synergen, T-Cell. There are things like granite construction, for example, that would be an infrastructure play. We've had, let's say, restaurant chains like Cracker Barrel that have raised money to expand. Stocks like FHP International, which is a HMO company. Companies like Fabric

[28:15]

Centers of America, which is home sewing. But, I mean, yesterday, I saw the convertible. There were some very attractive convertibles in the first quarter because I had a 50% gain in it from when it was issued back in January. And you figure that was such a big move in a short period of time, why not take it and get out, even though there might be a lot of room left in it? Yes, I could probably even buy it back. That's the other thing. You almost sound as if there's a feel for this. It's almost like you're talking about a game instead of a very methodical ruler or calculator or computer. Am I reading you right? I don't mean to be superstitious. There's a difference between intuition and superstition. Right. But, yeah, there is an intuitive aspect to it, and it's not always right. You know, speaking of that, what do you think are some of the most important psychological traits that successful investors like you have employ? I do think humility is very important. I think that people get arrogant about things that it's time to watch out. Let's just take, for example, a portfolio

[29:19]

of, let's say, $100,000 or $200,000. I think for a small portfolio, I would tend to stay with American or U.S. funds. I think by buying U.S. funds, you are getting an international play via the international companies that are likely to be part of it. I think there's a very good argument in favor of diversifying across a handful of mutual funds. I do think that's a better route than, say, owning even a handful of 10 or 20 stocks. I think the evidence suggests that in the period of the 80s, that mutual funds outperformed individually managed accounts. I think in looking at funds, you know, I would look at the record. I think the three-, five-year record is the latest year record, so forth, are important. It's getting easier to, say, track these kinds of things in newspapers like Investors Daily, for example. Personally, I find it very useful to know what, let's say, the top holdings are in a fund. Small-cap funds, I think they can be very volatile, and as with all funds, I think, you know, averaging is an important consideration. I think also in small-cap

[30:23]

funds that I think the size of the fund becomes quite critical because of the liquidity aspects of it and the tremendous diversification required to offset illiquidity. Now, since global investing is a growing trend, how do you perceive the timing of that? I mean, there are some people that say, yes, it is a trend, but it's way too early. I think here, I think averaging is important. I think it's a good argument in favor of large multinationals, so on a worldwide basis, I don't think we have a lock on, the U.S. companies have a lock on everything, and I think here, you know, diversifying across the range is a good idea. Now, in the global area, I know you have a number of investments. You've already discussed a few that would benefit from this. What would be your two favorites? On the manufactured goods side, or consumer side, I'd like CPC, and I also like, say, Illinois Tool Works and, say, the industrial side of it. But I

[31:24]

also have some long-term plays in here, like Archer Daniels, and I like companies like Freeport MacMoran. Archer Daniels has a lot of new plants that are coming on stream. It is a play into Eastern Europe. In Freeport's case, Freeport has two very large natural resource discoveries. One is sulfur in the Gulf of Mexico, and that should be coming on in the next 12, 18 months. And then they have this very large copper gold mine in Papua New Guinea. You know, assuming that the global economy, you know, moves forward, I think the positioning of the plant plus the richness of the road will be a big positive going forward. But in terms of near-term earnings, you know, we're sort of in a trough. In the meantime, we're getting a nice dividend. Well, Elizabeth, I've covered all the questions I have here. I really appreciate your frankness. You've been a great interview. Well, I don't know. Hopefully, I've added something to the whole state of the art. It really is evolving. It sure is. And I find these cassettes are very interesting to listen to in a car. I

[32:26]

think it's a great way to spend some of my dead time. Well, thanks again for talking with us. I really appreciate it. Okay. Thanks a lot. Okay. Incidentally, this interview with Elizabeth Bramwell ran considerably over the length of time that we can allow for our normal interviews. Therefore, subscribers who are interested in hearing her views in more detail may order this extended portion for $19. Remember, if you're a subscriber to Investors Hotline Plus, you'll be receiving this additional tape automatically. For more information on Investors Hotline Plus service,

[33:27]

contact our offices on the address listed on the front of your cassette. And now let's turn to our next interview with P.Q. Wall. P.Q. Wall is known as one of the most accurate forecasters to predict the direction of the financial markets. He's widely quoted in financial publications and has appeared on more than 20 television shows in the past year. He's been a money manager throughout the 1980s and is editor of the P.Q. Wall forecast. Additionally, he teaches investment analysis at the upper graduate level at both Regis and Metropolitan State College in Denver. Let's start off the interview with an economic forecast. What do you see for the economy for the next 12 months, 24 months, whatever is a convenient horizon for you? P.Q. Wall Okay. My work suggests that a four-year triple top formation in the stock market is very near completion. And I would think that we're within two

[34:32]

months of that completion, so that let's say by the end of July, I expect the top to be in completed form. And the market may, in some kind of a boom in June, run up to $32.45 as an estimated final high. But I think you'll have a June boom and a final high in July, and that's over the near term or intermediate term. At that point, I think the whole bull market of the 1980s, which has been the longest one in over 200 years that we've measured stock markets in the United States, will have completed itself. And I look at that point for the market to descend to an estimated $572 by 1993 or 1994. P.Q. Oh, that sounds nice. P.Q. I hope I made your day. P.Q. You made it, yeah. I guess with that kind of prognostication, it would be great if I were short right now. P.Q. Well, you might have another 300 or 400 points up.

[35:34]

P.Q. So now we've heard a lot of forecasts like that on the hotline over the years. So let me just play a little devil's advocate with you. As you well know, you read the work of a lot of technical analysts. And ever since that crash, practically everybody has been saying that the market's going to go down again, and each time it goes much higher than anybody expected. How do you arrive at this conclusion that this is going to happen? How do we know that John Templeton and a lot of the other bullish outlook is not going to happen? P.Q. History shows that the market has kitchen-type bull and bear markets. The typical kitchen cycle runs three to four years. And then also, it has longer term, which is what I call secular... P.Q. Wait, excuse me. I've never heard this word, kitchen cycle, before. Is that something you cooked up? P.Q. Oh, no. The kitchen was a... P.Q. That went right over your head, didn't it? P.Q. No, I didn't cook up. Very good, Joe. Very good. Well, maybe you could

[36:44]

snack on this explanation for a moment. Kitchen was a professor of Harvard in the 1920s who found a three and a half year cycle in the stock market that went back over a hundred years from that time, and has continued right on since. People have a lot of trouble with these cycles, because they're variable. And as Kitchen himself said, the cycle can vary from three to four years. But every three to four years, the market has a pretty oversold bottom. P.Q. Was that a takeoff of the presidential cycle? P.Q. There's some reasons why. I don't think there's really any connection. Number one, the cycle going back over 200 years averages three and a half years. And there's no election every three and a half years. Number two, the cycle is a worldwide phenomenon, and it occurs all over the world in countries that don't have the four-year American elections. So I think the fact that people refer to the Kitchen cycle as the presidential election

