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BARRON'S COVER | MONDAY, JUNE 14, 2010
Handle With Care

By LAUREN R. RUBLIN
Our panel of Wall Street experts gives their picks and pans for the rest
of the year. Why they like Microsoft and gold. Two views of
Treasuries.
2010 Roundtable Report Card
2009 Midyear Roundtable Report Card
AFTER THE MADNESS and mayhem of 2008 and '09, you expected calm to descend on
Wall Street in 2010? Not a chance. Instead it has been yet another year for steely nerves and
iron-clad investment portfolios, what with a terrifying "flash crash" in the U.S. and a
burgeoning debt crisis in Europe, where Greece is the word but Spain and Hungary may be
the problem. No wonder our old friend, volatility, has returned. • Some prefer aspirin, others
Scotch, to cope with such crazy times, but we'll take the members of the Barron's Roundtable,
with their unfailingly sagacious investment advice. When they last met in January with
Barron's editors, most of these 10 market seers offered up a grim long-term forecast for the
global economy and the financial markets unless the U.S. and other industrialized nations
reined in their runaway debt. In the short term, however, most thought stocks were cheap and
bargains plentiful, especially with the economy on the mend.
After ringing up the Roundtable crew in the

past week or so, we can safely report that they
feel the same, only more so, now that
government debt is higher, stock prices are
lower and the preponderance of economic data
points to a modest recovery. That doesn't
mean it's off to the races for equities—far from
it. But it suggests that smart stockpickers—and
View Full Image
fixed-income investors, too—can reap decent
Brad Trent for Barron's
returns in the next six to 12 months by
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choosing their spots carefully.
You'll read a lot in the pages that follow about gold's luster as a hedge against disaster, and the
attraction of fast-growing emerging markets in a slow-growth world. Our panelists also sing
the praises of some familiar—and dirt-cheap—health-care, technology and financial stocks, as
well as some lesser-known outfits. To get the details, please read on.
FELIX ZULAUF
Barron's: Does the world look any better to you now than it did in January,
Felix?
Zulauf: In January I said the market probably would peak in the spring, and I recommended
selling any remaining positions once the Standard & Poor's 500 crossed above the 1200 level.
So far, so good. The big question now is whether the rally off the 2009 low is over or whether
this is an interim correction, after which the business expansion and cyclical bull market will
continue. Most investment professionals believe this is a temporary correction, declines are
buying opportunities and the bull market will continue. I doubt that.
The world is at a major crossroads. Some countries are at the end of a dead-end street. Greece
has hit the wall. Spain and Hungary probably will be next. The Greek debt crisis was the
beginning of markets refusing to finance irresponsible public-sector indebtedness. It will
travel from the periphery to the center in coming years. The common denominator in the
housing crisis, the euro crisis and the banking crisis is that industrialized economies carry too
much debt. These crises show that we have to rewrite our system. We have been living a
fiction for the past 20 years in order to enjoy a greater standard of living. Hard times are
ahead, and the steps that Europe has announced to contain its crisis are only the beginning.
Governments must cut spending and promises, such as entitlement programs, and raise taxes.
At best this means stagnation for some years, but it could be much worse. Deflationary
pressures will increase.
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None of this sounds good for the stock market.
The U.S. is in better shape than the rest of the world at first
glance, but half the states are running larger deficits than
Greece. The market is naïve in assuming the earnings models
of the past 20 or 30 years can be extrapolated out to the next
five years. The market will hit a lower low than it did in
March 2009. What was missing last year was the complete
desperation and turning away from equities as an asset class
that marks the end of a secular bear market. That will come.
European and U.S. policymakers believe China eventually will
bail us out, but China is tightening. Its real-estate sector will
get hit badly. All the leading indicators are topping around
the world.
Commodity prices are heading lower. The stock market

probably will make its low for the year in late summer or fall.
The upside is probably 5%, the downside 20%. If there is a big
break in the fall and the Federal Reserve starts printing
money again, stocks could rally. I would be willing to buy if
the markets are oversold enough and my indicators turn
bullish medium-term. That likely would mean stocks go up
through year end, though they could rise more if the crisis
triggers another major stimulus by the authorities. The
market's move would be temporary, however.
Where will the market bottom?
Secular bear markets usually bottom slightly below book

value. Book value on the S&P 500 is around $500, a far cry
from last week's $1,064. In the 1930s, the market was trading
at half of book.
Given this outlook, what's an investor to do?
If you have a 10-year horizon, buy some solid blue chips with business models that succeed
even in stressful economic situations. If your horizon is one to three years, it's too early for
equities. Preserve your capital in high-quality bonds and maintain a position in gold. It could
correct to $1,000 an ounce in the short term, however, as too many people have come to the
party lately.
I like pair trades in European ETFs. At the January Roundtable I recommended buying four
DJ Stoxx sector ETFs and shorting the DJ Stoxx 600 Optimised Banks ETF, an ETF of
European banks, against each of them. I am keeping my pair trades in DJ Stoxx 600
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Optimised Health Care and DJ Stoxx 600 Optimised Telecom, and shorting the bank ETF
against each. I'm replacing DJ Stoxx 600 Optimised Oil & Gas [ticker: XEPS.Germany] and
DJ Stoxx 600 Optimised Utilities [X6PS.Germany] ETFs with DJ Stoxx 600 Optimised
Personal & Household Goods and DJ Stoxx 600 Optimised Food & Beverage. Also, I have
closed my short position in gilt futures at a loss. I was wrong about that.
Are you recommending any new short positions?
In commodities, I would short aluminum and the DJ Stoxx 600 Optimised Basic Resources
ETF, as well as the iShares MSCI Brazil Index and the iShares MSCI Australia Index. I expect
base-metals prices to decline due to softening demand and record inventories. The U.S. dollar
rise that started against the euro will spread to almost all other currencies. Resource
currencies like the Australian dollar and Brazilian real are in the early stages of a cyclical
decline. By shorting these ETFs, investors can catch declining equity prices as well as falling
currencies.
I am also shorting the Spanish stock market

