Mr. Holland: I want to add the point that most of us make our forecast and what-have-you, but probably everyone at this table is fully invested and has to be fully invested by definition, and obviously if you aren't fully invested or near that you'll have no chance of beating the index.
So I think that we make these judgments with regard to whether we're bullish or bearish and whether we think the market is going to go up and I think the focus should be on buying good cheap stocks.
P&I: What kinds of stocks are those?
Mr. Holland: Basically we like financial stocks - we like them very much; we think that they had a big bump there - the Citicorps of the world, AOL, some of the Fanny Maes, the Freddie Macs.
We continue to have very large weightings in drug stocks. The demographics are so powerful there, you know, the concept that drugs are part of the solution to the problem rather than being the problem. The new drug cycle, I mean, the drugs are getting through the FDA much faster, consolidation. They've got a lot going for them. It's one of the few areas, actually, where you are seeing some acceleration of earnings and some real top-line growth. Obviously, there could be some pricing pressures down the road, but they are now spending $10 billion a year to advertise their drugs so basically they seem to be hanging in there. Valuation-wise they are in the stratosphere, but maybe there's rationale for it.
Mr. Bond: Just touching on what Lou was saying with the drug stocks, they went through that phase where they were really cost driven and they weren't able to compete as much in the early to mid-'90s on top line and it's been nice to see them able to get FDA approvals much faster and get new products out.
In many ways the drugs also have more focus probably because of Pfizer this year than in years past just because of new products, and that's just one of hundreds of new products that are coming down the road.
I wanted to touch on one other thing and then we can talk about individual stocks, because there are things that worry me about the current situation that we're facing. Gene talked about the underpinnings and one of the underpinnings that concerns me is the magnitude of some of the mergers and acquisitions that are taking place. There is this big rush to do the biggest merger and the next biggest merger and all of these mergers are not going to work out. You have massive corporate cultures that are being assimilated.
Lou mentioned Citicorp and I'm not convinced that the Citicorp Travelers merger is going to be successful over the long term. I'm just not convinced yet that some of these mergers are going to work out in the long term and we won't know for the next two or three years.
But it's interesting also because a lot of foreign corporations are buying U.S. companies. Before, remember, it was U.S. real estate and now it's U.S. assets in that they want to own the company, and I'm just not convinced that the corporate cultures that have taken 100 years to evolve are going to be so easily assimilated on a global basis.
Because it's cheap is not a good enough reason for me, because the oil stocks have been cheap all year and they've probably been one of the worst-performing sectors in the S&P 500. If oil prices stay low, some people are saying maybe $9 a barrel, well, if I don't have to be there I don't want to be there because I think the fundamentals are still very important. And if you can't justify encouraging fundamentals then it's hard to justify holding these stocks because even though a lot of people say they're extremely long term, I'm not sure the accurate definition of what is long term in today's investment environment, maybe that's a year, maybe that's two years, but I still want to see strong fundamentals.
So to bring that back to some individual names, I like the retail stocks. I think the retailers are taking advantage of technology to the point where we don't know where it's going to lead. This retail environment that we're in the midst of right now has another component that I think very few of us would have factored in, meaning people that purchase over the Internet and that is a growing community. We have one in four people in the household using the computer, and I think in three to five years you're going to have three out of four people using the computer and that means using the Internet, that means taking advantage of Internet commerce and so forth.
Safeway in the grocery chain area, Home Depot, the Gap stores are all wonderful companies. In the technology area I still think Microsoft is the biggest company in the world but obviously their business plan has worked very well, and I like what I'm seeing in - I like the merger between America Online and Netscape and Yahoo.
Mr. Hansen: Within the industries already mentioned, technology, finance, etc., I think there are plenty of opportunities and I won't get into the individual names, but it is a stock-pickers market and it will need to be that in order for us to advance next year.
Mr. Sit: I think in terms of where you are going to make the money next year, let's look at a few themes that are out there. I think Alan said the consumer theme will continue to be there because the economy will be in pretty good shape, but you have got to really be in those companies that are gaining market share.
Mr. Holland: Category killers.
Mr. Sit: Right, category killers, job killers, more volume at reasonable prices, so that's theme No. 1.
Theme No. 2 is that global competition is forcing the need to enhance productivity and there are your tax services, your business services, your outsourcing, and they can range from Computer Sciences to a Cyridian and people like that.
A third area, and this is relatively new, is I think we are going to have to do something about our defense capability. We're spending less as a percent of GDP for defense now than we did in 1939. We're spending half of what we did in the Reagan years. You might say, well, that is not necessary, we won, that's the most important thing. And today we are literally back to the Jimmy Carter years in terms of our unpreparedness and people leaving the armed services. So I think there is a change in terms of added money for the whole defense area and I think that may be a new theme coming.
Mr. Holland: I agree.
Mr. Sit: I think as long as we are in inflation-disinflation - I would call it disinflation in preference to deflation - I think some of the financial stocks will be fine.
P&I: Jim, you didn't give us
Mr. Paulsen: I guess I come back to kind of three or four factors that have been going on in the entire bull market since 1982. They are big-capness, stability, predictability, and I would throw in interest rate driven, and lastly I would put demographic or structural themes for factors that continue to play or will continue to play. I think that the market cap will continue to dominate. I'm not saying small-caps won't go up, I think they will, but I think they'll underperform, maybe not every year but over the long pull.
If you look back at the long histories since '26, what you'll find is that the relative performance of small to large is just very highly correlated to the rate of inflation and I'm not so sure that small has always outperformed over time or whether it's just the fact that we're looking at a period of history where inflation always went up.
Ever since 1980, except for a couple of brief episodes, cap has dominated, and if we stay at zero inflation it could continue to dominate, values notwithstanding.
And I think there is good reason for that. I think that the big-cap has taken away one of the primary methods of the small entrepreneurship player, and that is everyday low price, or we can do it for less than the big guy.
Well, since 1990 the big guy has started to do that. IBM and Macy's are now everyday low pricers like Wal-Mart, and we're finding out that they dominate.
They also have the budgets to do tech things to lower costs. They can do M&As; they can do geographics; all the things the small player can't do. It's not important to any of those in an inflationary world but it's very important in a zero inflation world and I think that those trends will continue. So I still like the capness even though the values can get you nervous.
The second thing I would go to is predictability, and I think that falls back into unit growth-type companies and not on cyclical value plays, and it's less important for me to have high growth than it is just predictability. Some growth is predictable.
When you get into the structural demographics, the demographic movements favor certain things, certainly financials and certainly health care. I agree with those themes. I do still like some of the big nifty 50 unit growth companies. Another area I think is interesting is REITs. I think one of the reasons I'm attracted to REITs is that not only have yields gotten up to incredible levels in some of them - double digits like junk bonds - but I think the REIT has changed from what it was 10 or 15 years ago, you know, the vast majority of the REITs were 95% debt. Now it's all 95% equity. And so in a sense what REITs have become a bull market play because future growth rates are premised upon a good stock market so they can raise capital and grow. What happens with those is they got killed in the downdrafts of '98, but they also do really well if you get back into a bull mode because their estimated growth rates go up like an IPO would.