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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
Money Moves, 5/24: Chocomize Co-Founder Fabian Kaempfer talks with Bloomberg’s Deirdre Bolton about the business of customizing chocolate
The president's campaign has a new rule—no cell phones allowed
In honor of remote control inventor Eugene Polley, we recognize other influential but neglected inventors who have felt the sting of stolen glory
Forget Adderall. Traders now pop chia seeds to stay focused and energized
The Italian automaker and others are adding hybrid technology to elite cars
The storied bridge that links San Francisco and Marin County changed the face of California
Schools cultivate ties with startups before they're big successes
Dave McClure's traveling venture capital show scours the world for promising startups
Get Four
|  | JANUARY 11, 2005
A Bull Charts His Careful Course [Page 2 of 2] Q: Joe, are you worried about the real estate market at all, since your forecast is for rising interest rates and higher mortgage rates? A: Yes, when it comes to the real estate market, we've cautioned investors that the homebuilders may well run into peak earnings, and as a result we've been recommending taking a profit in this group. This relates back to the point we made about cycles. Commercial real estate, however, as measured through any number of REIT indexes, tends to offer investors a yield that is often more attractive than Treasuries, often close to a few percent more. The average spread between REIT indexes and Treasuries currently, however, is about 90 basis points. It's getting harder to make the case that incremental investments should go into REITs at this point. Commercial real estate is already going through a pretty significant corrective process. I don't expect defaults and the like to increase, but average transaction prices will come down. Banks are doing a very good job of keeping their exposure limited, though, by requiring higher levels of equity for real estate purchases. Q: Do you see any hope for the airlines? We have questions about both Delta Air Lines (DAL ) and American Airlines' parent, AMR (AMR ). A: I have felt for a couple of years that this industry needs to go through a dramatic restructuring akin to the railroads in the 1970s. Some of the weaker players, like US Airways (UAIRQ ), need to be absorbed into the stronger networks and their assets rationalized. This will enable prices to become more stable and reflect the true economics of air transportation -- the ongoing multibillion-dollar losses that are generated right now. Southwest (LUV ) and JetBlue (JBLU ) can profitably navigate this environment, and before we get this dramatic reorganization, I'm hesitant to recommend anyone. Delta's price cuts have already been matched by other carriers -- negative any advantage there. Once you compete on price, you get into that slippery slope of cutting margins, which for airlines right now is extremely dangerous. Q: Why is Citigroup (C ) going straight up and Bank of America (BAC ) going straight down? A: I wouldn't say either bank's performance has been extraordinary in 2004 and would offer that both have good prospects in '05. They both have a national consumer franchise -- Citicorp has been at it longer. But I think it's those franchises that will reward these banks well. Both stocks trade in a very narrow range; each is a couple of points off the year's high, and the yields in both cases are over 3%, with BAC's closer to 4%. For Citigroup in '05, they've got to avoid any potholes and snags from previous business activities. BAC needs to rationalize its recent acquisitions and get the economies of scale from full integration, and I predict both end the year up from where they are now. Q: Do any consumer cyclicals look good to you? A: At this point in the economic cycle, I would say the consumer appetite for durable goods is waning, and more money will be spent on more disposable items. Hence, the emphasis on consumer nondurables. After all, despite a very mild recession a few years back, we have one of the youngest automobile fleets on the road, the housing stock has been greatly invigorated by the lower interest rates over the last few years, and the baby boomers themselves are reaching an age where homes and the like are not as important as college tuitions and thoughts of retirement. It's true as capital spending expands, some areas such as telecom equipment will be helped. Large product purchases will support the industrial side of the economy. Rails and freight forwarders, like FedEx (FDX ) and United Parcel Service (UPS ), are interesting ways to play global trade and transactions, but they're service companies more than anything. So from that perspective there are still opportunities to be had in those categories. Q: So in consumer nondurables can you give us any names? A: Procter & Gamble (PG ), certainly. Johnson & Johnson (JNJ ). Among retailers, Electronics Boutique, which I mentioned earlier. Sanderson Farms as well, also mentioned earlier. Q: What lesson would you leave for investors as we start the new year? A: More often than not, it's time in the market, not timing the market, that makes a difference. Last year, there were negative returns for nine months, and we made all our money in the last quarter of the year. In addition, the big events heralded last year went without incident -- conventions, Olympics, elections, which made investors nervous at the time. We're often given the opportunity to sell stocks that have valuations that are no longer sustainable, and we should not miss those opportunities. The overall environment in 2005 for equities looks very promising -- certainly stronger than in the beginning of 2004, which in turn was stronger than the beginning of 2003. If we can have another year of solid equity returns, with more modest volatility, that would certainly take confidence a long way.
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