Archive for February, 2009

PETER FRANCESE, ROBERT KLEINSCHMIDT AND TOM PETRIE

February 6, 2009

On this week’s Consuelo Mack WealthTrack we’ll talk about long-term demographic trends and the investment opportunities they are creating with demographics pioneer, Peter Francese, the founder of American Demographics magazine. Plus we’ll explore some of the deep values being created in the beaten down oil patch with veteran analyst and investor Tom Petrie, and in a WealthTrack television exclusive, delve into other sectors of the financial markets with fund manager Robert Kleinschmidt of the highly regarded Tocqueville Funds.

WEALTHTRACK Episode #432; Originally Broadcast on February 6, 2009

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Francese – Kleinschmidt – Petrie

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PETER FRANCESE

Founder,
American Demographics

ROBERT KLEINSCHMIDT

President, Chief Investment Officer,
Tocqueville Asset Management

TOM PETRIE

Vice Chairman,
Bank of America Merrill Lynch
Consuelo MackNo Newsletter for this Episode
Mathews Asia

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ED HYMAN, CHRIS DAVIS AND TOM PETRIE

WealthTrack focuses on the economy, energy and value investing with three guests exclusive to us. ISI Group’s Ed Hyman, Wall Street’s number one ranked economist for 27 years running, star value investor Chris Davis of the Davis Funds, and veteran energy hand Tom Petrie, Vice Chairman of Merrill Lynch.

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This week on WealthTrack, it’s back to school with three experienced investment mentors- Random Down Wall Street’s Burton Malkiel, Harvard behavioral economist David Laibson, and energy market veteran Tom Petrie. They all have pointers for tough market tests.

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PETER FRANCESE, ROBERT KLEINSCHMIDT AND TOM PETRIE TRANSCRIPT

February 6, 2009

On this week’s Consuelo Mack WealthTrack we’ll talk about long-term demographic trends and the investment opportunities they are creating with demographics pioneer, Peter Francese, the founder of American Demographics magazine. Plus we’ll explore some of the deep values being created in the beaten down oil patch with veteran analyst and investor Tom Petrie, and in a WealthTrack television exclusive, delve into other sectors of the financial markets with fund manager Robert Kleinschmidt of the highly regarded Tocqueville Funds.

CONSUELO MACK: This week on WealthTrack, what will rescue the economy and investors from these treacherous seas? Leading demographer Peter Francese, contrarian investor Robert Kleinschmidt, and energy analyst Tom Petrie provide some lifelines next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. PIMCO bond king Bill Gross told Bloomberg News this week that the U.S. may slip into a mini depression unless the government spends trillions of dollars to support the economy instead of the billions being talked about. Mr. Gross is going to be sorely disappointed by what is actually happening in Washington right now. According to an analysis by Andy Laperriere of ISI Group top ranked Washington team, the dollars that are going to reach the economy this fiscal year, when its needed most, are going to be well under one trillion and there is a danger that very little of that will be spent right away. Of the approximately $233 billion slated to be spent in the second and third quarter in the Senate bill for instance, payments to states are nearly double the amount the federal government spends. And much of the transfer of payments to individuals, things like unemployment benefits, food stamps, and health insurance go through the states. How quickly will that get into the hands of citizens and how stimulative will it be?

Meanwhile, although there have been some signs that the rate of economic decline is slowing, the pressure for stimulus is increasing. The nation’s unemployment rate rose to 7.6% last month as businesses shed nearly 600,000 jobs from their payrolls, and the stock markets continued to flirt with recent lows although the S&P did finish with a gain for the week after the worst January in history. If not from the government, where can we look for economic growth? Noted demographer Peter Francese has some answers. Plus how much more risk remains in the stock and oil markets? We’ll ask contrarian money manager Robert Kleinschmidt and veteran energy analyst Tom Petrie, next on Consuelo Mack WealthTrack.

