Sunday, September 11, 2005

What the World Needs Now

Interview with Seth Glickenhaus,
Founder, Glickenhaus & Co.


THE READERS WERE RESTLESS. Summer's nearly over, and yet we hadn't published what's become an annual chat with one of Wall Street's more successful and seasoned investors. As ever, we found the now 91-year-old at his desk at Glickenhaus & Co., the investment firm he founded in Manhattan 44 years ago and has presided over ever since. In that time, he has built an enduring reputation for finding winners and delivering superior performance and has seen his assets under management swell to $1.25 billion as a result. He graciously cleared his schedule for us -- after also chiding us for not calling sooner -- and we graciously allowed him to sound off, as is his wont. Is he mellowing with age? Time will tell.

Barron's: So what do you make of events lately?

Glickenhaus: I think we are all quite distressed with what has occurred in New Orleans.

What about the economy and the stock market?

Let me list the negatives for the economy and the stock market, and then I'll address the pluses. The first negative is the huge military spending, both for peace purposes and war. Under a $400 billion-plus budget for a peacetime army, they are building a new fighter plane that is totally redundant and unnecessary and will cost us eventually hundreds of billions.

We don't get goods and services that are really important in our defense. That's true of the new submarines we are building in Connecticut and elsewhere, as well as the new aircraft carriers.

At 91, this Wall Street patriarch has no shortage of energy or opinions.

What would be more necessary?

A portion of it could be spent in better defense. Training young people in foreign languages is an area in which we are sorely lacking. That could make us much stronger by improving our intelligence and ability to infiltrate terrorist groups. The war itself is a war that occurred without any planning. The public is becoming increasingly disaffected with it, because we don't see any purpose in keeping our soldiers there. We are obviously unable to train the local people. We are spending huge sums every day to maintain the war, and we don't get any worthwhile goods or services or other offsetting asset.

Roughly 41 million people lack health care in this country. Some of the money spent on defense could be spent for that.

Then there is our school system, which is well below average, relative to the rest of the world. Any country that has a mediocre or worse school system is not going to be successful economically in the future. We should be paying teachers vastly more. We should only hire people to teach who are in the first third of their class, who not only know their subject matter, but also can inspire children to want to learn. Those people are not going into education today. They are going in to the law. They are going into engineering. They are going to Wall Street.

There is a dearth of public housing, and it takes eight to nine years between the time you apply for an apartment and you get it.

By inundating us with paperwork from the SEC, the government is failing to help businesses.

Then there's the greenhouse effect and global warming. Neglecting global warming is going to have the most incredible economic consequences -- mostly bad. Our farm areas will eventually be too warm to produce wheat and corn. The South will be even hotter.

Seth, you have raised many of these concerns in our past interviews.

I certainly have. But I do it because we as a country are very proud that our gross national product is up 4% or whatever on an annual basis. This is a great misstatement of the well-being of our economy. It doesn't take into consideration our depletion of capital, or the depletion of minerals, the depletion of fish, the depletion of raw materials or businesses that no longer exist. It gives a false picture. All it reflects is the amount of sales. If they sell oil at a higher price, why, that goes into the gross national product. The fact that you are using up an asset isn't accounted for. The disparity of income that has grown between the very wealthy and the poor is creating a bad situation.

It shocked me to see the July savings rate went into negative ground in the United States. That implies people are digging into their savings to maintain their spending. In other words, they are not only going into greater debt, but there is no offsetting savings. This is a great negative and eventually will catch up with us.

How about some pluses?

The pluses, for one, include population growth: There is built-in demand with 3% per annum growth on a world basis. Greater numbers of people, in India, China and Africa, are earning enough to join those of us who spend money for various products. Many of our corporations are being run far more efficiently than ever before. They are getting rid of marginal plants, they are getting rid of marginal employees and they are hiring people who are better trained. Overall, despite the many negatives, I am very optimistic. The surprise is going to be that the so-called bubble in housing is not going to go away. Immigrants are a big driver of the housing boom.

But the home-affordability level is at its lowest level since 1991, so are those homes really available to them?

