Barron's Roundtable 2004 III

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MONDAY, JANUARY 27, 2003 11:40 a.m. EST

FROM THE A RCHIVES: January 27, 2003

The Vision Thing -- Roundtable Part IIIFrom small stocks to big countries, our pros see enticing values

By LAUREN R. RUBLIN

"IT'S ALL ABOUT making money, not about staying in the U.S. or on the moon or in Switzerland."An original thought, that, but not, alas, ours. Credit goes wholly to Marc Faber, born inSwitzerland, based in Hong Kong, and one of the planet's most worldly investors. Marc's point,quite simply: Don't be parochial about your portfolio. If the U.S. stock market is heading south -- itsfavorite direction for three years running -- head north, or east or west.

It was the promise of just such uncompromising advice that led this magazine's editors just a fewblocks north of our familiar abode on Jan. 6 to meet with some bold and bright investors -- themembers of the Barron's Roundtable. (The whole illustrious crew is listed on the following page.)

The past two issues ofBarron's have featured our panelists' views of the stock and bond markets,the global economy, currencies, commodities and everything in between, as well as the 2003investment picks of most of the Roundtable members. In this week's installment, the final four --Archie MacAllaster, Abby Joseph Cohen, Marc and Meryl Witmer -- have their say. Although thepicks of none save Marc's are far removed from U.S. equities, you'll find enough ideas in the pagesahead to broaden your own world, not to mention your assets.

Barron's: Archie, what tempts you these days?

MacAllaster:Hub International. It's a Canadian company that transferred its home office fromToronto to Chicago. Hub buys insurance brokers. It pays a dividend of C$0.28, which is about 18cents U.S., and has 31 million shares outstanding. It 's listed on the New York Stock Exchange andthe Toronto Stock Exchange, but trades on the Big Board and has a market value of $400 million.The stock's 52-week high was 18.60 a share, and the low was 11.45. The shares were selling for13.50 Friday [Jan. 3].

Q:What do the company's earnings look like?

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MacAllaster: About two months ago, Hub reportedthird-quarter earnings, which were off by a penny f romestimates. The news cut the stock to 11 from 16 inabout two days. In 2002 the company probably earned$1-$1.05 a share. This year, it should earn $1.15 to$1.20, so it's selling for 11-11.5 times earnings. It is notfollowed very widely. The stock sells for about half theprice/earnings multiple of a company like Hilb Rogal &

Hamilton, which has had a great history. In Hub's case, the quality is just as good. Thecompany has increased its premiums since 1998 by about 350%, having bought 80different brokers. Just last week, it bought an insurance operation with about $25 millionin premiums, raising its total premiums to $225 million a year. Premiums in mostinsurance fields have increased by 18%-22% in the past few years. Hub needs almostno capital because it does no underwriting, so its margins are increasing. The stock isworth 20 a share in the next 18 months.

Q:What is your next pick?MacAllaster:Williams Cos. is a great speculation on natural gas. The stock went from25-26 a share to less than a dollar, and now sells for 2.70-2.80. There are 515 millionshares outstanding. The company reduced its dividend, but still pays a penny a quarter.Mind you, that's a yield of 1.5%. Williams is digging out from its troubles in California,Oregon and Washington, where it paid a penalty overcharging the states. Williams also

had an enormously profitable pipeline operation, with over 20,000 miles of pipelines. Thecompany had to sell some of these assets to Berkshire Hathaway, but it still has a lot ofassets. In addition, it's got about $1.6 billion in cash and credit lines, and $1.5 billion of

debt coming due in 2003, so it's in good shape. The problem is 2004.

Q:How so?MacAllaster: In March of '04, it has to refinance Williams Communication, now WilTel Communications Group [which emerged frombankruptcy on Oct. 15, and began trading on the Nasdaq Dec. 5.] Williams Cos. has about $3.5 billion in debt coming due in '04,but by the end of this year they'll be showing solid earnings and will have no trouble refinancing. If they had to, they have lots ofassets to sell. Williams is the largest natural-gas producer in the U.S. By the end of this year, it will have 60 to 80 cents a share inearnings. It's going to be at least a $7 stock within 18 months.

Gabelli: What is total debt?

MacAllaster: The company has about $14 billi on in debt and tangible book value of $8.50 to $9 a share. On a yearly basis ,Williams has never shown a loss.