via IBEX futures, and hedging that position by
buying futures on Germany's DAX. And I am
shorting European bank shares through the
bank ETF.
Does anything appeal to you in the U.S.?
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U.S. Treasuries probably will be a good
Brad Trent for Barron's investment for the next six to nine months.
Yields on 10-year Treasury bonds could fall
close to the former lows of December 2008. You could buy the 10-year or the TLT, the iShares
Barclays 20+ Year Treasury Bond ETF. Also, I am holding on to gold and recommend buying
more on a deep correction.
Returning to Europe, what is the local mood?
People are losing faith in the central bank and currency. When the euro was introduced in
1999, I predicted that if the European Union stuck to the rules it established, it would be the
shortest monetary union in history. I gave it 10 years. After about three years, they broke the
rules, which stipulated government deficits couldn't go above 3% of gross domestic product;
no member country could help another financially amid a crisis, and the European Central
Bank couldn't buy the government bonds of any EU nation. Now they have broken them
again. How can one trust the currency when the authorities keep breaking the rules?
It would be best if the weaker members left the EU. If they don't leave, the devaluation of the
euro will continue. Eventually it will have to decline to a level at which even the weakest
member can compete in the world economy. At the end of the day, the EU will break up,
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because its other members are using Germany as the payer of last resort for their sins.
German citizens will revolt and vote in a new government with a different attitude.
Thank you, Felix.
BILL GROSS
Barron's: What lies ahead for the economy and the markets?
Gross: We have been talking about the "new normal." It doesn't mean a double dip in the
economy or an immediate funk, but slower growth generally. We have seen some relatively
strong growth in this year's first half, but the second half will be weaker in the U.S. That's the
new normal, unfolding in the next 12 to 24 months.
The foundations for this view are the delevering taking place in the private market, and now in
the government sector; re-regulation, which slows private enterprise and forces a more
conservative investment tint; and de-globalization, which, simply put, is "every country for
itself." As I discussed in January, most of our benefits and many of our problems emanate
from the rather sudden trend toward globalization that began in the late 1980s with the fall of
the Iron Curtain, the rise of China and the incorporation of two billion potential new workers
into the global workforce. The G-10 countries have been trying to fight the forces that stole
production from them. They have fought them with debt creation and leverage.
That doesn't seem like the right ammunition.
It was for a while, but it had to end because lenders have called a halt. That has happened in
Greece and Spain, and is also occurring in the U.K. and Japan. The U.S. has gotten off
scot-free because it is viewed as the last bastion of liquidity. But at some point in the next
three to five years, America's free-spending ways could be tested.
How do you invest in this new normal world?
I recommend high-quality sovereign bonds in the U.S. and Germany. These markets will see
slower growth and next-to-zero inflation. Ten-year U.S. Treasuries yield 3.37%, and the
German 10-year is at about 3%. They aren't raging buys, and yields won't drop, nor will prices
rise, substantially. But as you're assured payment, they represent decent value. Quality
corporate bonds yield closer to 5%. Bond mutual funds have been the recipients of flight-
to-quality money, while stock funds aren't getting inflows. Historically that would be a
negative indicator for bonds and a positive one for stocks, but the new normal isn't a
risk-asset-friendly environment. We see similar gains of 4% to 5% this year in stocks,
high-yield bonds, commercial real estate and other risk assets. There is no asset that glistens,
promising double-digit returns.
How about some specific picks for the second half?
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I still like everything I recommended in January, including Pimco Corporate Opportunity

Fund [PTY]. Pimco Income Strategy Fund II is a look-alike, but it is cheaper. It holds the
same types of Baa-rated bonds. I manage it. It trades at net asset value. The yield is 7.9%. I
suspect it might yield close to 11% in a year, due to a special dividend. That's an attractive
opportunity for an investor stuck in a 4% or 5% world. The fund benefits from some leverage;
it can borrow at 1% and reinvest at 7% or 8%. That is where you get the 10% to 11% eventual
yield. As with PTY, there is a risk if interest rates move up, but that isn't likely. The fund could
borrow at 1% for the next six months, or longer.
What else do you like?
I like GMAC, the old General Motors

Acceptance Corp., which recently changed the
name of its bank to Ally. In January I
recommended a GMAC bond—the 8% due
2031. It yields 8.5%. Now I'm recommending a
generic class of GMAC notes, SmartNotes. I
View Full Image buy them for Pimco's closed-end funds.
SmartNotes were GMAC's way of getting
money from retail customers. There are hundreds of maturities, and they were issued in small
sizes. Smart Notes yield about 1-to-1.5 percentage points more than regular GMAC paper, so
we're talking about yields of 8% to 9% for two-year to 10-year Notes. GMAC is 65%-owned by
the government, which has invested close to $25 billion to recapitalize the company.
Can you buy SmartNotes through a broker?
Yes. I can't recommend a specific maturity because there are so many. This is more of a
generic recommendation. With SmartNotes, an investor is being paid for the illiquidity and
small size, as opposed to paying up for it.
What are your thoughts on current Fed policy?
The Fed has two camps today. It's sort of partisan, which is unusual. The Bernanke camp
wants to maintain the status quo, but some other members are suggesting the need for a
normalized interest rate of perhaps 1% to 1.5%. There is no evidence Bernanke could be
challenged in terms of policy, but it should be watched.
The Fed is on hold until the end of this year, and maybe well into next year. It has run out of
options in terms of interest-rate policy. At the same time, it wants to get the mortgages and
Treasuries it bought as a result of quantitative easing off its balance sheet, which suggests
you'll have to drag Bernanke with a rope to get him to engage in quantitative easing in the
future. Central banks generally are increasingly reluctant to take the lead in terms of policy.
They are passing it back to governments, whose fiscal polices are being challenged by the
deficit vigilantes. Our options are starting to freeze in the event another mini-crisis develops.
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That's a scary thought. Thanks, Bill.
ABBY JOSEPH COHEN
Barron's: Let's start with the economy. How does it look to you?
Cohen : We have had a somewhat non-consensus view that the economy would start the year
on a strong note and then decelerate. Recent statistics suggest there has been some
deceleration. We expect gross domestic product, or GDP, adjusted for inflation, to be about
3% this year and 2.5% next. Such deceleration isn't unusual. GDP and industrial production
perked up a year ago, as inventories had been cut to the bone and companies needed to
rebuild them. We also saw a nice pickup in capital expenditures, particularly for technology.
Plus, we had the benefit of government stimulus, which could be seen in the housing and auto
sectors. Inventories are now back to more normal levels, and the impact of the stimulus is
abating. We are looking for signs that the economic recovery is broadening out. The consumer
is behaving a little more vigorously, and we look for a broader recovery in real estate.
What does this mean for the stock market?
David Kostin, Goldman's chief U.S. strategist,