Prices have gone up, but somehow this group saves money and takes extra jobs. Everything I've seen indicates the backlogs are there in housing and there will be continued demand. Same with cars.

In the past, you've been concerned that low interest rates meant we were stealing demand from the future in terms of demand for housing and autos.

I was wrong. As soon as General Motors reduced the price of their cars, they sold 25% more cars. Apparently, the demand is extraordinarily elastic and much bigger than we realized. In my youth, if you owned a car, even if it was a low-priced car, you were considered among the wealthy people. Today, it seems everyone owns a car. Underneath it all, the economy is much stronger than the negatives would have you believe. Somewhere along the way, some of these negatives are going to catch up with us but, for the time being, our economy is much healthier.

You noted that the consumer is going into greater debt to continue spending.

He has been doing this for a long time, and the savings rate has been very low for a long time. It is now getting worse than ever.

Right, so doesn't that jeopardize sales of houses and cars down the road?

Down the road may be five years off. Look, the old business cycle hasn't been repealed. But you've had many more negative articles written about the economy, and the public is on alert. By the time the public realizes there may be a giveback and there may be a recession, it has an odd way of not happening, because the public has prepared for it, to some degree. The conventional wisdom is much more pessimistic than I am. I have found that anytime I look at the conventional wisdom, if I do the opposite, I make much more money. If everybody is pessimistic, that's the time to buy stocks. The retail figures have been surprisingly good, and they continue to be good, despite all the pessimism emanating from Wall Street.

What's your outlook for stocks?

As far as the stock market is concerned, the majority of stocks are either fairly priced or overpriced. You have to be very selective. Still, with 3,000 to 4,000 companies listed on the Big Board, there are a heck of a lot of bargains even though many stocks are overpriced. The disparity is almost as great as the disparity of income between Bill Gates and other people. In other words, there are some stocks that are grossly underpriced and very, very attractive.

It is a market of averages, and the averages are invariably overpriced because there is so much money that pours into them because they want average performance. As soon as something goes into the Standard & Poor's 500, the stock goes up 10% almost automatically. They will continue to be overpriced and mediocre values and that is where most of the money will flow. In the meantime, investors overlook a lot of companies. Our customers are always calling and saying, 'Seth, I've never heard of that company.'

One of the stocks I would rank among the five or 10 outstanding success stories in America over a period of years continues to have a brilliant future.

What's that?

Countrywide Financial [CFC].

I knew you were going to say that. But you have owned that for years and it can't be a surprise to your investors. Hasn't that come down a lot as interest rates have risen?

It has gone from around 5 to 40 and is now at 34.13. It is holding up very well, and I think it has finally bottomed. The pessimism around it is enormous.

Talk about the pessimism.

There's concern that housing is peaking and there's greater risk because of all the ingenious mortgages devised to satisfy public needs and that people who can't really afford a home have been encouraged to buy one. The mere fact that some of the mortgages are interest-only with deferred amortization does not mean they are bad loans or questionable loans.

Company Ticker Recent Price
Countrywide Financial CFC $34.13
Intel INTC 25.66
Eagle Bulk Shipping EGLE 13.20
Enterra Energy Trust EENC 19.53

Source: Bloomberg

This stock sells a little over eight times earnings. It is a company that in five years is apt to double the business they are doing in the mortgage world. They also have a bank that is growing in leaps and bounds. Countrywide will earn, conservatively, $4.00 a share this year and possibly as high as $4.40, the way things are going. Everybody was afraid of high interest rates. But now, after the hurricane, intermediate and long-term bonds have been very strong, and the yields have dropped.

As a result of the hurricane, Chairman Greenspan's team at the Federal Reserve will have to pause somewhat in jacking up short-term interest rates. This is a great paradox. The figures show remarkably contained inflation but, between us girls, that is sheer nonsense. The average person is well aware that the inflation rate is much above what the government puts out. But despite that, the Federal Reserve will pause now for political reasons and practical reasons. Don't forget, rates have gone from 1% to 3½% in a relatively short period of time. There is no reason the Fed can't pause and they will pause, especially when the full costs and the problems of this hurricane become apparent. Plus, the experts believe there are going to be at least four more hurricanes before this season is over.