Neff: Is Williams out of energy trading?

Marc Faber, Meryl Witmer, Archie

MacAllaster, Abby Joseph Cohen


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MacAllaster: No, they still have a problem. They're trying to sell their energy-trading operations, or find a partner.

Gabelli: The prices for pipelines have started firming. Southern Union is buying the CMS Panhandle Cos. in a very nice deal.Multiples are going up. There i s an opportunity to make a lot of money.

MacAllaster: Agreed. Last year I recommended Radian Group, which did everything I said i t would. It will report earnings of $4.45-

$4.50 a share for 2002. [Wednesday Radian reported earnings of $4.41 a share.] The stock was 41 last year, and it is now 37-38.

Q:So it did everything but go up.MacAllaster: The market was down 20%-25%. This stock was down 5%-6%, so it held inpretty well. This year they'll make $5 a share. Radian is in the mortgage-insurancebusiness, but it also guarantees tax-exempt bonds for cities. The company has muchbetter balance than in the days when it did just one thing. Growth has averaged about12% a year for the past few years, and the company hasn't had a down year in 10 years.

Q:What has ailed the shares?MacAllaster: Worries that the boom in mortgage refinancings is going to end. The stockmoves in sympathy with stocks like Fannie Mae, which trades for about 10 times earnings.But this one trades for only eight times this year's earnings.

Last year I recommended Wells Fargo, and it was actually up. [The stock rose 7.06% fromJan. 7 through Dec. 31, 2002.] It trades for about 45-46 a share. It's got about 1.7 billionshares outstanding, and is the fourth largest bank in the U.S. in terms of assets. Wellsraises its dividend every year. It pays $1.12 a share, and yields about 2.2%. The dividendcould go up 8-12 cents this year. Last year the company was expected to earn $3.30 ashare, and this year it's likely to earn $3.70. [Tuesday Well s reported 2002 earnings of$3.32 a share.] Here's a really telling figure: It makes almost 20% on capital, year afteryear. You ought to buy the stock, pay cash for it, take it to the sa fe-deposit box and leaveit alone.

Q:What do you think of banks generally?MacAllaster: I liked them last year, and I still like them. They pay great dividends, and thestocks are cheap. They trade for 12-13 times earnings. Actually, a lot of bank stocks are

cheaper than that. My next stock is FleetBoston Financial. Everything in the world wentwrong with this company last year, and it still ought to make about $1.70 for the year. [OnJan. 16 Fleet reported net income of $1.44 a share from continuing operations.] It pays$1.40 a share in dividends.

Neff: Are they going to maintain the dividend?

MacAllaster: A lot of people say no. I say yes. I estimate they'll earn $2.60 a share for theyear. If they come anywhere near $2.60, they are not going to cut their dividend. The

Roundtable Participants

BARTON BIGGS

Founder and chairman,Morgan Stanley Dean WitterInvestment Management,New York City

SCOTT BLACK

Founder and president,Delphi Management; portfoliomanager,Delphi Value Fund, Boston,Massachusetts

ABBY JOSEPH COHEN

Chair, investment policy committee,Goldman Sachs,New York City

MARC FABER

Managing director,Marc Faber Ltd.,Hong Kong

MARIO GABELLI

Chairman, GabelliAsset Management,


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stock sells for 26, or less than 10 t imes earnings. You've got two chances on this one.Earnings are growing. Second, it's a natural for some large bank to acquire. They've takenan absolute bath in Argentina. That was part of last year's problem. They also took a bathon Robertson Stephens, their former investment-banking business. But you've got a greatchance here. It's cheap, it has a 5.5% yield and will be treated well if taxes on divdendsare eliminated. And it could be very attractive to a bank like Citigroup or perhaps someforeign bank.

Q:What would FleetBoston be worth in a takeover?MacAllaster: About 42. Otherwise, it's good for35 this year. My next pick is also a name from lastyear: Old Republic International. They, too, dideverything I predicted, and they're going to make

$3.25-$3.30 a share for '02. This year they could make $3.45-$3.50. Old Republic has abook value of $26.50, and the stock sells for just over 27. I t pays a dividend of 64 cents ayear -- 16 cents quarterly -- and it's been raising its dividend every year. I'm certain theywill raise it this year because their earnings are better. The company has 120 millionshares outstanding. They deal in three kinds of insurance: mortgage, title and generalinsurance. The last accounts for about half their premiums but provides only 30% of theirearnings. This year the general insurance business probably will provide closer to 55% ofearnings. Title insurance will be off some, and mortgage insurance will be flat.Nonetheless, earnings should go from $3.25 to $3.50. Next, I've got a real speculation.