What forces will pull the economy out of recession? How much more risky are the stock markets and what’s the outlook for oil? We try to focus on longer term trends here at WealthTrack and we have three guests who are experienced enough to have that kind of perspective. Our first guest is a WealthTrack television exclusive. He is a well-known demographer who has written widely about trends that drive consumer spending. He is Peter Francese, founder of American Demographics magazine. Peter is currently the demographic trends analyst for the global ad agency, Ogilvy and Mather. Our second guest is a WealthTrack regular who is also a WealthTrack exclusive. He is Robert Kleinschmidt, president and chief investment officer of Tocqueville Asset Management with $5.5 billion under management. As Kiplinger’s Personal Finance magazine noted, his flagship Tocqueville Fund has compiled “a terrific record by staying true to his contrarian instincts.” And we are delighted to welcome back an old friend and another WealthTrack regular. He is Tom Petrie, one of the savviest oil and gas analysts and advisors in the business. Tom’s longtime research and investment banking firm Petrie Parkman was bought by Merrill Lynch in late 2006. Now he is a vice chairman at Merrill Lynch which is owned by Bank of America. Welcome to all of you. Great to have you here on WealthTrack this week. It’s nice to have you down from New Hampshire, Peter Francese. So I want to get an economic reality check from each of you before we start our discussion, and that is how worried, number one, are each of you about the economy? And also, if there’s one thing that you all think that the government should do or not do, what is it, in the weeks ahead? Peter, first to you.

PETER FRANCESE: I think the very best thing the federal government could do would be to do something for the average American homeowner, and they seem to have that in mind. I don’t know whether it will pass or not. But the idea of a 4% mortgage, the 30-year fixed 4% mortgage, a $15,000 tax credit– those ideas are floated around now and may actually be in the bill. If those pass and they can actually jump start the housing market or at least get people to come back into the housing market and start buying again, I think that will make a huge difference. Housing is really the fundamental thing, in my view, that we need to fix first.

CONSUELO MACK: Okay. Robert Kleinschmidt?

ROBERT KLEINSCHMIDT: I agree, housing markets have to clear. I don’t know if additional government intervention in the housing markets will make that better or worse, but until housing markets clear, the housing prices are not going to stop going down. I think what the government needs to do is increase transfer payments to lower income people, unemployment, et cetera so they can broaden the social safety net, but then they have to let companies fail. They have to let creative destruction happen. You can’t save every auto supplier. You can’t save every auto maker. You can’t save every industry that comes to Washington with a hand out. If you do that, I think that’s just a recipe for stretching out this recession for another 10 years or so. The other thing that they have to do, if they’re going to do tax cuts, they have to make people believe they’re permanent; because temporary tax cuts aren’t going to do anything for anybody. It’s not going to change people’s behavior. So if you have transfer payments and tax cuts that appear to be permanent, such as capital gains taxes, or maybe corporate taxes or maybe dividend taxes, something people perceive as being a long-term change, then you’ll get re-investment and you’ll be able to help the people hurt by this economy through it as a result of the fact of more generous social network. And I think that’s what you really need to do. It’s not going to happen because the political pressures are all to the other side. It’s all to saving companies and keeping industries afloat that are probably not economic.

CONSUELO MACK: All right. Tom.

TOM PETRIE: In the energy area, they need to proceed with caution on some of the things that were advertised during the campaign- the notion of a carbon tax or cap and trade. Those are things that could really elongate this downturn.

CONSUELO MACK: When you say proceed with caution, they shouldn’t do them?

TOM PETRIE: That would be even better. Political reality may say totally abandoning them will be a tough proposition, but if they move along the lines they’ve talked about, this is how you take a two-year problem and make it a five-year problem or longer.

CONSUELO MACK: So let’s get to how we get out of this recession. And that really is– I think it’s something that all of us are optimists. We’re investors and demographer, so I know there will be an end to this recession at some point. Peter Francese, you think that demographics is going to be key to pulling us out of this recession, and you brought a chart, which actually shows the 50-plus U.S. population growth. Tell us why this chart is so important.