[37:44]

cycle has to do with the four-year pattern that the Kitchen cycle adopted in the 60s and 70s, and that four-year thing was equated with the election cycle. But normally, the Kitchen cycle does not run on an average of four years or very long. P.Q. Well, what is the degree of reliability of this cycle? I'm not even familiar with it. It's the first time I've heard of it. P.Q. Well, I think everybody has run across it that took economics in college. It's known in economics one and two as the basic business cycle of inventory and then excessive inventory. P.Q. But how reliable has this been? P.Q. It's been enormously reliable. P.Q. All right. Now, there's two points I'd like to play devil's advocate with you on, and that is, one, you yourself said that reading all of this stuff is artistic as opposed to scientific. So therefore, that's one thing, that even though these patterns are probably there, it's a question of interpreting

[38:49]

them correctly. In hindsight, it's perfectly clear. Everybody said they forecast the stock market crash in hindsight, but I know from having conducted all the interviews, we had a number of guests who did, but it was a very small number of people who nailed it. Then the second thing is that the free market, as John Exner has been saying for years, that the free market was master of us all and that we were going to have a massive deflation. We really haven't had it yet. We're in a deflationary period, but the government, the Fed has been able, in spite of all the debts, all the problems and everything, the government really has been able to keep the economy together. And the market really had one crash, but it really hasn't hit down to the areas that you've talked about yet. So would you address both of those? P.Q. Okay. Well, first of all, the idea that the government has been able to control supply and demand. The human race is in the position of a Stone Age tribe that believes, who certainly believes, that the king and the witch doctor are controlling the weather. So when you tell me, well, the government

[39:49]

managed to ward off this runaway deflation, this is like telling me that the king and the witch doctor had their colored feathers and their powders and they did a particularly good dance around the bonfire and they managed to keep the drought away. I'd say when it's time for the drought to happen, it's going to happen and it's a worldwide situation and there's nothing anybody can do to prevent it, in my view. Now, my forecasting predicted the market would reach 3,000 by the beginning of the 90s and that then a 29 to 32 type crash would occur. Now, admittedly, the second part of the forecast has not yet happened, but we're now on the brink of completing a four-year triple top. Now, I predicted the top in 1987. I said in approximately November of 1987, I was only a month off, the market would get to 2,778 and then you'd have a crash. So I predicted that within 42 points on the dial, five years in advance. Then I predicted that that was not the real crash. You know, I said to

[40:55]

newspaper interviewers in January and February of 88 that that was a crash, but not the crash. So I predicted the second top in 1990. In fact, I had estimated it at 29.69. I actually was within 41 points of that. I'm talking about on an actual print, inter-day print basis. Yeah, but now let me, but you also expected that the crash would occur by the end of 89 in that Barron's article that you sent me. Well, that's right. I thought that the crash was set to begin and that same top rolled over as the broad indices began to decline. The blue chips kept it alive, but to me that was the same top. Boy, now why can't it happen again? That's my point. Well, okay. Now, the kitchen cycle, the three- to four-year kitchen cycle ended October 11th. I thought the end of that last kitchen cycle would precipitate the crash. So I'm saying that I saw it as a double top, not as a triple top, but the fact that it's a triple top and that the ultimate high is a 91 rather than 90 really won't change anything. If you go

[41:56]

back and look at commodity prices, you'll find that just about every known commodity did peak out in 1980. So what the Gavaddian theory predicts is not understood. It predicts that early deflation, which would be, let's say, approximately a 10-year period after the worldwide inflationary peak, would cause a giant bull market all over the world, and that's exactly what's happened. In other words, early inflation was from 49 to 66. That produced a giant bull market, but then it led to runaway inflation from 66 to 1980 or 82, and the stock market was no good. You see, that's what really threw so many people off. You take Kondratiev. Jeez, in past interviews back in the early 80s and the 70s, everybody was talking about Kondratiev. Of course, when that Kondratiev peak hit and everybody was saying it was anywhere between 78 to 82, everybody had different reasons for when it was going to hit. Even though that Kondratiev cycle might have kicked in, as you say, from an investment perspective, it actually

[43:00]

hurt if you really believed that deflation was starting because the stock market took off, just the opposite of what most Kondratiev experts thought. Well, what you're saying just proves that the people who say they understand the Kondratiev wave simply don't understand it. The Kondratiev wave is a wave of price inflation and deflation, so that approximately every 54 to 55 years, the worldwide prices rise to a certain climactic point. Now, that large mountain of the rise and fall of prices and interest rates, you have to picture two mountains in front of that big mountain. The two mountains in front of the big mountain are the stock market, which does not trace the big mountain pattern. The stock market is the barometer of corporate efficiency. So, early inflation, coming off the stagnant period where men and plants are not being used to capacity, such as the 30s and 40s, early inflation is very healthy

[44:03]

for corporate activity and corporate profits boom in early inflation. Thus, the stock market boomed from 1949 to 1966, it went from 150 to 1,000. Now, 1966 to 1980 or 82, that's the period of runaway inflation, and if you actually measure it in terms of purchasing power dollars, you had a 75% invisible crash between when the dollar hit 1,000 in 1966 and 1980. Now, early deflation, which began in 1980, is ready to turn away into runaway late deflation, and that will cause the markets to crash. All of the markets, you're talking about the stock market, you're talking about worldwide stock markets? Yeah, if you look at a chart, for example, of the Commodity Research Bureau Index, you'll see clearly that commodities of every kind worldwide peaked out in 1980, or any other major commodity index used in the financial realm will show that commodities have been coming down ever since 1980,

[45:06]

exactly as they came down between 1920 and 1929. Now, you're going to have a huge gain in the purchasing power of the major currencies as prices come crashing down. All right, now what about precious metals? Let's take gold. Is that going to go the way of the commodity trend, which you say has continued to go down? Yeah, I think gold will be the best of Osiris-1 commodities, but I would see gold as going under $200 before this crash is over. Now, you say that the stock market's going to decline primarily because the Kitchen Cycle and the Kondratiev Cycle are in sync. Now, how do you determine the timing of that? Since these cycles are very broad, how do you determine when it's going to go into effect, and also how do you determine the extent of the decline? Do you use other indicators that point that out? Because, obviously, these cycles are not that fine-tuned. Well, yeah, we do use other indicators to try to help us stay a little around