recently made some slight changes in his S&P
500 earnings forecast. Our pre-writedown
estimates now are $83 for 2010, and $93 for
2011. That is slightly higher than earlier
forecasts, in part because first-quarter results
View Full Image were quite good. After running these earnings
forecasts through our valuation models, we
concluded the S&P 500 is likely to be in a range of about 1250 to 1300 for the next six to 12
months.
In that case, it will have a lot of catching up to do.
David expected the market to start the year strongly and then run into speed bumps. But
because we don't see the global economy slipping into another recession, we expect equity
markets to regain their sea legs. We are watching the situation in Europe carefully, but it is
China and the U.S. that have the biggest impact on global GDP. We have been enthusiastic
about the long-term outlook for China. The trend is toward increased expansion of the middle
class. But we aren't surprised by the Chinese government's moves to raise interest rates to
slow the economy down to a more sustainable path.
In Europe, while it is important to study developments in Greece, it is more important to look

at Spain, whose economy is four times larger. Our European team doesn't believe the current
crisis will be a fatal test for the euro zone or the euro.
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The problems abroad arguably make the U.S. look better.
Long term, the U.S. has faster population growth than almost any other developed economy.
We also have better productivity growth, which is a function of the significant investment
made by American companies in technology and equipment. April 2009 represented a critical
turning point for the U.S., because that is when we did stress tests on the nation's major
financial institutions. The banks that needed to do so adjusted their accounting, taking
dramatic writedowns. That didn't happen in Europe.
Let's move on to your picks for the second half.
The selloff in the past two months has created valuation opportunities. One is in U.S. Steel,
which is poised to move from losses to profits. There is a lot of variability around profit
estimates. The stock is trading for 8.3 times our below-consensus 2011 earnings estimate of
$5.50 a share. U.S. Steel is vertically integrated, which helps in terms of costs. Utilization rates
are rising across the industry. Scrap-metal prices had risen notably, and may back off
temporarily. One concern is what will happen if Chinese demand for steel abates. But demand
in the U.S. is rising, especially in the auto business, and in the industrial-equipment markets.
If you believe the economy will continue to grow, U.S. Steel makes sense.
My next stock is in health care. We had concerns about valuation and how health-care reform
would play out. Now we see opportunities. Pfizer trades for around 14.50. It is yielding 4.9%.
It trades for 7.3 times 2010 estimated earnings, and 6.9 times 2011 estimates. The P/E is low
compared to drug companies not only in the U.S., but globally. Investors aren't giving Pfizer
any benefit of the doubt in terms of its product pipeline. Our pharmaceutical team thinks they
are being overly pessimistic. There are some new products coming down the line.
Such as?
One is a new monoclonal antibody, tanezumab, that could become an important arthritis
drug. The potential isn't reflected in Pfizer's P/E [price/earnings multiple].
I recommended Occidental Petroleum in January and am doing so again. This has been a
difficult period for many energy companies, given worries about global growth, and the special
situation involving BP [BP] in the Gulf of Mexico. To the extent that all energy stocks have
been hard hit, it is time to look at them again. Occidental is our team's favorite domestic
petroleum company. The yield is 1.8%. The P/E based on 2010 estimates is 11.1. Based on 2011
earnings, it is 7.6. Plus, crude prices are likely to rise.
Thank you, Abby.
OSCAR SCHAFER
Barron's: You were somewhat upbeat in January, Oscar. Are you still?
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Schafer: We are focused mostly on the U.S. market. It will do better than most people think.
The problems in Europe's smaller countries aren't really going to affect business in the United
States. Business is good here, and will get better. Company earnings and productivity are
improving. There are a lot of cheap stocks. I'm not a market prognosticator; I'm a stockpicker.
But I have found, over 40 years in the business, that when there are a lot of cheap stocks, the
market tends to go up. If China implodes or the European contagion spreads, we'll have
problems, but I'm not predicting that. The market indexes might end the year where they
started, but it is going to be a stockpicker's market.
Meaning there are opportunities to make money, no matter the averages?
Yes, on the long and short sides. I have two ideas. Investors are always looking to diversify
geographically and find companies in emerging markets that are growing faster than domestic
companies. Given the politics, currency issues and volatility in these markets, and our
inability to meet and know the managements, it is difficult for us to invest abroad. Thus, we
try to find U.S. companies that will benefit from the demographics and economic growth in
other parts of the world, with managements we have known for years. They invest on our
behalf.
My favorite company fitting that bill is Crown Holdings, which makes food and beverage cans
all over the world. I have followed its permutations for the past 20 years. The management is
superb. In 2009, $2 billion of the company's $7.9 billion in sales came from Asia, the Middle
East, Eastern Europe and Latin America. Crown is investing in Brazil, China and Vietnam,
where returns are higher than in more mature markets. In the U.S., consolidation has left only
three big manufacturers, and made them stronger vis-à-vis their big soft-drink and beer
customers. Greater pricing power is important in a market that grows only 1% or 2% a year,
versus 5% or 6% in emerging markets.
Crown has done a masterful job of balance-sheet management, as debt-to-Ebitda [earnings

before interest, taxes, depreciation and amortization] has been reduced to only 2.5 times, from
six times in 2001. Even with a $300 million capital-spending program, the company generates
$400 million, or $2.50 a share, of free cash flow. It will earn a little more than $2 this year.
Shares should sell in the 30s, not the 20s, where they are now.
What are the potential negatives?
One would be an increase in tin-plate costs,