PETER FRANCESE: Well, because, in the past, if you had very large growth in the elderly population, you say that would be terrible.

CONSUELO MACK: Exactly.

PETER FRANCESE: And these are dependent people. We’ve got to support them and all sorts of things. But you can’t forget, these are baby boomers. And baby boomers are still working. A majority of them have said they intend to continue working after they turn 65. They really have no intention of retiring. But people in this country, according to the Federal Reserve Bank, who have the most assets are people 55-74 years old. So the growth in this market is very positive. Because they are transforming retirement because they’re not retiring, and they’re transforming being grandparents.

CONSUELO MACK: So that’s a key–what’s going to make the baby boomers, and I’m a baby boomer, what’s going to make me spend and my parents’ generation spend?

PETER FRANCESE: What’s going to make you and your parents– I know you’re not a grandmother yet, but when you become a grandmother, trust me, you will spend fortunes on your grandchild. You’re smiling.

CONSUELO MACK: Agree.

ROBERT KLEINSCHMIDT: Including the tuition.

PETER FRANCESE: Whatever, whatever it takes. If your son asks for something, you’d say, “well, money’s tight.” But the grandchild? Whatever, whatever it takes. So I think that baby boomers are going to transfer immediately an awful lot of money down to the next generation, which are the children.

CONSUELO MACK: And that could happen quickly, especially in times of economic distress.

PETER FRANCESE: Absolutely. More in economic distress than might otherwise.

CONSUELO MACK: Let’s hope that’s the case. I will look to my own pocketbook here. Robert Kleinschmidt, you think we see a sea change in investment risk. Tell us, what’s the big change?

ROBERT KLEINSCHMIDT: I think the big change is we have taken a giant step or a giant half-step to be a more European-style economy. The public sector, as a result of events of the last fall, the public sector took a big step into the private economy, and it’s not the history of governments to voluntarily pull back. So it seems to me that the level of government intervention in the U.S. economy, while it’s not yet France, it’s a lot more towards that model than it has ever been in the past. And that means– and I think that the public’s behind that, by the way. It’s not what I prefer, but I think the general public is in favor of more government intervention, more regulation, more government services, more health care, et cetera. And what that means is that you’re looking at an economy that, going forward, for whatever else might be good about it, it will not grow as quickly it as did in the past. And that changes one’s investment outlook, particularly when you’re look at various kinds of companies where’s you need a certain amount of economic growth in order to make an investment case.

CONSUELO MACK: So how does it change the investment outlook? Slower economic growth, even in a recovery?

ROBERT KLEINSCHMIDT: Even in a recovery. The last two recoveries have been classified as jobless recoveries in the early ‘90s and 2000s. People complained about how long it took for unemployment to begin to come down–

CONSUELO MACK: The jobless recovery.

ROBERT KLEINSCHMIDT: Right. And it will be worse this time. And I think the permanent level of unemployment in the United States is likely to more towards the European model than it is the historical U.S. model. In terms of investments though, that may have negative impact on smaller companies that are not global. It may have a negative impact on the overall valuation of the U.S. economy from a PE point of view versus global markets. So I think we’re still working out the implications of all of this. I think the one thing you can say for sure, when the federal government and state governments go from 30% of the economy to maybe 40% of the economy, that’s a big change, and it’s a big weight on the productive side of the economy. And it’s very unlikely that the private sector will be able to claw that back because governments don’t normally like to give you the power that they’ve accumulated.

CONSUELO MACK: Unless it becomes temporary, which is certainly some of the talk in Washington, but we’ll see what action speak louder than words. Tom, speaking of risks, you’ve been telling clients that we’re really in a black swan world. You brought a chart as well– Peter’s not the only one who brought a chart along. And your chart really shows that the oil patch has had black swan events that have been drivers of oil prices, really for a long time.