Has your view on oil changed? You didn't believe higher oil prices would have much of an impact.

So far it doesn't seem to have had much of an impact if you look at retail sales and home sales and auto sales.

What other companies can you recommend?

Eagle Bulk Shipping [EGLE] is one. They have 11 handymax boats, dry cargo boats, of which a good number are super handymax models. These are relatively new ships, six years old on average and some are brand new. The company is new and it is run by a very strong group.

The stock, which closed recently at 13.11, is going to pay an annual dividend of about $2.24 and it should stay at that rate for at least six quarters. That's a yield of about 17% or more. Their dividend policy is to pay out all the money they earn. They have enough capital from having sold stock in an initial public offering to pay the dividends. The stock came out at 14, below the 16 to 18 range that was expected, and it is now down to around 13. It is at a bargain price.

This company is going to expand very successfully. I am very impressed with their management.

Does your outlook for the stock depend on shipping staying strong?

A big product they ship is iron ore. China has an almost insatiable demand for iron ore. They also ship coal, fertilizer, wheat and corn. Eagle Bulk's ships are modern and very low-cost. The company has very little debt. It is possible to unload these ships without bringing them into piers where there is a big waiting time. I like this stock a great deal.

What's hurt its stock price?

There's been a whole raft of little companies that came public at the same time and the market was flooded.

What else do you like?

Enterra Energy Trust [EENC]. It is preposterously cheap. They've raised their dividend, and they pay a huge dividend. Their goal is to raise the dividend a penny a share every three months and they have been able to do it. They now pay 16 cents a month, or $1.92 a share a year.

It is a fine company. They've got about 135,000 net acres of undeveloped land with over 120 identified drilling locations.

Their success ratio in drilling in west central Alberta and northeast British Columbia is around 97% or very close to that. They just took over another company and that is one of the reasons why the stock has receded to 19 from 26. It has a 9% yield. Their current overall production is over 10,000 barrels of oil a day. They just bought a 50% working interest in an exploration well that flows at a rate of 10 million cubic feet a day with limited drawdown.

Their proven reserves should last for 8 years and their natural gas assets have a reserve life of 8 to 10 years. It is a stock that will double in a year and a half as it has more or less in the last year and a half.

Are you more focused on dividends in this environment than you have been?

I certainly am because sooner or later I think the bond market could deliver very big yields and I want to own stocks that have good competitive yields as well as a great potential for going up.

How long before the bond market gets to that point?

That's a tough question. We are at the mercy of foreigners to maintain our bond market. The odd thing is that the foreigners believe their own countries are in worse shape and want to invest here. Bonds are absurdly overpriced at the present time but there is no sign of them going down. There have been fortunes lost on the short side of the bond market.

How about a stock you haven't recommended before?

To be truthful, the stocks that I would like to mention have gone up too much to talk about. We have been great bulls on natural gas and the price is now at $11.62 per cubic feet. To think I used to suffer with it at $2. We have stocks such as Burlington Resources [BR] that we bought from 12 to 18 to 20 to 25 to 30. It closed recently at around 77.56. I cannot recommend it at 77.56.

Are you taking profits in energy stocks?

No, we haven't started taking profits. Even though the stocks are up a great deal, the price of the commodity is up much more and, in some cases, they own the only domestic natural gas there is, and it will be at least three years before liquid natural gas is an alternative.

And are you betting on liquid natural gas companies?

Yes, to a minor degree. But even those stocks have gone up a great deal, and I don't want to recommend them at this price. I much prefer Eagle Bulk Shipping.

What about all the bargains in the market you mentioned earlier?

I gave you three of them.

But only one is new to your portfolio.

There is one in the technology field I think is attractive.

Not Texas Instruments again?

Intel [INTC] at 25-26 is a buy. It is the leader in its field. It has an enormous profit margin and the stock is down from around 29 even though their last quarter was a good one because they were more cautious about the ensuing quarters.

But they are developing new products all the time and doing a brilliant job of maintaining a preeminent share of the market.

Seth, how is your health?

I'm as healthy as the devil.

That's good to hear. Thanks for taking the time to talk to us.


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