but the company can pass that on to
customers. Second, they will have problems if
they charge customers too much. Clients might
self-manufacture, although the trend has been
going in the other direction. On the plus side,
View Full Image people in emerging markets are drinking more
beer, and there has been a shift from bottles to
9 of 22 8/16/10 5:57 PM
cans in some markets, specifically Brazil.
My second stock is CNO Financial Group. It sells supplemental health insurance to the senior
middle market through Bankers Life & Casualty, Colonial Penn and Washington National. The
company's targeted age group is growing rapidly, as the first of the baby boomers will become
Medicare-eligible next year. The average cost for CNO insurance policies is only $800 to
$1,000 a year. The company sought bankruptcy protection in 2002 after a series of ill-timed
acquisitions, when it was called Conseco. It emerged from bankruptcy court in 2003, and a
new management team arrived in 2006, which has put the company in a much stronger
financial position. The stock is selling at 5.40 a share—less than 40% of the company's book
value of $15.
What is the price-to-book norm in the industry?
About one. The stock sells at such a low multiple of book because a large part of the company's
capital is under-earning. CNO could earn between 50 and 60 cents this year. It has a
net-operating-loss carry-forward, so cash earnings are 50% higher than reported earnings.
There is some risk remaining because of poor underwriting, but the company spun off its
biggest potential risk—its legacy long-term-care business. CNO has none of the exotic
instruments that hurt other insurers. It has a conservative balance sheet and conservative
investments. Book value should approach $20 a share in two or three years, and the stock
should, too.
Thanks, Oscar.
FRED HICKEY
Barron's: What do you make of the market's behavior?
The stock market's 80% rally from March 2009 until April 2010 anticipated a lot of good news
in the economy. But there isn't a lot of good news. Right now there is a lot of bad news from
Europe. China is starting to wobble. Its stock market is down 22% year to date. We are even
picking up signs of a slowdown in Chinese spending on cellphones and similar things.
Europe's troubles are going to blow back here. It is a big market for U.S. technology, and the
U.S. generally. With the dollar up almost 20% against the euro, U.S. companies are going to
have a currency-translation problem. The currency is now a headwind.
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What do you see in the U.S.?
Even after all our stimulus spending, the

housing market doesn't look good. The latest
unemployment data was poor. Retail sales are
weak. We hear consumer-electronics sales
have softened. I see deflation worldwide. Debt
is weighing on everyone.
View Full Image
Brad Trent for Barron's Do you expect the government to announce
another stimulus plan?
Of course. I also expect the Fed to start printing money again. The "exit strategy" talk of
earlier this year now has gone by the wayside. All exit strategies have been put away. That is
why I continue to be heavily invested in gold. The stock market is dangerous as valuations
aren't where they were at the lows last year. I expect stock prices to keep falling unless and
until the Fed starts printing again. If that happens, stocks can go up. It is hard to say where
the market will be at the end of the year. That also makes it a dangerous market to short.
The alternative to printing money would be to let the market clear the excesses in the system.
But that becomes more difficult the longer it is postponed. Ultimately that is what will happen.
As Ludwig von Mises said, the final outcome of a credit expansion is general impoverishment.
Great. What else do you own these days?
I have been reducing my tech positions. Luckily, a couple of my tech holdings, Sybase [SY] and
Novell [NOVL], have received buyout offers, so I am able to sell them at a profit. The only
position I have added to is Microsoft, because a lot of good things are happening there. And
the stock is hated. Microsoft's new products, including Office 2010 and SharePoint 2010, have
started shipping. Windows 7 is a big success. All these products will lead to big revenue and
earnings gains in coming quarters.
What are your expectations for the stock?
I always thought it would go to 40. Right now it is around 26. My only short right now—and I
am shorting it through put options—is Salesforce.com [CRM]. The stock is selling for 120
times earnings.
My biggest positions are in gold. I am playing it every way I can. I own physical gold, and I
continue to buy a variety of ETFs, including the SPDR Gold Trust, or GLD. I also own a bunch
of individual gold stocks. In January I recommended the Market Vectors Junior Gold Miners
ETF [GDXJ], but the one to own now is the Market Vectors Gold Miners [GDX], made up of
the 30 biggest-capitalization gold miners. Barrick Gold [ABX] is 16% of the index. Goldcorp
[GG] is 12% and Newmont Mining [NEM] is 10%. These companies are starting to show some
big earnings and huge cash flows. Newmont Mining is earning almost a dollar per share per
11 of 22 8/16/10 5:57 PM
quarter, and generating hundreds of millions of dollars in cash flow. And that was with gold
prices at lower levels. In the latest quarter the average realized gold price for these miners was
about $1,100 an ounce. Today gold is at $1,220.
Unlike with tech companies, currency translation is becoming a tailwind for gold miners. In
addition, the largest cost component for gold miners is oil, and oil prices are down. Everything
is falling into place for the industry. These companies will generate so much cash that they are
talking about increasing dividends. Also, the price of gold has moved up much faster than the
price of the gold stocks. The stocks are going to catch up.
What is your price forecast for gold?
It will depend what the Fed does. But let's say $1,500 for this year. There is tremendous
demand for gold. The Chinese and Russians are buying. The Swiss and Germans started going
wild buying coins and bullion after the European Central Bank reneged on its promises and
started buying government debt.
My last pick, for those looking for yield, is Verizon Communications, which I recommended
last June. It has a dividend yield of 6.9%. It is now almost certain that Verizon will get the
iPhone for the holiday season. If they do, they will get a lot of AT&T [T] customers. The
dividend looks safe, based on the company's cash flow. The iPhone would be the kicker. As
customers switch to Verizon, the stock price could get a boost. This is a play for the next six
months.
Duly noted. Thank you, Fred.
MARC FABER
Barron's: Rumor has it you turned very bearish on stocks around the end of April. Do you
expect the selloff to continue?
Faber:The April high wasn't confirmed by all the technical indicators, so I turned bearish. We
have had a meaningful correction. Now the market is oversold and might rally some. But the
correction hasn't run its course. There will be strong resistance at 1170 on the S&P 500, and
again at around 1200. The bull market that began in March 2009, when the S&P was at 666,
won't resume. The stock market could bottom in October-November, and then the rally will
resume, but it might resume from a substantially lower level.
How much lower?
The S&P might drop to around 950. I am bearish about the world. In the second half of the
year, data on economic growth and corporate profits will disappoint. At the same time the
Federal Reserve is run by a money printer, and a prospective vice chairman, Janet Yellen, who
said she would implement negative interest rates if she could. Interest rates, in real terms, will
stay at zero forever. Investors will be badly served, in this money-printing environment, by
12 of 22 8/16/10 5:57 PM
being in cash and U.S. government bonds. The only avenue of growth is assets—that is,
equities, real estate or commodities, in particular precious metals.
So will the stock market end the year up, down or unchanged?
It will end the year moderately lower. Thereafter there could be a more meaningful downward
move, which would be termed the real bear market. But a new high in the near term isn't very
likely.
The period from February to May 2009