Q:Let's hear it.MacAllaster: It's one with an E on the end [Nasdaq adds an E to a stock symbol if thecompany is delinquent in filing an earnings report.] It's Nash Finch, NAFCE. The stock hasfallen from 34 to 7. Book value is $18-$19 a share. The company is about to reportearnings of $2-$2.10. Nash Finch is primarily a wholesale food company, though it alsoowns stores. The company changed auditors last summer, and withheld its third-quarterearnings report. Then it said its books had been inspected by the SEC. [The SEC isconducting an informal inquiry into the way it handled certain promotional allowances fromsuppliers.] There's a chance Nash Finch might be delisted from Nasdaq. I don't think thatwill happen. The company has 12-13 million shares outstanding. It's got over $4 billion ofsales. It pays a 32-cent dividend. When they get around to filing in the next few weeksand report their third-quarter earnings, and do whatever is necessary to satisfy the SEC,the stock will be worth more than $7. Looked at another way, this company is selling in

the stock market for less than $100 million, and it's generating more than $4 billion insales.

Originally, Fleming [the nation's largest grocery distributor] got in trouble for sort ofstealing from customers. The SEC started asking others in the industry if they were doingthe same thing. This happened about a month before Nash Finch changed auditors.

Q:Why did they make the change?MacAllaster: I am not sure. The new auditors said, "Look, we're oin to o throu h this before we et ourselves in trouble." You

y , w r

ARCHIE MacALLASTER

Chairman, MacAllasterPitfield MacKay, New York City

JOHN NEFF

Retired portfolio manager,Vanguard Windsor Fund and Gemini II;

managing partner (retired),Wellington Management, Radnor,Pennsylvania

ART SAMBERG

Chairman and CEO,Pequot Capital Management,Westport, Connecticut

OSCAR SCHAFER

Managing Partner,O.S.S. CapitalManagement,New York City

MERYL WITMER

General partner,Eagle Capital Partners,New York City

FELIX ZULAUF

Founder and president,ZulaufAsset Management,Zug, Switzerland

Table:Roundtable 2002 Scorecard


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can't blame them after what happened to Arthur Andersen. So that's what they've done. As I say, it's a speculation. But it's 7 ashare, and sales are 40 times market value.

Q:Thanks, Archie. Abby, how about you?Cohen: We think the U.S. economy looks far better than other developed economies in four areas. One, our banking system hashad tough-love regulation from the Fed and other regulators for at least five years. Bank managers themselves have done a verygood job focusing on credit-quali ty control. The second interesting contrast between the U. S. and other major economies has todo with labor productivity. Technically, short-term productivity measures look better because of weak hiring trends. But the

important story is the long-term improvement in productivity, bolstered by a high capital-to-labor ratio, in which workers are givengood equipment and other resources to work with. Thi rd, over the past several years, as the U.S. economy has restructured,we've been focusing on something economists refer to as comparative advantage, instead of simple competition.

Q:Meaning what?Cohen: That it's okay for us to import inexpensive manufactured goods from China,because we'll use our most precious resources, our people and our capital, to producehigher-value-added goods and services. That's why one of my biggest concerns is pooreconomic conditions in Europe and Japan, the natural markets for our more expensiveitems.

Fourth, there's been a great deal of discuss ion about the problems in U.S. accounting.But 2002 was the year of inflec tion. The bad guys did the perp walk, and other

companies that should have been more conservative in their accounting made somesignificant adjustments. This year there will be a lot of discussions between the FASB[Financial Accounting Standards Board] and the International Accounting StandardsBoard [IASB] about harmonizing standards. Outside the U.S. there currently are nointernational standards for pensions and consolidation-accounting.

Q:That's a gross exaggeration.Cohen: Some nations do have standards, but the IASB does not. To return to mybroader view, we felt last year that it was important to have geopolitical hedges in ourportfolio. I recommended exposure to energy through the commodities markets and anenergy stock [ChevronTexaco]. This year, we think energy prices will be above the low$20s, due to concern about developments in the Middle East and Venezuela. Pricescould spike dramatically on these geopolitical developments. We are still recommendingsome exposure to commodities, but by and large the equity markets are a good place to

be. We expect equities will outperform the fixed-income market, particularly the Treasurymarket. We're looking for stocks with economic sensitivity, such as Bank of America,which trades for 12 times earnings. It 's got a 3.5% yield and an 18% est imated return

on equity.