TOM PETRIE: Over four decades, there’s been a series of events, and on this chart, I show a few of them. There’s the first oil spike, the Yom Kippur War back in the early 70s, the Iranian revolution that drove the second spike. Then a long slide through the 80s, a collapse in the mid-80s of oil prices, and then really a long recovery. And then only, really more than halfway through this decade, did we get back in real price terms to where we were at the end of the 1970s. But lots of events in between that came out of the blue were not well anticipated, and, therefore not well provided for, whenever we had a meaningful move in the price of oil. This time, the most recent black swan event may be on the fortuitous side. You can have good or bad deviations on the normal distribution that we show on that curve. And when you think about that, right now the best stimulus we’ve had so far is a $100 decline in the price of oil, $100 per barrel in less than six months. That’s a billion dollars a day in round terms–

CONSUELO MACK: Fortuitous for the economy and consumers, not fortuitous for oil producers.

TOM PETRIE: That’s right, certainly fortuitous for the consumer. The one that got out there faster than anything that’s going to happen from the government. By itself, it is not enough to turn it around but it is a relief to the system to some degree, and it’s front-end loaded compared to many things.

CONSUELO MACK: So the oil outlook from here. We’ve had this big decline.

TOM PETRIE: Looking forward from here, we’ve got a lot of different issues that are cutting in both directions, but resource maturity is a major issue. Conventional oil is changing in character. The new oil is in deep water. It’s above the Arctic Circle. It’s in Russia. It’s in other parts of Asia where there’s a lot of political instability. And so that’s going to drive, tend to drive prices higher. The slow growth, or the slower growth in the future recovery that Robert talks about, maybe helps us work through the problem. There are big adjustments coming, it’s clear from what President Obama has talked about, he believes there needs to be a transformation in the patterns of our consumption, to the degree that it’s government-driven, it has a lot of issues with it, but it’s hard to argue against the notion that better efficiency, better conservation are needed as part of the solution to the problem, and to counter that issue of resource maturity.

CONSUELO MACK: So what where do you think oil is heading? What are we looking for in the next year?

TOM PETRIE: We were at an overshoot at 147. We’re in an undershoot now. The range we’re in now, sub 40, maybe it’ll get back down and test $30 a barrel or a little lower, but in those kind of price ranges, we’re talking about a non-sustainable situation. I think it will be back in probably a $60-80 range. It may take a year and a half or two years to get there. But that’s a range where you can see new developments bringing on oil that helps meet the world’s needs.

CONSUELO MACK: Peter, you mentioned the baby boomers plus are hopefully going to bail us out of this recession. How much attention should we as investors be paying to demographics? And when did demographics really start paying off as far as investment trends?

PETER FRANCESE: I think they can pay off any time. But they pay off on a longer term scale. Demographics don’t help you if you go in and out of the markets in three months but if you can put some money in a stock or in a mutual fund and leave it there for five, six, or eight years- certainly for 10 years, then the money– I’ll give you an example. On the chart that you showed, the 75 and older population is growing at twice the rate of the regular population. And a lot of them are going to need homecare but we don’t have the people, we don’t have the staff to provide all this homecare. And so who are the device makers out there who are manufacturing devices that can help one nurse or one home care agent–

CONSUELO MACK: Monitor the number of homes–

TOM PETRIE: Productivity gains in that service.

PETER FRANCESE: Productivity gains. And the number one company in my view in that area is Intel. They have these fantastic devices which they’ve invented which do all kinds of things that never have been possible before. Can they get reimbursed for that? We don’t know that yet. But the fact of the matter is, people are in health care information business, the people that I would watch– not the people providing the health care, but people providing information to make it more efficient. If I could just say a word about Robert’s comment, the states and localities taking on more employees and so forth- there’s a really important countervailing force to that, and that’s home-owning baby boomers because they watch their property taxes. I live in New England where property taxes are very high, and they fight tooth and nail to bring down any budget increases. So there is a countervailing force. I’m not sure which force is going to win out. But the people’s not willingness to pay any more property taxes mitigate against–

ROBERT KLEINSCHMIDT: Growth in government?