probably was the low point of economic
activity. Compared with that, things look OK.
But it is hard to say the economy has strong
momentum, based on unemployment data, the
housing industry and so forth. It has stabilized,
but within the context of a huge stimulus
package and huge transfer payments
View Full Image
[government payments]. The European
economy is rolling over, the U.S. economy
could roll over, and there is evidence of a slowdown in China. As soon as economies around
the world weaken again, central banks will have another excuse to ease and keep interest rates
artificially low. The global economy could deteriorate but the markets might not go down,
because there is more money-printing and more stimulus packages. But the market could get
more selective. From March 2009 through April 2010, equities and commodities went up, in
particular industrial commodities. In the future, industrial commodities might not perform
well, because of a global economic slowdown, but some equities could do well.
You have been a fan of Thai stocks. Should investors avoid them now, in view of Thailand's
political unrest?
The political situation has calmed down, but the problems haven't been solved. That said, Thai
shares are inexpensive. Thai Tap Water Supply [TTAPF] is a relatively safe investment. It
yields 7%.
Everything I recommended at the January Roundtable is still OK, but I wouldn't rush to buy
now because if China slows more, other Asian nations will suffer. I also recommend shorting
the Australian dollar as a way of playing the slowdown in China, which will lead to reduced
demand for industrial commodities. Australia, a major commodities producer, is like a
warrant on China. I would rather short the Australian dollar because the Chinese market
already has fallen 30% from its August 2009 high. Another investment I like, on the long side,
is the Market Vectors Vietnam exchange-traded fund [VNM], a proxy for the Vietnamese
stock market.
A year ago I said that if the yield on the 10-year Treasury bond dropped to around 3% I would
13 of 22 8/16/10 5:57 PM
be tempted to short it again. The 10-year now yields 3.2%. You could short the TLT, the
iShares Barclays 20+ Year Treasury Bond, an ETF of long-term bonds. It has rallied from
87.30 to 98. If we are in a deflationary environment in the U.S., the Fed will print money
again. Therefore, bonds aren't attractive.
I don't consider any paper currency desirable, so my recommendation in January to own gold
still stands. Gold can correct from today's level, but in the longer term responsible citizens
must own gold reserves.
Thanks, Marc.
MERYL WITMER
Barron's: How does the world look to you, Meryl?
Witmer: We are getting a lot of mixed signals. When we talk to the companies in which we are
invested, they say their businesses are seeing stable to rising demand. Inventories are still very
lean. They want to do some maintenance shutdowns and they are running hard to have the
inventory to be able to do that. The market, on the other hand, is manic. It is a good indicator
of value over the long run but not the short run. Stocks ran up to a level at which very little
was cheap. Then it came down more than 10%, and a bunch of stocks came down even more.
We found some interesting things to buy. We're looking at some stocks in the oil-drilling area.
We recently bought some Diamond Offshore [DO] at about 57 a share. But we don't have
the conviction to load the boat yet. Most of the offshore drillers are good actors. The evidence
in the Gulf of Mexico points to BP making mistakes.
What is cheap enough now?
Globe Specialty Metals [GSM]

manufactures silicon metal and silicon alloys.
It has four of the lowest-costs plants in the
world. Silicon metal is made by smelting
quartz and a special grade of coal. It is used in
the aluminum industry to improve castability
and strength. It is used in the chemical
industry to make silicone, which is used in
View Full Image
shampoos, toothpaste, plastic, solar panels and
other products.
What, besides the products, do you like about the company?
The industry grows at GDP plus 3%. It is partly driven by the increased use of aluminum in
cars, to make them more fuel-efficient. GSM came public in July 2009 at 7 a share. The stock
is 11 now. The financials are confusing, due to a multitude of issues. Prices for silicon metals
14 of 22 8/16/10 5:57 PM
and alloys are rising due to the uptick in the economy and the growth in the developing
countries.
Significant electricity shortages and cost increases have been experienced by competitors in
China and Venezuela, so there is a shortage of the material now.
By January 2011 a lot of the noise will be out of the earnings. The current spot-market price
for silicon is $1.45 a pound, up from about $1.20 earlier this year. If the price stays there, GSM
will earn about $1.20 a share and produce after-tax free cash flow of $1.30 a share. It has $2 a
share in net cash. If it traded at 10 times free cash flow, plus the $2 in cash, the stock would be
15. The company has a market share of more than 50% in the U.S. Its costs are variable, so
even in tough markets it stays in the black. It has an amazing management team, with a knack
for doing brilliant acquisitions, and a strong balance sheet.
Silicon-metal prices would need to get to at least $2.20 to make it worth adding capacity. If
the metal sells for $2 a pound, GSM would be able to earn north of $3 a share. At $2.20 a
pound, it could earn about $3.70 a share. Prices should get to $2 sometime in the next few
years, assuming there is growth in the world economies. Our near-term price target for GSM
is 15 to 17 a share, but our longer-term target is 35.
How about another idea?
Packaging Corp. of America [PKG] is the lowest-cost producer of containerboard in the