Q:Your energy pick, we should mention, was selling for 89.72. Now it's about 66.Cohen: While the spot markets have moved higher, investors are not treating the sharesas if commodity prices are going to stay at those levels. In particular, ChevronTexaco hadsome merger-related disappointments.

Abby Joseph Cohen

Abby Cohen's Picks

Compan S mbo l 1/ 6/ 03


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This year, we believe the worst is over for the U.S. economy. Another more cyclicallysensitive name is Delta Air Lines. The stock has been very hard-hit and is already pricing inconcerns about higher oil. The stock has a 1.6% yield, but it's the underlying companythat's most interesting to us. Leisure travel began to pick up during the holiday season.Should business confidence begin to pick up from currently anemic levels, not only wouldwe see some improvement in capital spending, but we might begin to see business travelpick up. Our analyst believes Delta has the strongest balance sheet in the industry and

the best control over its costs.

Schafer: Abby, what is the impact on Delta ofUAL's bankruptcy filing?

Cohen: The workforce at Delta is about 90% nonunion, so it could put some pressure on the company.

But before I go further, I neglected to do mention something on behalf of my legal department. No. 1, I am not the analyst on anyof these stocks. No. 2, one should presume that Goldman Sachs either had, has or would like to have an investment-bankingrelationship with any company I mention.

Q:Is there any company that Goldman wouldn't like a banking relationship with?All: WorldCom!

Zulauf: If you do business in the U.S., you have one businessman and 10 lawyers. If you do business in Asia or Europe, it's justthe opposite.

Cohen: My next stock is Waste Management, which was held in low regard for a long period of time. There were concerns aboutmanagement controls and activities. There were concerns about accounting, which our analyst believes has now been cleaned up.Waste Management has about a 25% market share and fairly high SG&A [sales, general and administrative expenses], which theanalyst views as positive. They boosted SG&A as they tried to get controls in place. This now creates an opportunity to lowercosts. There is also an opportunity for price increases, if economic activity picks up and more solid waste is generated. WasteManagement has an ROE and long-term earnings growth of about 15%.

We are not enthusiastic about the consumer. We are not interested in consumer staples, and we recently became much lessenthusiastic about autos, housing and retailing because this area of the economy already has done reasonably well. We're lookingfor things related to consumer service. Delta falls into that category, as does Viacom, which I mentioned last year. To update you,

our analyst thinks Viacom has low-double-digit long-term earnings growth. Most of its cash flow comes from the cable and radiobusinesses. The stock was 43 on Friday [Jan. 3].

Q:And 46 last year.Cohen:Rohm & Haas is another cyclical company, a very broad-based specialty-chemical company. It's been under some pressure,as many investors have focused in on some of the less cyclically sensitive names in the area. If the economy is, in fact, lookingbetter, we may see some movement and interest here. The s tock yields 2.5%, and long-term earnings growth i s about 9%.

Price

Bank of America BAC $71.25

Delta Air Lines DAL 13.35

Waste Mgmt WMI 23.76

Viacom VIA/B 43.36

Rohm & Haas ROH 33.69

Parker Hannifin PH 48.80

Danaher DHR 67.98


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Schafer: They have a big exposure to electronics, too. If that turns around, it should be good.

Cohen: Exactly. The company and stock have been under pressure in part because of the electronics business and because ofrising energy prices. But investors are cognizant of the risk.

Neff: What is the P/E on 2003 earnings?

Cohen: Rohm & Haas sells for 16 or 17 times estimated earnings, which is high relative to commodity chemicals but not relative tospecialty chemicals stocks. With regard to capital-goods stocks, our analysts also like Parker Hannifin and Danaher. Thesecompanies will benefit should there be some modest improvement in capital-goods spending, but we may not see this for the nextfew months.