[46:06]

the edge of one of these major turns, but there are certain guidelines. Now, you can see in the Asiatic markets already the big contraction beginning. I'm sure you know that the Nikkei was off 50 percent last year, and the Taiwan market, which is number three in the world, was off actually 80 percent, so the cold winds are starting to blow. But basically, the mechanism here is that at the entrance of the runaway deflation, you have a worldwide debt collapse. And it's not the end of the world. It's just like the four seasons of the year. Each of these phases is actually necessary and beneficial. What do you think about interest rates? Is that one of your forecasting mechanisms? Do you think that they're going to go much lower? Yes. The Canadian wave would say that the coming period, which ought to last until around the year 2009 A.D., is one in which stocks crash, commodities further crash, and the bonds are the big bright spot. And eventually, high-grade interest rates should drop to two or three percent over the next six or seven

[47:08]

years. And this period of wintry inactivity will really last until the year 2009, approximately. But it'll be heralded by a giant credit convulsion, and that crash will take prices to the lowest point they're going to be over the next, shall we say, 18 years. They won't get that low again, because that's a violent convulsion that sets the thing off. But the deflation doesn't end with a crash. So you're expecting a depression? Yeah, absolutely. The crash can only be defined as a depression. In fact, I'm estimating a panic low of $572 on the dollar. I'm estimating that oil will dip under $4 a barrel. Let me hasten to say that we're talking about panic lows. It could well be that 60 days later, the stock market could be back up over $1,000 again, or the oil could be $8 a barrel two months after its panic low. Okay, now, the dollar has been declining for the past several years, but in January reversed that trend and has been gaining in value. Do you

[48:09]

expect that that trend for strengthening dollars is going to continue, or is this just a dollar rally? Remember that the Canadian wave is not nearly as interested in the horse race between the various hard currencies. And by hard, I mean the British pound, the American dollar, the mark, the yen. These are relatively hard currencies as this world goes today. If you want to say how hard are they going to be 50 or 100 years from now, of course, they're going to be subject to tremendous deterioration over the long haul. But over the short haul, we think all those hard currencies will gain, as a group, gain enormous purchasing power with the collapse of prices. So that retired people on fixed incomes are going to find this a big bonanza, because their dollars and their marks and their yen will buy a lot more of this world's goods over the next three to five years. Well, where do you think, what do you think is going to be the best place to park your money? Basically, the answer to runaway deflation is bonds. And another answer is that if you look at

[49:09]

this thing properly, if I'm correct, that the dollar will actually reach a panic low of, you know, 572, anywhere around the 600 mark, you'll be psychologically and financially prepared to take advantage of these crash prices, which, as we all know, crashes are the single most important time when great fortunes are made. Or the United States. You don't care whether you're in the bonds of the Germany or Switzerland or the United States. Wherever you live, just go into those bonds. Is that what you're saying? Forget about the currency factor? Well, not if you live in Brazil, you know. I'm just saying, you know, you can keep an eye on it. You can look at the horse race of the major currencies, and if German bonds are a better deal, you might want to switch to them. But I don't think it'll matter that much, especially if you're willing to take the cash that you preserve and

[50:13]

that you make it grow because as interest rates come down, the capital basis of the bonds will increase. If you then turn around and buy stocks, commodities, real estate, three or four years from now, I think that residential real estate in the United States over the next four years will drop in half. And this is based on the same cycles that have led again and again the bullseye long-range forecast that I've made. How much of a leeway would you give in this? And what degree of certainty would you give to the forecast coming out the way you've said? Well, I think that you could clearly show from studying the past congradiative waves that the early deflation bull market tends to last nine to 11 years from the inflationary peak. So we say the outside limit of it is normally 11 years. 1980 plus 11 is 1991. Sometime this year, this market should reach its peak. So at this point, would you have all of your money in bonds? You'd just be totally out of the market, totally out of... No, we're going to be buying into the June boom, but that'll be more

[51:17]

or less for intermediate-term purchasers. For somebody who said, I want to make one decision over the next five years, it would be clearly to get into high-grade bonds and out of stocks. Are you putting your money where your mouth is? Absolutely. Is this... I mean, do you really believe... You believe this strongly in it. This is not just an interesting story, theory that you think's going to happen. You really believe it in your bones. Well, let's put it this way. In the last 60 days, I've paid off the mortgage on my house, and all the money that goes into the PQ wall, our profit-sharing plan, which is for myself and some of my employees, goes into one place, which is Resolution Trust Zero Coupon Bonds. They're out for as long as I can get them, which is 30-year and 40-year bonds. That's the best place for your money. You'd only go into anything by the government. And now, if this would happen, you know, many of the... Even the deflationists say that it's going to be a timing affair, that the government's going to get in and bail out like crazy, because we could... The

[52:19]

social fabric of our society wouldn't stand what we had in the 30s without massive rioting. So therefore, even if that horrible scenario did take place, that the dollar would, at some point in this period of turmoil, would lose its value very rapidly when the Fed went ahead and opened the floodgates. Well, Joe, once again, you're talking to me about what the king and the witch doctor are going to do to prevent the worldwide weather patterns. All of my forecasting has been based on the idea that I pay no attention to OPEC. I don't think OPEC has anything whatever to do with the price of oil. I don't think the Fed is controlling anything. But it doesn't distress me that human beings aren't controlling it, because I realize there are forces out there that are just bigger and wiser than humanity. PQ, it's been great talking with you. Thanks for sharing your views with our subscribers. I loved it, and I hope my enthusiasm wasn't too great. Well, I think we could use some of that, as long as anybody didn't take it so seriously that they drove off the road while they were listening to it.

[53:20]

Thanks. Thank you. Okay, bye. Bye. Investors, hotline subscribers may order a three-issue trial subscription to the PQ Wall Forecast for $99. Write to PQ Wall Forecast, Inc., 1512 Larimer Street, Suite 350, Denver, Colorado, 80202. Our next interview is with Jim Collins. Jim Collins is the Chairman of the Board and CEO of Insight Capital Management, located in Moraga, California. Insight is ranked in the top 5% of 658 managers as monitored by CDA Investment Technologies for the first quarter of 1991. Insight's return was 33.5%. For the past three years, managed accounts have earned a 20.4% rate per

[54:22]

year. Insight is also in the top 10 money managers for the first quarter in Pensions Investments Performance Evaluation Report Universe. Mr. Collins personally has been actively involved in investment management since 1957. Prior to founding Insight Capital Management, Inc., Mr. Collins served as an officer of a large mutual fund company and worked for a major firm on Wall Street, and was also vice president of one of the nation's largest banks and also a chief investment officer responsible for $1.6 billion in investments. He has a demonstrated record of accomplishment in portfolio management research and economic analysis. He holds an MBA from Harvard University and is also a chartered financial analyst. Additionally, he is a graduate of the Pacific Coast Banking School. Jim, let's start out with an outlook from you for the stock market in