U.S. It converts 80% into boxes. The company was spun out of Pactiv [PTV] and then taken
private by Madison Dearborn in a leveraged buyout in 1999. It came public in 2000 and has
paid down $1.2 billion of debt. It is a cash machine. The industry structure improved
dramatically after International Paper [IP] acquired Weyerhaeuser's [WY]
containerboard business in 2008 and closed plants that represented about 12% of industry
capacity. Packaging Corp. finds local customers for its finished boxes and focuses on smaller
businesses, where it can get better pricing. Even in the economic crisis, it was profitable.
The industry is very short of inventory. Eighty percent of global containerboard

manufacturing uses recycled fiber, known as OCC. Demand for OCC has increased
significantly due to growing demand for containerboard and the lack of virgin fiber, or
lumber, outside the southeast U.S. and Scandinavia. Packaging Corp.'s products are made
from wood chips, so OCC price increases have little effect on its costs. But they might improve
profitability, as end-product prices tend to move with OCC prices. When the new contract
prices are fully implemented, Packaging Corp. should make about $1.90 a share. Its capital
spending is about 50 cents a share less than depreciation, yielding free cash flow of about
$2.40.
Plus, there's a 2.7% dividend yield.
And the yield might go up. We see total free cash flow of $3.05 a share in 2012, due to energy-
15 of 22 8/16/10 5:57 PM
efficiency and capacity-expansion projects. We like the management team and the way they
have allocated capital and strengthened the balance sheet. Management may soon allocate
some of its bounty to dividends and a share repurchase. We see the stock trading north of 30 a
share in about a year and a half.
Thank you, Meryl.
ARCHIE MacALLASTER
Barron's: What is your market forecast, Archie?
MacAllaster: I remain constructive on the market, based on the earnings tables published in
Barron's. Only one of the 30 Dow industrials—Walt Disney [DIS]—trades for 15 times 2011
estimated earnings. All the rest trade for less, and eight sell for under 10 times earnings,
including stocks such as Hewlett-Packard, ExxonMobil [MOB], Bank of America [BAC] and
Merck [MRK]. These are quality companies and dividend payers, though the banks don't pay
much anymore. Pfizer sells at 6.7 times next year's estimates. If earnings come in close to
consensus estimates, the market not only is cheap but maybe as cheap as it ever gets. It's not a
bad time to put your toe in the water and invest, but given the way the market has been acting,
do it carefully. Don't use leverage, and make sure you have enough cash on the sidelines in
case stocks go even lower.
Where do you see the biggest bargains?
Manulife Financial is listed on the New York Stock Exchange, although more shares trade on
the Toronto Stock Exchange, as the company is based in Canada. Like a lot of life-insurance
companies, Manulife got into trouble with its variable-annuity business, and reported a couple
of quarterly losses in 2008. Variable-annuity sales have fallen considerably from where they
were two years ago, and they have adjusted some contracts. Last year the company turned
around. It cut the dividend in half, but still pays 52 Canadian cents and yields 3.2%. The stock
is about 16, and I estimate the company will earn C$1.90 to C$2 a share this year, having
earned C64 cents in the first quarter. My estimate for '11 is C$2.25. Manulife sold in the
high-40s in 2007. The 52-week range is 24.97 high, 15 low.
Does the company operate in the U.S. or Canada?
They do about half their business in the U.S.

They own John Hancock, which they bought
some years ago. There is a lot of potential for
global growth, as well. About 26% of sales
come from Canada and 14% are from Japan
and the Far East. Sales in Japan and the Far
East are growing by 30% to 40% a year.
Manulife's book value is between C$16 and
View Full Image
16 of 22 8/16/10 5:57 PM
C$17 a share. The stock has sold off by about 10% this year. The stock is very cheap.
My other recommendation is Hewlett-Packard [HPQ]. It is selling for 45.87, and the 52-week
range is 54.75 to 36.31. The company earned $3.85 a share last year and the estimate for this
year is about $4.50, so the stock is selling for about 10 times this year's earnings. The estimate
for next year is $5. Hewlett-Packard will generate sales of about $125 billion this year. Return
on equity is about 24%. In the next 18 months you could see the stock sell at 13 times 2011
estimates, or 65 a share. That's a potential increase of 40%.
Any other names, Archie?
I recommended MetLife [MET] in January at around 38. It is close to 39 now, and I'm
recommending it again because there is a new development. MetLife is in the process of
buying one of American International Group's [AIG] largest insurance units, which will
give it an excellent foothold in Japan and the Far East. The deal will increase the size of the
company substantially.
Is the purchase accretive to earnings?
Not in the next year or two, but it will help them substantially over a longer period. MetLife
could earn about $4.50 a share this year, and as much as $5 or $5.25 next year. It trades for
well under 10 times earnings, and close to book value. The company pays a dividend of 74
cents a share, and could raise that substantially. It yields 1.9%.
The stock could sell for at least 14 times earnings. That is about 65 a share, based on next
year's earnings. The stock hit a 52-week high of 47.75 almost two months ago. The low is 26.
MetLife didn't take any TARP [Troubled Asset Relief Program] money.
Thanks, Archie.
Scott Black
Barron's: What do you see ahead for the economy and the stock market?
First, the good news: Corporate profits are excellent. Looking across a wide swath of the
industrial and consumer economy, the numbers are going up. Capacity utilization is 73.7%,
against 69% a year ago. Real GDP is up 3%, against minus 6.4% at the low. Consumer
spending, retail-store sales, factory shipments—all are showing positive growth year over year.
The stock market isn't reacting to this; it is acting on fear. People are worried about the
European contagion, but Asia is doing well. They are worried about slowing growth in China,
but we should all have the problem of slowing from 12.9% to 8.5%.
What is the bad news?
In the short term, we have a jobless recovery, and if you don't have employees, you don't have
consumers. Only government payrolls are up substantially year over year. The unemployment
17 of 22 8/16/10 5:57 PM
rate is unacceptable at 9.7%, or 16.6%, counting full unemployment. The public policies of the
Obama administration are very disappointing. The president should have launched a jobs
program, as Franklin Roosevelt did in 1933 when he inherited a mess from Herbert Hoover.
Health care is important, but more government mandates will discourage capital formation
and hiring.
The budget deficit is $1.17 trillion, and gross