Q:Okay. Now, let's hear from Marc.Faber: First, I am surprised by the complacency that exists about the U.S. dollar. Last yearin Argentina the stock market was up 77% in domestic currency, but down 55% in euros.Maybe the U.S. stock market will go up this year in U.S. dollar terms, but adjusted for theprice of a stable currency such as gold, or possibly the euro or the yen, it might havenegative returns. Last year in euro terms the Dow Jones Industrial Average was down29%, the Nasdaq 41% and the S&P 35%. You had a weakening stock market and aweakening currency.

Schafer: But what difference does that make except for people who travel?

Faber: An American could have bought a euro and kept it in cash, and made 16%, insteadof losing 29% on the Dow Jones. Or, he could have bought German bunds and made 28%.People should be concerned about making money, not about whether they stay in theU.S. or on the moon or in Switzerland. That's why I want to focus first on some macroplays.

In 1982, I was invited to a seminar in Hong Kong. I had to speak about bonds in the afternoon. In the morning, there was asession about energy and oil stocks, and gold and gold shares, and attendance was approximately 500 people. In the afternoon Ihad one attendant, and he stayed out of politeness.

Zulauf: That was a great signal.

Faber: I should have asked for his signature. Today, if you go to investment seminars,even where people traditionally have been positive about gold, and ask how many havemore than 1% of their assets in gold, only one or two hands go up in a crowd of 200-300 people. The world is grossly underweight gold.

If a bubble is created in an investment sector, there is an undervaluation created

Archie MacAllaster's Picks

Company Symbol 1/ 6/ 03Price

Hub Intl HBG $13.40

Williams Cos WMB 2.71

Radian Group RDN 40.25

Wells Fargo WFC 48.84

FleetBoston Fincl FBF 27.46

Old Republic Intl ORI 30.27

Nash Finch NAFCE 7.89


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somewhere else. Once the bubble bursts, there is always a change in leadership. Butthe change can occur over many years. Bonds bottomed in the U.S. in September 1981,and then rallied strongly into 1983, before totally collapsing once again. There was hugeupheaval in the bond market, and Lehman Brothers almost went bankrupt. But then themarket started to turn around, and bonds rallied for years, until recently.

Q:Are you predicting a similar trajectory for gold?Faber: Gold was up slightly more than 20% last year, and is up 40% from its lows. We

could see a big setback in prices because the bullish consensus now is very high. Butthat doesn't change the fact that the 30-year bear market in commodities and grainsthat started in 1973 -- and for cocoa and coffee, in 1977 -- is running out of steam.Therefore, I would emphasize commodities, as well as commodity-related stocks andcountries. Not everybody can store five tons of coffee at home.

Let's take coffee. In Switzerland, per-capita consumption is 50 times higher than inChina, but the Chinese population is 200 times larger than Switzerland's. Forty years

ago, the Koreans and Japanese drank hardly any coffee. But per-capita consumption in Japan and South Korea has gone updramatically in the past 10-20 years, and is 10 times higher than in China. People complain that China is exporting deflation in themanufacturing sector. We also have to focus on the rising standard of living in China. One of the best ways to play that is throughcommodities, whether coffee, wheat, corn, soybeans, meat or oil.

Q:And gold?Faber: There has been a great increase in paper money per unit of gold and silver in theworld. That's why gold is becoming relatively rare, along with other hard assets. Asiancentral banks have practically no gold holdings. Japan has 1.8% of its foreign exchangereserves in gold, China 2.1%, Taiwan 3%, Singapore 1.7%, Thailand 2.32% and Malaysia1%.

Also, when we talk about future dollar weakness, what is the impli cation for Europe? I ammuch more positive about the future of Euroland than most people are. The inclusion of 10new countries, and the eventual inclusion of Russia and Turkey, will be very beneficial. Itwill create a huge economic zone and kill the unions in the West and enlarge the marketdramatically. There will be a dramatic conversion play. In 2002, Romania's market went up100%, Bulgaria's more than 50% and Slovakia' s around 50%. The real estate in thesecountries is very cheap compared with Western Europe. There will be an arbit rage similar

to that between Chinese real estate and real estate in Hong Kong. People living inWestern Europe should consider buying real estate on the Dalmatian Coast in Croatia,because it is much closer to Germany than, say, southern Spain. If you look at what'shappened to real-estate prices over the past 20 years in Mallorca and southern Spain,you can imagine what will happen in some of these eastern European countries. There arevery dramatic opportunities in real estate in emerging economies, not just in Europe butAsia.

Q:What do you make of silver? It has hardly moved by comparison with gold.