[55:23]

general. What we've been looking at lately in the stock market is a restraint being placed on stock prices by high interest rates, particularly the interest rates on long U.S. government bonds. They've been in a range of about 8.25 to 8.3%, and this has definitely held stock prices back. Part of the reason here is that the U.S. Treasury has had to refinance because we're, you know, this country's still in a deficit spending mode. Once we get past this stage, I think what we're looking at is about a six-week period in which we will not be facing these very, very large offerings by the U.S. Treasury, and we feel that stock prices will break out on the upside. If you go back over the last 51 years, you'll find that out of that 51 years, 50 of the years, we've had a summer rally, and so our forecast definitely includes a summer rally. Even though the long-term rates haven't come down, short-term rates have come down a lot, do you think that the market is not going to move ahead unless those long rates follow? The long rate comes into play because the large institutions, particularly

[56:25]

employee benefit money, I'm talking about large pension and profit sharing plans, will take a look at interest rates on long bonds, be it AA corporate bonds or be it 30-year U.S. government bonds, and they crank that yield into the asset allocation models. And when that number is very high, like it is at the present time in comparison to inflation, the models have a tendency to drive money toward fixed income. For stock prices to go up, the demand's got to go up, and so a slight shift downward in those long rates would definitely cause the large institutional players to put additional money into the stock. Do you basically, in making your decisions, ignore the market direction and just look at the value of stocks, or does the timing of your entry and exit enter into it? Basically, we are stock pickers. We're bottom-up in our approach versus top-down. You're right. We pay more attention to trying to identify good stocks in all seasons, regardless of which way the market is going. A number of studies have been done that show quite clearly that if you're willing to stay fully invested in these small, medium-sized growth companies

[57:26]

that we work with, you're going to get your best total returns, and also you'll get your best returns after giving consideration to taxes and transaction costs. The only reason we look at the forecast and pay a lot of attention to where yields are on various bonds and money market funds and so forth is to help us decide whether to hold cash or not. If the trend is up in yields, we're going to probably hold some cash and wait for some ripples in the market and come right back in and apply our very, very disciplined approach to picking stocks. What percentage do you have in cash right now? We have been sitting, for the last three weeks or so, with about 15 percent in cash. We're gradually working it right back into the market at the present time. I definitely want to get these monies invested before we get to mid-June. The reason being is that even though the volume is not there to support a runaway situation, from our perspective here, we do see a summer rally. Do you feel confident that the stock market is going to stay in the up territory? I mean, that we're either going to be in a bull trend or a sideways trend? We're bullish over the next five to six years for our particular type

[58:28]

companies. We're somewhat negative on the larger companies because the dollar has risen in strength and most of the very large companies, the General Electrics and the IPMs and so forth, have operations overseas. And with a strong dollar, when you bring those profits from overseas back, they convert into smaller numbers of dollars of profits. But with the small companies that we're working with that have growth rates anywhere from 25 percent to 100 percent per year, these companies are going to continue to do very well. And not only that, most of these companies are bringing exciting new products to market. So they will be able to sell in Europe because their products aren't cost-effective in terms of meeting needs. And so they're not as sensitive to the changes in the valuation of the dollar. Well, getting back to the concern about a bear market, which you're essentially saying is, I don't care about a bear market because I'm looking at the smaller stocks that are undervalued. And if the market in general goes down, so be it. If the company still looks good, we're going to hold it. That's correct. There's basically two approaches that seem to have been highly visible, I guess, over the last 10 years. One has focused in on buying companies that were undervalued from an asset

[59:32]

point of view. That triggered a lot of mergers and acquisitions in the 1980s. The other approach is to focus in on a company's earning power and then trying to place some value on its earnings power. For the period 1983 through 1990, very few people were paying any attention to the earnings power of a company. And we've seen, starting I think in the fourth quarter of last year, refocusing on the ability of a company to grow its earnings and to generate good returns on its equity. So I think we're in for a long period of time where people will be paying up for companies that have the ability to grow earnings at a very high rate, 20% or more per year for the foreseeable future. Now, of course, that is a direct link to the economy then. Yes and no. Even in periods of slow growth, if you can demonstrate quite clearly that you have the ability to grow earnings at a 25% plus rate per year, year in and year out, particularly through the environment we've just come through, people are going to be attracted to you and they're going to buy your stock. What if we do go into a bear market?

[60:34]

What would you do then? If we enter into a bear market, our strategy will not change very much here. We will probably go to our 30% cash, maybe more if we see it coming. If we don't see it coming and it happens as suddenly as it did in October 1987, then we're going to stick to our guns and continue to do what we've done all these years, and that is to really continue to pick the winning stocks, even in that kind of an environment. What we did in October 1987 was, even though we had about 30% of our money into lesser known companies, we did rotate at the bottom of that market into the more visible companies. I mean, we went from a company with little market recognition to something like an Apple computer, which had a lot of recognition in terms of name. And between October of 87 and October of 89, our portfolio is fully recovered. In fact, we had about a 90 plus percent run. Even though the market takes a sharp drop from time to time, you still find that there are some stocks that are doing very well. And that's where the relative strength plays a major role. If you're in a bad market, you still want to be in the best performing stocks. What are the most important criteria that you use in order to determine when you're

[61:39]

going to buy, and what you're going to buy, and when you're going to sell, and what you're going to sell? I'm a firm believer that the over-the-counter market is very inefficient. So the problem becomes one of how do you identify the stocks that are going to do very well in an inefficient marketplace? By that, you mean there's just not as much publicity on the stocks? That's correct. There's a lot more information available on IBM than, say, on Cisco Systems. So then in an OTC market, then you could be absolutely right on picking the right company. But if it's not marketed effectively, then it'll go nowhere. Yes and no. What we try to do here is to identify the right company, but we want to identify a company that has the necessary characteristics to attract a Wall Street securities analyst, or to attract an analyst working for a mutual fund. And we've been very fortunate in that area. Generally, we lead the street anywhere from about four weeks to maybe four months on picking up a company that does indeed meet their criteria to be passed on to their clients.