public debt is $13.06 trillion. We're not
Greece. We have the right to print money. But
we're not going to get away with this forever.
The U.S. is spending its way into oblivion.
Lastly, there is a lack of credit for small
business. In the past 20 years more than 75%
of new jobs have been created by small and
View Full Image
medium-sized businesses. But only 40% of
small companies were able to borrow what
they needed in fiscal 2009. I expect the Democrats to take a huge hit in the fall congressional
elections because they haven't focused on jobs.
In the short term, the economy will probably grow by 3%, 3.5%. In the old days we would have
had a V-shaped bounce off the bottom and grown by 5% or 6%, but as Bill Gross says, it's a
new era.
For the stock market, as well?
The S&P 500 is trading at 1050. Industry analysts expect S&P companies to earn $81.79 this
year, which implies a price/earnings multiple of 12.8. The top-down estimate from market
strategists is $71.32, for a P/E of 14.7. Let's say the market is selling for 13 to 14 times
earnings, compared with a historical multiple of 16 times. Stocks are statistically cheap. The
Fed isn't going to raise rates. You're getting great earnings acceleration. Corporate balance
sheets are good. The problem is fear. Nobody is paying attention to the good news.
The S&P is down 13.9% from its April 26 peak. The Nasdaq Composite is down 14.3%. The
Dow industrials are down 13.2%, and small-cap value stocks are down 18.6%. I expect stocks
to end the year higher because P/Es are too low. But I advise staying on the sidelines until
volatility drops. It is better to be behind the tsunami than in front of a 20-foot wave.
Well said.
I've got two stocks. The first, America's Car-Mart, is a consumer stock that benefits from a
lousy economy. The company sells used cars to people who don't have credit. The cars are
Dodge Neons, low-end Chevys and things like that. The average car sells for a little over
$9,200. The company has 47,000 customers. It has a straight up growth record. The stock is
around 23. There are 11.7 million fully diluted shares, and the market capitalization is $265
18 of 22 8/16/10 5:57 PM
million. There is no dividend. The company operates in eight states, including Arkansas, Texas
and Oklahoma. It has 97 lots and is expanding by eight to 10 lots this year. Establishing an
incremental location costs only $125,000.
Car-Mart had $339 million in revenue in the fiscal year ended in April, versus $299 million
the year before. It earned $26.8 million, or $2.27 a share, against $18 million, or $1.52. I
figure revenue will grow by 13% this year. Including implied interest, that comes to $383
million for 2010. With total expenses of $335.5 million, profit before taxes will be $47.5
million. Taxed at 36%, net income is $30.4 million, or $2.71 a share, after share repurchases.
If revenue grows by 15%—the company's stated goal—earnings will be about $2.91 per share.
Using $2.81 a share, the midpoint between these forecasts, the stock trades for 8.2 times
estimated earnings. Free cash flow will be between $9 million and $14 million.
How old is the average car?
Three to four years old. Car-Mart has been a smart buyer of used cars, getting them wholesale,
not at auction. Current management came in a few years ago from Wal-Mart and is doing a
good job. The stock could rise to 30, at least, which would be a gain of 30%. The P/E is
ludicrously low.
My second stock is Novellus Systems, a leader in physical and chemical vapor deposition in
semiconductor manufacturing. There are 96.7 million fully diluted shares, selling for 24, for a
market cap of $2.3 billion. The company shot the lights out with first-quarter earnings of 43
cents a share, versus a year-ago loss of 69 cents. Revenue was $276 million. They have a small
business in Germany which is break-even at this point. It will have no impact on the bottom
line. The growth is coming from the semiconductor capital-equipment business.
What is the outlook for growth in that market?
A lot of people estimate unit sales of personal computers will grow by 20% to 25% this year.
They were up 28% in the first quarter. Semiconductor capital spending will be $26 billion to
$28 billion this year, up from $19 billion last year. Novellus has the wind at its back.
Why is the stock so cheap? Many people think the refresh cycle in technology will peter out,
but I disagree. The U.S. and Asia are driving demand, which will continue to grow. Novellus
will do $1.26 billion in revenue this year. Gross margins were 48.5% in the first quarter.
Operating profits will be almost $270 million, and net profits, $225 million. On a per-share
basis, that is $2.47, which means the company trades for about 9.7 times earnings. Adjusting
for $5.87 a share of net cash, you get a stock price of 18.13. Adjusting earnings for stock-based
compensation of 25 cents a share and interest income on the cash of five cents, you get $2.17.
Thus, on an adjusted basis the stock sells for 8.3 times earnings. The company will generate a
return on equity of about 18%, and free cash of $70 million. Revenue could grow 15% next
year, to $1.44 billion, while earnings could rise to $3.25.
19 of 22 8/16/10 5:57 PM
Thank you, Scott.
MARIO GABELLI
Barron's: It has been a rough spring. What now, Mario?
Gabelli: My market view for the rest of the year hasn't changed. In January I thought the U.S.
market would end the year up 5%, with a pretty good first half followed by a significant
pullback. I thought corporate profits would be terrific, and they are even better than I thought.
Companies are watching expenses, and demand has picked up. Every industrial company we
talk to continues to do well. The big questions are, how do you create jobs and a more
favorable environment for small business. For one thing, we need tort reform, which is
unlikely to happen. We also have to divert job creation to the private sector from the public
sector.
I was worried about three things at the start of the year: One was Beijing, or China cooling off;
I like what the government is doing to end the housing bubble. The second was Bernanke:
Does he start reducing monetary stimulation? The third was Barack, as in Obama, and how he
handles the fiscal-policy initiative in light of the coming November elections. I'm adding a
fourth, Berlin, which refers to the current problems in the European Union. There are also
some sidebar issues.
Such as?
How do you stop the quants [computerized