PETER FRANCESE: The growth in government.

ROBERT KLEINSCHMIDT: That’s very touching but there’s no evidence in the last several hundred years that governments tend not to grow. They do tend to grow, and if they can’t get the money for taxes, as we’ve seen, they’re perfectly content to borrow it And so what you’re going to see, in my view–

CONSUELO MACK: At the federal level.

ROBERT KLEINSCHMIDT: At the federal level, I think the dollar is in jeopardy. The dollar is certainly a currency that sooner or later people will begin to worry about it in a significant kind of way, and government bonds, I’m very negative on government bonds because I think that the– it’s been the most crowded trade for the last several months or so as people have rushed to what they perceive as quality, but sooner or later you’re going to have to be paid a lot more to hold U.S. government bonds if you think the currency is going to go down and if you think the overall inflation rate is higher. Those are the forces that are in play.

PETER FRANCESE: That screams for international, global investing.

CONSUELO MACK: Let me ask in this world where the public sector in the U.S. is going to be much more involve in the private sector, so how are you changing your investment strategy?

ROBERT KLEINSCHMIDT: Well, one of the things we’re looking at– speaking of oil– we’re looking at natural resources because they’ve been devastated in this market decline. But it’s very clear to me that all the money printing that’s going on, sooner or later will be effective. Right now you’ve got this tug-of-war between the commercial market shrinking through deleveraging and on the one hand, and the government printing a lot of money on the other. Sooner or later the governments will win, and it’s my contention that the governments will not pull in their horns the minute they reach the tipping point.

CONSUELO MACK: Like Paul Volker did.

ROBERT KLEINSCHMIDT: The political pressure will be, keep it on the accelerator for awhile and we will unleash, in my view, an inflation not terribly unlike what we saw in the 1970s. And you’re on aboard with that, I think.

TOM PETRIE: I am.

ROBERT KLEINSCHMIDT: As a consequence of that, I think that you want to own some oil stocks. You want to own some gold. You want to own copper stocks. You may want to own timber. Those are fair things to own that can make you some money in this environment.

CONSUELO MACK: And start owning them now.

ROBERT KLEINSCHMIDT: You want to own them now while they’re out of favor. And the one thing you don’t want to own are government bonds.

TOM PETRIE: One of the points I’ve made is people often say to me, when will we get back to $100 oil? I say it’s not simply a supply-demand issue. It may well be the next time we see the $100 oil is when the value of the dollar is depreciated, that’s the price that’s demanded by those who say, “I don’t want your dollars.” We’re flirting with that this time around, just like we’re worried about the issue, will China buy our bonds? We need to think about it.

CONSUELO MACK: You can’t give specific investment advice, Tom Petrie, however, for those of us who have well diversified portfolios, we’re interested in energy holdings, which have been lousy investments for the last year, but what hasn’t other than Treasury bonds– what should our investment strategy be?

TOM PETRIE: It basically should be resource-oriented. There are well-run companies because they’re cycle tested that have not relied on high-financial leverage–

CONSUELO MACK: These are some of the big oil companies, for instance?

TOM PETRIE: Certainly among the majors there’s value. But also among the EMP companies, there will be a phase where they will move into actual growth in output of natural gas and oil.

CONSUELO MACK: This is exploration production. The one thing that investors are looking at as well are dividends and a lot of dividends are not secure. How secure are the dividends you would find in some of the major oil companies?

TOM PETRIE: I think they’re relatively secure. Basically, for the very large companies, they, by virtue of their integrated operations and so on and the relatively conservative policy they’ve had, their dividends look to be secure.

ROBERT KLEINSCHMIDT: And many have cut back on their capital spending.

TOM PETRIE: In preference of making dividends.