[62:39]

And what are some of those criteria? We have three different analytical approaches. I guess you'd call the first approach a quantitative computer screen. And what that computer screen is looking for is a stock that has a history of outperforming the market. And the second most important characteristic we're looking for with a computer is a stock that not only does the first thing, that is, outperform the market, but also has low-risk characteristics. And we measure risk by how volatile the stock is in terms of price and, more specifically, in terms of monthly returns on the stock. The second analytical process we apply is fundamental analysis. And we want a company with at least three years of solid sales growth as well as earnings growth. We also look to see if there's been a positive change in cash flow. We also favor companies that have a low amount of debt. We also try to pick companies that have very, very good management teams. We try to stay with the top three companies in any given industry. Many of our companies have become classified as niche companies. They're working with a few products or a few services, and they're not trying to

[63:44]

cover the world, but they're doing a great job at doing a few things. And the third approach that we take has to do with the performance of the stock. We compare a stock's performance record to about 7,000 other companies. And we've found that if we're going to buy a stock, that we do not want to buy any stocks unless they're in the top 15 percent of all stocks in terms of performance. We just do not want to get into stocks that look as though they're doing a turnaround, that is, that they've been down for a long time and their relative strength is very weak. So we typically start out looking at about 2,400 stocks. We end up investing in about 18. Well, it seems what you said was very logical. One would think that a lot of institutions would be doing the same thing and come in at the same time as you or maybe even before you because of the sheer manpower and computer power forces that they have. Well, there are some other players out there that are doing some things somewhat like what we're doing. But let's just take a look at where money comes from that goes in the stocks today. Most of that money comes from institutional investors, that is, very large

[64:46]

pension and profit sharing plans or very large mutual funds or from insurance companies or banks. Those organizations are very, very reluctant to move. That is, to go in and buy one of these companies without having some additional support from Wall Street, from the securities analyst in Wall Street. This is the big advantage that we have here. We do not have a situation where we've got to service the institutional market like most of the firms in Wall Street do. We can come in and buy a stock, and if it's not performing up to expectations over the next five or six weeks, we can get rid of it and go on to something else. Well, when Wall Street and one of these large institutions make a commitment to a stock, they've kind of gotten married to it. Whether they want to recognize that or not. How do you determine where you're going to sell your stock? We do not have a time horizon. We do not have a profit objective. Probably the best way to describe how we go about selling is that we have 2,400 stocks competing for basically about 20 positions, and we let the forces in the marketplace decide who's going to occupy those 20 positions in our portfolios. I will say this, that some of the things that we monitor on the stocks will get us

[65:51]

out of stocks fairly quickly. One thing that will take us out of a stock very quickly is that if its relative strength deteriorates. And it's very easy to monitor this, Joe. Investors Daily does a good job on printing a relative strength number in its listing of stocks. Another way for a listener to create his own relative strength is simply to take the price of the stock and divide it by an index, such as the S&P 500, and just plot that day after day. And if he uncovers a downtrend for a period of a week or two weeks, that's a caution sign to come out of the stock. We try to keep an eye on where the ranking is. It's like watching planes in a formation. If one of them begins to fall out of alignment, that is, it begins to sink in relationship to the group, you've got to get rid of it. I guess another thing that I look at personally when I go through our portfolios is if a stock comes off of its recent high by about 20 percentage points, that's a very early sell signal to me personally. Last year we got triples in Microsoft and also in Amgen, and the stocks pulled

[66:52]

back not quite 20 percent, but I took my profits and ran. In the case of Microsoft, someday we might come back into it, but at the moment its relative strength in our 7,000 stock database does not look that attractive. On the other hand, Amgen surprised us. We may have gotten out of Amgen a little early. The stock seems to me that it could easily go to $170. It's currently trading around $125. For a person that has some mutual funds or 10, 20, 30 stocks, it's pretty difficult to do a relativity situation, right? Other than that relative strength formula that you mentioned, is that what you would use as your primary guide if you had just mutual funds or a small portfolio of stocks? I would still use that, Joe. Even without the computer support that we have here or that the institutions have, I'm a great believer in cutting losses early. The easiest thing in the world to do is to buy 20 beautiful, good-looking stocks. The hardest thing in the world is to face the fact that one of them is not

[67:54]

really performing up to expectations. At least 70 percent of the time, whenever we've seen the performance on the stock begin to break down, that is its relative strength. We have discovered, usually somewhere around a month or two months later, that there was something fundamentally going on on the negative side. So the market tipped you off ahead of time by the relative strength? That's right. Even if I had a portfolio of 12 stocks, I would do what I mentioned just a minute ago. I would calculate a simple relative strength indicator on each one of them. In fact, I think making good investments oftentimes comes down to just basic common sense and being willing to put the time on tracking what you do on and tracking it very carefully. Now, when you purchase, do you believe that you should purchase in thirds or just when you've got the money, just go in and buy what you're going to buy? I think once you've done your homework on a stock, you shouldn't wait around. You should go ahead and buy, and I'm assuming that you're looking at the market conditions, too, when you make that decision to go ahead and buy.

[68:54]

Dollar-cost averaging generally works pretty well, but when you're working with small growth companies like we are, day in and day out, it's not uncommon for a $20 stock to spike up to $23 in a matter of one or two trading days. What you don't want to do is to jump in on a spike where a stock has jumped up 20% or so in one or two trading days. A great mistake in this business is that investors will allow their emotions to get involved. They will see a stock, and it was trading at $18 a day, and all of a sudden, it's now at $23. And doggone it, I missed it. I'm going to go ahead and buy the stock right now. Well, stocks move from $18 to $23. That's a five-point move, almost a 30% move in a few days. Don't do it. Wait until the stock backs off a little bit. And if you missed that one, don't worry about it. There's another good stock sitting there waiting for you. In terms of looking at charts, we're not much in terms of technical analysis, but one chart pattern that seems to repeat itself on high-quality, small-cap growth companies is that they will run up, and then they will consolidate for a period of time. And if the fundamentals are indeed intact, it's not a bad idea to step in

[69:56]

and buy those stocks when they're in a consolidating mode. Coming back to the sales side here that I didn't mention, and I think is very critical, particularly working with the kind of stocks that we work with, is the amount of institutional ownership. When you go to buy one, look for a modest amount of institutional ownership. And by that, I'm talking about ownership by mutual funds and the banks and insurance companies, et cetera. You're looking for something less than 30% ownership. And I prefer getting into stocks when they have only about 10% institutional ownership. How can you find that statistic out easily? You'll have to do a little research on it. It is published in some chart services. The old daily graphs will have that information as one source. But if you get into stocks that have institutional ownership over 35%, in particular when you get into the 40% level, you've got to stop and ask the question, where's the additional buying going to come from for the stock? And that usually occurs with a medium-sized company, growth company, runs up in price, and all of a sudden the institutional ownership is

[70:58]

sitting at 45% and the stock pauses. And in today's marketplace where you have some aggressive people out there to do some shorting, they watch this also. They'll come in and short the stock, take it down 30% or 40% in a few days. Right now, what is the two best areas for growth that you foresee? Well, the healthcare field has turned in a spectacular performance, Joe, over the last two quarters. Now, I was going to ask you about that. Last year, they were also the leader, and often last year's leaders are this year's laggards. Do you think that could be the case this time? There could be, but the earnings on some of these companies, particularly HMOs such as United Healthcare, also U.S. Healthcare, the earnings are growing so rapidly in these companies that they haven't gotten overpriced on a fundamental basis yet, and they are performing very, very well. It's typically our kind of company. And also a company like Healthcare Compare. All three of those companies look very, very good. And coming into the biotech area, we think that Amgen should be a very