trading] from running wild? I have long
preached for the uptick rule [governing short
selling] to be restored. Regulators have to put a
tax on high-frequency trading and eliminate
dark pools. They have to make the market
View Full Image more transparent and eliminate exchange
arbitrage. We can't have another flash crash, as
we did on May 6.
Another issue: How do you trust any currency? Therefore, you have to nibble at gold, although
that isn't one of my midyear recommendations. Going into this year I assumed corporations
would start doing deals. I thought a lot more big corporate buyers would emerge. We have
seen some transactions, and more will happen. The private-equity guys are back in the game.
Mostly, we're back to what clients like me to do, and that's POSP—plain old stock-picking.
So pick us some stocks.
I still like everything I recommended in January. A new pick is Sara Lee [SLE]. CEO Brenda
Barnes did a good job of reshuffling the portfolio before she took a medical leave. There are
661 million shares, trading for 14.50. The company is selling some assets in Europe. After the
20 of 22 8/16/10 5:57 PM
sale they will have no debt and about $500 million of cash. The businesses remaining include
baked goods and food service, but their biggest driver is single-serve coffee. The business is
growing by about 20% a year. Sara Lee has the Senseo brand in Europe. In addition to the
traditional Senseo brand, they recently introduced L'OR, a universal coffee pod that can be
used in a Nespresso machine, which is made by Nestle [NSRGY]. Sarah Lee could earn $1 to
$1.10 a share in the fiscal year ending June 30, on about $10.8 billion of revenue. In fiscal
2011 they could earn $1.10 to $1.20. If that happens, the stock will trade 50% higher.
My next pick is Las Vegas Sands [LVS]. Steve Wynn [head of Wynn Resorts (WYNN)] is
the best in the business, but I'm picking Las Vegas Sands for the midyear because it is opening
a casino in Singapore this month. The stock is 24 and there are 660 million shares. The
company will generate $700 million to $1 billion of Ebitda in the next 12 months in Singapore.
Las Vegas is showing signs of stabilization. The combination of Las Vegas and their Macau
properties will mean another $1 billion of Ebitda. The company owns 70% of Sands China
[1928.Hong Kong], which operates its Macau property. That represents about $13 a share of
value. Las Vegas Sands has very strong cash flow and debt is falling at an accelerating rate.
How high can the stock go?
I'm not putting a cap on it. My third name is Vivendi [VIV.France], which I have
recommended in the past. The stock is around 16.5 euros, and there are 1.2 billion shares.
Hopefully NBC Universal will merge with Comcast [CMCSA], and Vivendi, which owns a
stake in NBCU, will get about $5.5 billion. The company is moving more into wireless
telephony and cloud computing, a technology that will develop in the next there or four years.
If telephone companies figure out how to take advantage of it, they are in the driver's seat.
Vivendi has several businesses: It owns 56% of a telecom and technology business, largely in
France, and may buy out its partner, Vodafone [VOD]. Vivendi also own 53% of Maroc
Telecom [IAM.France], and it has a footprint in Brazil. Then there's the Universal stake, and a
big stake in videogame maker Activision Blizzard [ATVI]. We think they could earn as
much as €2 this year. The stock sells for eight times earnings and could have a significant run.
Finally, I am reiterating my January recommendation of National Fuel Gas [NFG]. The

U.S. needs to have politically secure energy resources. NFG trades at 49, down from 54 in
April. There are 80 million shares. The Marcellus Field, a gas play in the continental U.S., has
proven more prolific than we thought. The BP spill in the Gulf of Mexico will be a catalyst for
National Fuel Gas to figure out how to monetize its Seneca Resources operations.
Taking a piece of Seneca public or doing a deal with another company would make sense.
Natural gas is a bargain. My case is based on natural gas selling at $4 to $4.50 per thousand
cubic feet.
Where is gas selling now?
It is just under $5 per Mcf. You could even make money at $3 to $3.50 per Mcf if you owned
21 of 22 8/16/10 5:57 PM
the land NFG does.
That sounds promising. Thanks.
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Barron's Roundtable Gives Midyear Investment Picks and Pans ... http://online.barrons.com/article/SB5000142405297020329600...

BARRON'S COVER | MONDAY, JUNE 14, 2010

Handle With Care

2010 Roundtable Report Card

2009 Midyear Roundtable Report Card

After ringing up the Roundtable crew in the

choosing their spots carefully.

None of this sounds good for the stock market.

Commodity prices are heading lower. The stock market

Where will the market bottom?

Secular bear markets usually bottom slightly below book

Given this outlook, what's an investor to do?

Are you recommending any new short positions?

I am also shorting the Spanish stock market

Does anything appeal to you in the U.S.?

View Full Image

Returning to Europe, what is the local mood?

Thank you, Felix.

That doesn't seem like the right ammunition.

How do you invest in this new normal world?

How about some specific picks for the second half?

I still like everything I recommended in January, including Pimco Corporate Opportunity

What else do you like?

I like GMAC, the old General Motors

Can you buy SmartNotes through a broker?

What are your thoughts on current Fed policy?

That's a scary thought. Thanks, Bill.

ABBY JOSEPH COHEN

What does this mean for the stock market?

David Kostin, Goldman's chief U.S. strategist,

In that case, it will have a lot of catching up to do.

In Europe, while it is important to study developments in Greece, it is more important to look

The problems abroad arguably make the U.S. look better.

Let's move on to your picks for the second half.

Thank you, Abby.

Meaning there are opportunities to make money, no matter the averages?

Crown has done a masterful job of balance-sheet management, as debt-to-Ebitda [earnings

What are the potential negatives?

One would be an increase in tin-plate costs,

cans in some markets, specifically Brazil.

What is the price-to-book norm in the industry?

Barron's: What do you make of the market's behavior?

What do you see in the U.S.?

Even after all our stimulus spending, the

Great. What else do you own these days?

What are your expectations for the stock?

What is your price forecast for gold?

Duly noted. Thank you, Fred.

How much lower?

The period from February to May 2009

Barron's: How does the world look to you, Meryl?

What is cheap enough now?

Globe Specialty Metals [GSM]

What, besides the products, do you like about the company?

How about another idea?

Packaging Corp. of America [PKG] is the lowest-cost producer of containerboard in the

The industry is very short of inventory. Eighty percent of global containerboard

Plus, there's a 2.7% dividend yield.

Thank you, Meryl.

Barron's: What is your market forecast, Archie?

Where do you see the biggest bargains?

Does the company operate in the U.S. or Canada?

They do about half their business in the U.S.

Barron's Roundtable Gives Midyear Investment Picks and Pans - Barrons

Barron's Roundtable Gives Midyear Investment Picks and Pans - Barrons