CONSUELO MACK: So Peter, you brought one more chart, which is really a stunner, talking about, you were just saying looking globally, and this is a chart that shows the population right now of 15- to 24-year-old males. Why is that important and what is this chart telling us?

PETER FRANCESE: What this chart tells us is that there are only 22 million men 15-24 in the United States.

CONSUELO MACK: My son is one of them.

PETER FRANCESE: Your son being one of them, one of the few. But in Latin America, there are over 50 million of them. There are over twice as many in Latin America. In Asia, there are over 350 million. Those young men are going to, sooner or later most of them, are going to get married to some young woman and start having children, and that’s going to unleash an enormous amount of economic activity, and every one of those young men is going to be looking for a job and going to start spending money once they find a job, whether that job is here because they’ve immigrated here or whether it’s in their country.

CONSUELO MACK: The best way for the One Investment that all of us should own something of in a long-term diversified portfolio, the best way to play this demographic is young men.

PETER FRANCESE: It’s to own an emerging market fund. Because emerging markets are youthful markets. There are many, many more young people who are going to be building families and spending money and earning money and creating wealth in the emerging markets. So one of my favorites is the Vanguard Emerging Markets Index Fund (VEIEX). Vanguard is good at spreading the risk around. They have Brazil in there and China in there and a number of others. But if you wanted to invest in an individual country, we were talking about this earlier, all you have to look at, Consuelo, is how they treat women.

CONSUELO MACK: I have to cut you off. That’s a very interesting comment. But Robert Kleinschmidt you were saying bet against Treasuries. So how do we do that as an individual?

ROBERT KLEINSCHMIDT: Well if you can’t short stocks, you can buy an ETF, symbol is TBT, which works inversely to the price of bonds, so that when bonds go down because interest rates go up, your ETF goes up. I own that in a number of accounts.

CONSUELO MACK: I’m going to have to leave it there, unfortunately. Peter Francese, great to have you here, our demographics guru. Robert Kleinschmidt from the Tocqueville Fund, wonderful to have you here as well, and from Bank of America Merrill Lynch, Tom Petrie, great to you have here, too. Thanks for joining us on WealthTrack.
At the conclusion of every WealthTrack, we leave you with one action to take to build and protect your wealth over the long term as well. This week, we are focusing on protecting yourself from financial scams. Everyone knows about Bernie Madoff’s massive $50 billion Ponzi scheme, but it turns out his is only the biggest and best known. In January alone, at least six multi-million dollar fraud cases have emerged across the country, all uncovered by the bear market. Most have a common theme: they offered outsized returns. So this week’s Action Point: protect yourself from financial fraud.

How do you do that? Beware the current hot investment pitch. According to white collar crime experts, criminals chase the news- they like to exploit whatever is current and hot. For instance, in this low return environment, a common scam has been high yield promises of better than bank returns. To avoid becoming a victim, law enforcement officials advise: be skeptical. Don’t rely on word of mouth referrals or assume others have done the due diligence. You have to do your own or hire a reputable professional to do it for you. So get a knowledgeable second opinion, and be sure to check the financial adviser’s own credentials. Much of the money that was lost with Madoff came through intermediaries who received hefty fees for directing business his way. Another tip from the experts: if you don’t understand the business or investment strategy behind the scheme, don’t invest. And if it sounds too good to be true, you know the answer to that, it really is.

We’re facing a hard truth right now, we are almost out of time. Next week, we are going to reassess the outlook for the economy, markets and your retirement portfolios with noted NYU economics Professor Mark Gertler, well known financial journalist Dave Kansas who just authored The Wall Street Journal Guide To The End Of Wall Street As We Know It, and Kristi Mitchem, head of the U.S. defined contribution business that includes 401(k)s for Barclays Global Investors.

Until then, to watch this program again go to our website, wealthtrack.com. Starting on Monday you can see it as a podcast or as streaming video.

Thanks for visiting with us, and make the week ahead a profitable and a productive one.

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