[72:01]

good investment over the next several years. United Healthcare is trading around $48 a share, $47, $48. U.S. Healthcare has moved up recently. It's on a little bit of a spike, so I'd be a little bit careful here, but it's trading around $35 a share. Healthcare Compare has also moved up about 8% to 9% here just in the last few days, and it's trading around $38 a share. It also will be coming up for a two-for-one split. Amgen in the biotech area is still our favorite company there. It's trading at around $127. Which of those stocks now are attractive at the levels that you just cited? I think my first choice out of the group would be U.S. Healthcare. I think it's still undervalued here. And Amgen would certainly have to be considered almost at the same level. I think Amgen has a downside potential of about $115, maybe a little bit below that, but I do feel very comfortable in saying that this stock should sell somewhere around $150 to $170 over the next year. The stock that's on the top of our quantitative screen is Surgical Care Affiliates.

[73:01]

This is a very interesting company. It's also growing very fast. The only problem I have with it is that it's a little pricey, selling at about 33 times earnings. United Healthcare, again, is still a very highly ranked stock here. In a nutshell, the way we rank them at the present time would be, number one, Surgical Care Affiliates, number two, United Healthcare, number three, Amgen, number four, U.S. Healthcare, and then Healthcare Compare. If you only wanted to buy anywhere between two to five stocks, would you buy all those or would you say, wait a minute, these are all healthcare area, maybe I should also be in another sector in case I'm wrong on this and buy a couple in another area? I would definitely do that. Studies, again, show that if you have nine stocks and they're all in different areas, that you've diversified away at probably a good 85% to 95% of the risk that you can diversify away. It doesn't take very many stocks, but they do have to be in different fields. What would your next most popular area be then? In the consumer area, two companies that we like very much is Costco Wholesale.

[74:03]

Again, I have to caution about a little bit of a spike on the upside, but this stock has a lot further to go. It's trading around $43 a share. I would be very anxious to own some of that if it breaks below $40. The market itself continues to perform very well. That is, if we don't get a drop here in the Dow Jones of 100 or so points, I think I might be tempted to go ahead and buy this one for the long term, Joe, even if I had to pay the full $43. A smaller company that looks very promising to us is Seattle Filmworks. It's currently trading around $14. We are into a small company called 50 Off Stores, which is growing very rapidly. That would be worth looking into, but on that stock in particular, be very careful about a spike. The stock came from $15 to $19 almost overnight. Wait for some pullback on that stock, but that one would be a good one to hold. And I would not hold a lot of it, but I would have a small position in that stock. Shifting away from the consumer area, another area that looks very promising at this time is the high-tech area. One of our favorite stocks in that area is Novell. They're in the local area, networking of computers.

[75:04]

A second company that I think has more upside potential than Novell is Cisco Systems, a company that's growing almost at 100% per year. It's in the multi-networking products, including routers and bridges and that sort of thing. As a company, I would probably buy just slightly ahead of Novell. I would buy Cisco Systems at $32. I'd buy it on the end of maybe $35. Novell, I'd probably buy that one up to around $55. The third company that we like in this high-tech area is Sing Labs. They're into making graphic enhancement boards for computers. Even at $9 a share, we think the stock is very, very attractive. That was a stock we covered on our other service value track. Oh, really? Yeah. Well, I thought we were going to be a little bit ahead. No, I don't think so. In the semiconductor area, if you were a top-down investor like a lot of the institutions, that is, if you're playing economic cycles, you would definitely be buying the semiconductor stocks. For those that make investments on an overall economic outlook point of view or approach,

[76:09]

linear technology would be our pick in that area. The stock has moved from $20 to $22 very quickly. I would try to pick up that stock at below $22. Well, Jim, it's been great to talk with you again. Thanks for sharing your views once again with our subscribers. Good visiting with you. Bye. Through a special arrangement with Jim Collins, Investors Hotline subscribers may subscribe to OTC Insight before the end of June at a special 10-month subscription price of $88. The regular yearly price is $195. Jim Collins also manages accounts of $100,000 and up on an individual basis and accounts of $10,000 and up through a pooled arrangement. You may write Jim Collins in care of Insight Capital Management Incorporated, Post Office Box 127, Moraga, California, 94556. And now, last but certainly not least, we're pleased to present Nicholas Mikus.

[77:13]

Nicholas Mikus is the Vice President and Director of Institutional Research for Rosencrantz, Lyons, and Ross, Incorporated, providing semi-monthly economic and investment strategy reports to institutional clients both here and abroad under the title of Growth and Global Diversification. Prior to this, he worked for Renfroe Boston Associates, William D. Witter, First Boston, and Gabellion Company. He was educated at Athens College, Athens, Greece, and also did doctoral study at Columbia University with a special emphasis on economic theory, statistics, monetary, and international development economics. Nick, a number of subscribers have wanted an explanation of exactly how the Fed creates liquidity. Can you explain that process? Yes, they have been doing that for a very long time.

[78:14]

It is by impacting the so-called member bank reserves, the reserves of the member banks, and they do that either by purchasing government securities outright in the market or by a number of other things, not offsetting other influences that are occurring on bank reserves and allowing them to expand. When you say they purchase those securities in the market, you mean Treasury bills? Yes. Okay. Now, many economists that we have had on Investors Hotline have said that depending upon where we are in the economic cycle determines the psychology of where investors will end up parking their money based upon the Fed expansion. For example, in the 1970s, when the Fed expanded, of course, the majority of the money ended up going into real assets, and we had visible signs of inflation. In the 1980s, the Fed expansion ended up, according to many of the analysts that we spoke to, in the stock market, in financial assets, and in bonds.

[79:18]

Can you explain that process? Yes. The essence of the performance of the different assets lies, of course, in the fundamentals, in the returns of those assets, the expected returns of those assets. So in the 1980s, there was a major recession that started a decade, and then stimulation that brought down interest rates in a significant manner, and also there was disinflation, and the combination of liquidity and disinflation clearly pointed out towards financial assets. And both bonds and stocks, for 10 years on average, did something like 16 to 17 percent. That's a remarkable achievement. And the 90s represent a continuation maybe of this disinflation process, not as significant though, and some expansion of liquidity. So the action is going to be still on the financial assets, but less so. So it is what I call the normalization of returns.

