Christine Benz: Hi. I am Christine Benz for Morningstar. The market has suffered a steep pullback over the past few weeks. Here to provide some context on the recent market action is Steve Leuthold. He is the founder and chief investment officer at Leuthold Weeden Asset Management. Steve thanks for being here.
Steve Leuthold: I am delighted.
Benz: So, Steve you wrote a commentary that went out to your clients late last week. You talked about why you think the market is currently in a bear market. You think stocks are in a bear market. What are the three big factors that you noted that you believe to be weighing on stocks currently?
Leuthold: Well, I think, and this is kind of in chronological order maybe, but I think the complete failure of the what I call the 'Congressional clowns' to accomplish anything meaningful in addressing the deficit was probably the starting point. And the deal that they came up with, as best as we can determine, shaves maybe $22 billion in cuts over the next year, with no revenue increases, and it didn't even close the loopholes that are there in terms of the tax code which applies to hedge fund managers and carried interest and also applies to the oil companies and to a lot of the subsidies that still exist like the subsidy for ethanol.
Leuthold: To me it doesn't make any sense whatsoever, but it seems to me it was a fault of both sides; the Democrats and the Republicans. And all they are interested in apparently is retaining the good things that they can keep for their folks back home and for the people that contribute to their campaign funds. I mean it's really disgusting. You know, Obama Monday said the U.S. is still an AAA country, but the Congress is a CCC- as far as I can see it, and that's one big problem.
The other one is certainly what we saw a week or so ago in terms of the government estimates on GDP growth that were revised back down for the first quarter, down to 0.3% which is really pretty low. And I think it probably stimulated more thought that we're headed not, I don't think, for a double dip, we're maybe headed for a new recession. It may take another two quarters to see that, but people say, "Well, it can't end that early." I mean, we have expansions that are for 100 months, 110 months, and so on. But this is a different environment that we saw back in the first recession. I mean, we had basically some fiscal responsibility on the part of the politicians. We were still a really dominant growth country at that time, which we no longer are, and it's very possible that the expansion phase would only run maybe 30 months which is about the long-term average for expansion.
So, we're no longer the super nation in the world, and we've got to realize that, especially when you look at our balance sheet.
And then the most recent thing, number three, was the triple whammy or as my friend Bob Farrell calls it, the Perfect Storm. The third thing was what's happening in the eurozone and the real difficulties that are there. Even the dollar looks better than the euro. I mean, you are seeing the dollar up today after the downgrade. You are seeing the yields on 10-year Treasuries that are down because the money is flowing in here because it's still regarded as a safe place, but that's only relative to what you have available elsewhere like in terms of the eurozone.
Benz: Right. So, Steve, you didn't even mention the downgrade of U.S. Treasuries by S&P. It sounds like you think that that's pretty much a nonevent for the markets?
Leuthold: Oh, well, yeah. I mean you hear a lot of talk about that. Everybody tries to blame it on that, blame it on Standard & Poor's but the fact is, it's the U.S. Congress that has made the situation difficult. And if I were rating them, I wouldn't even rate them a AA+. I'd rate them maybe AA-. But what we have failed to do in addressing the deficit is absolutely embarrassing, and with what has gone on in Congress over the last two months, as an American I am embarrassed about what's happened. And I think a lot of other people are.
Benz: So, you noted Steve in your recent report that you are expecting stocks to have maybe a pretty significant rebound, but you would view that, for your clients, as a selling opportunity because you think there is more pain to come. What's your thinking there?
Leuthold: I mean, this is a really oversold market, and everyone is negative, whether it's institutions or individuals or whatever, so if market history is any evidence, we should be pretty close to seeing a rebound here.
And before I'd reduce our equity exposure more, we'd like to see a rebound, and it might retrace about maybe half of the decline. So we'd maybe go up to 1,250, 1,260, or 1,270 on the S&P, which would be some kind of rebound, and we would view that as the selling opportunity because I'm fairly certain that we're headed not for a double dip, but a new recession.
Benz: So you're looking for opportunities to trim equities more, but I guess the big question is what do you think is attractive relative to stocks right now? Where are you finding places to put that cash to work?
Leuthold: The most attractive places are where the internal growth is greatest.
Benz: So developing markets?
Leuthold: You bet, including China. And sure Chinese stocks have gone down with this market. But you should look at the rebound prospects. I think also a number of really good-quality European stocks are due for some kind of a for rebound. They've gone down more than the U.S., and we have a lot of those companies that are global companies, too. So I really don't think that more than maybe 40% or 30% of an equity portfolio should be in U.S. stocks. I think it should be outside the U.S.
Benz: So in some ways, it would be kind of mirroring the extent to which the U.S. takes up a piece of the global market cap, such as maybe thinking about setting the baseline?
Leuthold: Absolutely. I mean, you take IBM, and that's a global company. Or you take Siemens in Germany, and that's a global company. I think these are the ones that are probably the most undervalued, and that along with the pure plays is places like South Korea, maybe in Indonesia, certainly in China, and maybe Taiwan, these are the places I'd rather be in. I'd position myself to be there.
Benz: And the pullback in those markets has made them more attractive to you?
Leuthold: It's actually the growth, the internal growth, in the economies. The U.S. has been a wonderful growth economy since World War II. And at the end of World War II we had all the liquidity in the world; we had all the growth potential. We financed the revival of Europe. We financed the revival of most of Asia or great part of Asia. But the U.S. in this whole growth thing where you had a 100-month and 150-month expansions in the last 20 years, that was kind of the result of what had been built up, and we didn't have any rivals at that point, other than Russia which was a military rival. But we didn't have any economic rivals. However, now we do really have economic rivals, and our industrial base is broken down. Also our earnings potential is broken down, and the margins that we see, which are at record levels for U.S. companies, are probably going to come down.
Benz: So, I know, Steve, at various points in time your portfolios have held gold. I'd like your take on that asset class right now; it's been hitting new high seemingly every day. I am wondering if that's something that you would find attractive at this point in time.
Leuthold: Well, we still have 5%-6% in gold and silver. But I've been around for 50 years, and when you get too much exuberance anywhere, like we're seeing in gold right now, that doesn't last forever. And I am reluctant to add at this point, and I have faith that the U.S. is going to--and maybe this crisis is going to do it--it's going to come back to reality and start reducing the deficit. I think that's probably the best thing about this correction. It's got to take a shock, it's got to take a crisis, to get our representatives and senators back to thinking about what's good for the country rather than what's good for them.
Benz: Thank you so much for sharing your insights with us today. It's always great to hear from you, Steve.
Leuthold: All right. Nice to talk to you.
Benz: I am Christine Benz for Morningstar. Thanks for watching.