[80:19]

The returns, instead of being up in the stratosphere, 16, 17 percent may come down to a more reasonable like 10 percent level. And for a while, I think the action is going to be more on bonds and less on stocks. Now, another point is that it's been pointed out that when the Fed expands the money supply, they are limited in their effectiveness by the level of public confidence, and obviously that is evidenced in the public's willingness to borrow from the banks. Right now, we're hearing that even though the banks are given more liquidity through the Fed, that people are not borrowing. We're also hearing at the same time that this money will probably end up going into the stock market. I am of the opinion that the creation of bank reserves, which, to give you an order of magnitude, for the period between October and March, was moving at a rate of 10 to 15 percent,

[81:20]

which is as high as the Fed has ever gone as far as an expansion rate of bank reserves. In the previous six months, they did between three and five. So all of that has been really part and parcel of the behavior that we have seen in the stock market, anticipation of a recovery, anticipation of some sort of confidence, and therefore all of that reflected in a stock market that has moved and moved aggressively way ahead of the fundamentals. Yes, that's the case. All right, but how does it happen that if people are not borrowing the money from the banks, then why does the stock market go up? Maybe the lending process is not up to previous rates of growth, but other elements of activity are on, like borrowing maybe for buying stock or other types of transactions are moving. So in a sense, the monetary aggregates have began to move. Or as the profits lag and corporations that are not experiencing cash flows continue to

[82:23]

raise funds externally. And we have seen that process already beginning. Okay. If the Fed creates the liquidity, then is it in the minds of money managers around the world that, ah, now we can put more money into the stock market? That's exactly the process. There are lags, the lags have been identified five, six months, and also there are visible signs that short-term rates are falling. During this period of expansion that we talked about, the last six months, between October and March, short-term rates fell by 200 basis points. So the impact of that injection of liquidity brought down short-term rates, and it's another way in which people jump into stocks, because interest rates drop and the valuations of stocks appear to be promising and they move into financial assets. So what do you think that those, what are you expecting to see in the stock market in terms of some of the Dow averages or the NASDAQ, some of the important indicators? I was thinking of returns for stocks for two years, 90-91, of the order of 5%.

[83:25]

And we are a little bit ahead of that schedule, but, and then maybe 92 will be a little bit better. We will do maybe 10%. And in bonds, I was thinking that we will break below or approach $7.50, which we are now at $8.30 on Treasuries, and that will give us a return of about another 15% this year. Obviously, there's a tremendous trend for global investment, whether you're in the United States or whether you're overseas, the communications that is available now allows for more and more global trading. Do you feel that there is a change in investment strategy that's going to take place because of this globalization? Yes, it has been slow in coming, but I think it's picking up momentum. I'm talking primarily about the attitudes of investors here in the United States, particularly institutional investors, who for a while felt almost insulated.

[84:28]

They had big enough markets, bond and stock markets, not to have to deal with the other ones. Now, the U.S.-denominated assets are of the order of, as a weight of the total financial assets, between 30% and 40%. And you find American institutions and American investors with exposure, let's say, abroad of the order of maybe 5%. So there is a lot to be done in terms of a diversification process of a country whose share of the financial assets has come down from 80% as we emerge from the Second World War down to about 30% to 40% where we are now. Obviously, everyone that's a serious investor has heard about the theory of contrary opinion. Namely, for the sake of new investors that might not understand what we're talking about, if the majority of the investors feel that a particular investment is the place to be, then chances are it's not the place to be because all the money that's going to be able to go to that area is already there. Now, in terms of investment in a broad sense, since we're in a global economy, do you think

[85:37]

that this principle might apply in terms of globalization? I think it will be a major feature in the investment scene for a very long time to come. And it will come slowly. Now, of course, it will move with leaps and bounds. The reason for thinking this way, that it will be a continuous interest with periods of diversification, is because the U.S. is lacking leadership and financial discipline in both monetary and fiscal policy. We are not doing as well as the Germans and the Japanese. And eventually, investors are going to perceive that the dollar would be weakening. And it is during that period of time that the emphasis on globalization will get another impetus. President Bush has used the word new world order. Many people feel that this is almost conspiratorial in tone. And there have been, for years, people that have felt that the trend was toward a world currency and that this would not be good. This would not be in the best interest of the United States.

[86:40]

What is your opinion on the possibility of a world currency? And what do you think about this overall theory of some type of unification worldwide? There is no doubt that we are moving toward the idea of a global village, interconnected, interrelated information moving rapidly, financial markets getting all coordinated and so on. Do you think that this is in everyone's best interest? Or is it against the United States' interests, as some have alluded? I would think that it would be in the long term for the benefit of everyone. Freeing up resources, allowing for capital movements, unifying currencies, all of that makes for faster and better use of resources and increases trade and productivity. Do you think that as an investor or as a holder of U.S. dollars that there might be any dangers in store where one could lose value of the dollar because of some of these jugglings

[87:43]

that are going to be going on? Clearly, clearly. Any substantial investor must have his dollar played. Part and parcel of what we are talking about is some exposure either to an international stock fund or to an international bond fund or a country fund or something like that. Some kind of a dollar play. Well, the dollar has been strengthening since January. How do you feel about it from this point forward? Do you expect that strengthening to continue? I thought that it was too fast, too soon, more of a reaction to the idea that we won the war and our prestige was strengthened and as a result of the Fed moves, the economy would revive, all of those kind of things. But it was mostly based, again, like the stock market on hope. Now the realities are coming home to us that there is a tremendous demand all over the world for capital and a lot of that capital is leaving the United States and is trying to go back into the areas where the prospects are stronger.

[88:45]

It's beginning now to recede and it may continue, the dollar continue to move down for a while until the weakness appears to be catching on in Germany and Japan and then both the Japanese and the Germans will have to take an easier stance monetarily, that is easing themselves and at that point the dollar again would rally. So my outlook for the dollar is that it would probably end up where it started the year. If in order to hedge yourself against the continuing erosion of the dollar, what currencies do you think would be the best place? If you're talking about major currencies, I would say the D-mark would be a pretty good way of hedging. At the moment you hear only the negatives, but investment is taking place and if you judge by the history that the Germans have been astute investors in the past and therefore the process of reabsorbing parts of Eastern Germany is going to proceed at a pretty strong steady pace and continuously better and better, then I think it could be reflected pretty

[89:49]

soon, within a year let's say. One of our earlier interviewees this year had pointed out that, in his opinion, that the U.S. was able to disguise the weak dollar by hiding it in the trade deficit and that as long as there were cheap imported goods, it created the illusion that the dollar was really worth something. The trade deficit recently has really begun to disintegrate. Does this mean that the dollar really is getting stronger and that the Fed is able to get away with this expansion? No, the dollar has come down and the trade deficit has narrowed, so the trade deficit follows the dollar. It's not the other way around. Well, the dollar has been rising since January, right? Yeah, but it is from a very low base. It has moved up a little bit and I said even not move can be considered, but it hasn't moved all that much. But during this same period, even though the dollar has been strengthening, the trade deficit has been declining. Yeah, but it's a very short period of time to be judging.

[90:50]

I mean, you have to take here a long-term point of view. The dollar moved up, let's say, about 10 percent after having declined, let's say, I don't know, for four years in a row. So the trade deficit figures being affected by the rise that we saw in the month of March, that 10 percent move from 80 to 88 on the Morgan Index may not be reflected in the trade figures for another year and a half. So for the economy overall, as you alluded earlier, you basically foresee a fairly modest growth. Is that right? No, no, no, no growth is here, actually decline. That is, I'm differing with the consensus. I don't see any recovery until the fourth quarter, which actually calls for an outright decline in GFP of about 2 percent. Now, if in a diversified portfolio, could you tell us, roughly speaking, what percentage of assets you might feel appropriate in the various sectors of the economy on a global

[91:51]

basis? I'd say on a global basis with sort of a long-term outlook, one to two years or maybe even longer, I would put 40 percent in bonds, 60 percent in stocks. And against the stocks, I would have some reserves. And the stocks, I would have, the U.S. right now has like a 35 percent weight. I would be a little underexposed in the U.S. Europe has a 33 percent weight. I would be a little overexposed in Europe, so let's say 40, 50 percent. And Japan and the Pacific has a 33 percent weight. The free markets are almost evenly divided. And in Japan, way underexposed. So I would be, let's say, 50 percent Europe, 30 percent U.S., 20 percent Pacific at the moment, given the valuations of these markets and the prospects for growth for the next two, three years. And in bonds, the best returns, I think, are going to be obtained by the so-called English-speaking countries, Canada, Australia, U.K.

[92:52]

They are around 10, 11 percent, those kind of bonds, as against U.S. and Germany, which are around 8 to 8.5 percent. But I would play there cautiously. That is, if I was running bonds as a portfolio manager, I would be 50 percent among the low interest rate countries, U.S. and Germany, around 8.5 percent, and 50 percent in the high interest rate countries. But the idea that those high interest rates eventually would come down as we pass the crisis and a more period of normality is achieved. Now, are you taking into account the currency factor when you're talking about the bond markets? Yeah, that is, you have to, but the currency is a lesser factor than the interest rate play. If Canada, let's say, moves from about 10 percent and joins us around 8, Canadian bonds could offer 20, 30 percent. So the Canadian market looks like the best-priced market right now. The Germany factor represents my currency play, but it may also represent my interest

[93:55]

rate play. At the moment, the Germans have raised their interest rate to historic high levels, 8.5 to 9 percent. That represents peak for Germany. So my German play on bonds represents not only a pure currency, but also interest rate, thinking that from 9 percent it may come down towards 8 a year from now. Nick, how about the sectors in the U.S. market that you think would be the best bets for the next couple of years? And also, could you mention a few specific stocks that you think would be appropriate within these sectors? The economic recovery in 1992 would be led in the U.S. by export growth, and there would be also a rebound in capital spending. I believe that capital goods stocks, both machinery and technology, and afterwards basic materials are the sectors of preference. However, continued disinflation and successful defense of this new world order, which would mean stronger growth abroad as a result of all the trends, favor selected U.S. multinationals

[95:00]

across all sectors. I believe that the emphasis is shifting from consumption to investment, from assets and takeovers to earnings growth, and from large to smaller capitalization growth for stocks. And the themes of the 90s are going to be infrastructure, productivity, communications, health, and the environment. These are the growth areas. Now, within those parameters, I run a model portfolio, and I would mention two stocks that constitute that 25-stock portfolio that I think fit the 90s in all the things that I mentioned before. Unfortunately, those kind of stocks are hitting sort of their all-time highs. But even though they do, I still think they could double from here in the environment of the early 90s that I envisaged in terms of world growth. I'll mention Thermoelectron, TMO, at about $38, $39. And I'll mention also ITW, Illinois Tool Works, as a prototype of a manufacturing firm

[96:01]

across the main parts of the manufacturing sector, but with a big stake in the world economy, almost 30, 40 percent of the earnings coming from abroad, that kind of a company. Thermoelectron is also, TMO is the symbol, is also a globally oriented company, more technology and values aspects of it, while the Illinois Tool Works is more of a fundamental manufacturing place. You know, on the hotline for the past 15 years, we've had technical analysts, as well as fundamental analysts, who have had very good reasoning pointing out that the debt binge could not continue much longer, and that when it did end, that we would have a major deflation, and that it would be worldwide. What are your thoughts on this? What are the odds of the risks of something like this happening? It hasn't happened, but yet it does seem like we continue to defy the laws of nature. That is, that's correct. The key to that question is really in the work of an economist called Charles Himmelberger,

[97:02]

who, in my opinion, has pinpointed the issue. He says when the capital movements worldwide would become destabilized, that is, the credit concerns of Europeans regarding the adequacy of the financial intermediaries of the U.S., come to the point of seriousness when they begin to withdraw money from the U.S., when you have that kind of a phenomenon, international capital movements begin to act in a destabilizing way, as they did in the 30s, then the panic would come. What could trigger it? I don't know, but something major could change the image, and then money is pulled out, then becomes a vacuum, then that consideration. Now, if an event like that did occur, what do you think would be the best, what type of an investment posture would be the most apt to weather that kind of crisis? That is, I would think that gold would come in pretty good at that, and good real estate. The treasury bonds as well, that is the top quality, top, top quality bonds. Yes. Stock market, the worst place to be. Right. Right.

[98:03]

Well, Nick, I've covered all the questions I have here. It's been great to talk with you. Thanks for sharing your views with our subscribers. Thank you. I enjoyed it, too. Investors Hotline subscribers who are interested in receiving regular investment and economic communications from Nicholas Micas should write to him in care of Rosencrantz Lion and Ross Incorporated, 6 East 43rd Street, New York, New York, 10017. We just wrapped up the first year of publication for our second monthly service, ValueTrack, and are very proud of the performance results. You'll be receiving information shortly, giving you some figures. But just let me say that ValueTrack stocks ended up outperforming not only the market, but nearly all of the mutual funds as well. Look for a subscription opportunity in the mail, or if you'd like to act more promptly, you may write or call the address or the toll-free number listed on this cassette.

[99:07]

This concludes the June issue of Investors Hotline. In our upcoming issues, we'll be featuring a global perspective from a well-known European investment strategist, David Fuller. We'll also be talking with Evelyn Garris of the Iban Browning Organization to get an update on the climatological impact on the economy. We'll also be talking with a leading closed-end fund specialist, assuming the conditions are right. Until next time, I'm Joe Bradley. Thank you very much for listening.

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