Marc Faber

Marc Faber's Picks


PRECIOUSMETALS

Gold - $351.25

Silver - $4.90

Newmont Mining NEM $29.25

Harmony GoldMining

HMY rand15400

COMMODITIESMerval ArgentinaI dx

MAR 508.26

IRSA Inver. IRS $5.82

Cresud CRESY $5.20

Schlumberger SLB $42.40

Diamond Offshore DO $22.05


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Faber: Silver has very good potential. The fundamentals near term are more favorablethan for gold, because you don't get central-bank selling in silver.

Zulauf: There is a production deficit in silver, and inventories around the world have beencoming down. The supply/demand situation is presenting a pretty bullish p icture for thecoming years.

Faber: Everyone says we'll need less photography paper as digital photography takes

hold. But if people print out their photographs, they need silver-coated paper. If anything,that is rather positive for silver.

Anyway, you can play commodities through the purchase of physical gold, and I wouldencourage every responsible citizen in this world to buy physical gold and silver and storeit in a safe-keeping box in a country that is friendly to gold and silver holdings. You canalso buy gold shares, although they have not performed well recently, considering thatgold has made a new high. Gold shares are lower than they were last summer, which is anegative technical signal. Nonetheless, if you want to buy stock in a company with hugeexposure to gold, consider Newmont Mining and Harmony Gold Mining. Harmony is run bymy friend Adam Fleming. It has acquired assets at very low prices over the last few years,and it is unhedged.

The other way to play commodities is to buy the Argentine stock market. Argentina is thepurest play on grain prices. If they recover, Argentina will do extremely well. Its stockmarket was overpriced before, but now it is undervalued.

Black: The country's middle class has been wiped out, and there is a huge exodus ofpeople from the country.

Faber: Argentina is a boom and bust economy par excellence. I went there for the firsttime in 1988. Everything looked grim, and valuations were extremely low. The bankers inGeneva said: 'This is a country where we only take out money. We will never invest apenny.' Then the market went up more than 30 times. Argentina's stock market won't goup thirtyfold from here, but it can easily double in dollar terms. Both the property andshare markets are incredibly inexpensive. There are two commodities-related companieslisted on the New York Stock Exchange. IRSA Inversiones y Representaciones has amarket capitalization of slightly under $100 million. Cresud is the largest agricultural landowner in Argentina. Both are controlled by Eduardo Elsztain, a very successful fund

manager. Both own office buildings in Buenos Aires. As for the country's currency, in 1997 per capita income in Argentina wasalmost twice as high as in Mexico. Now per capita income is lower than in Nicaragua and Bolivia.

It is very bullish for Argentina and for all emerging markets if they default on their debts, because then they're essentially debt-free and can start anew. Don't forget that well-to-do Argentines probably have about $60 billion to $80 bil lion outside the country,which they will bring back if they see the opportunity arise.

Source: Bloomberg

Pohang Iron and St. O549 KS won124500

BHP Billiton (ADR) BHP $11.55

Tatneft (ADR) TNT $15.27

ASIA

People's Food PFH SP S $.735

Brilliance ChinaAuto 1114 HK HK $1.53

Travelsky 696 HK HK $5.55

Next Media Ltd. 282 HK HK $1.74

Singapore Telecom ST SP S $1.22

PT TelekomIndonesia

TLKM IJ rupiah3550

Siam CommercialBank

SCB TB baht 30.25

Thai Farmers Bank TFB TB baht 27.75

Reliance Industries RIL IN rupee284.85

State Bank of India SBIN IN rupee279.00

Dr. Reddy's Labs DRRDIN

rupee921.60

The India Fund IFN $10.62

India Growth Fund IGF $9.96

Asia Pacific Fund APB $9.27

Greater China Fund GCH $9.07

Apollo Fund APOL CY CYP .17


10/19



Q:What will make them bring that money home?Faber: At the bottom of a bear market you never see why it should go up. Then something happens and the money starts to flow.What will restore confidence? Low valuations. In Argentina, low valuations are there.

Q:But isn't the banking system broken?Faber: It's finished. That's why I wouldn't be too bullish about the American banking system, either. It can happen here with allthe derivatives and real-esta te loans and so forth. I would be short the homebuilding and financial stocks in the U.S., relative to

the S&P.

Last year, incidentally, the South Afri can rand was the strongest currency against the U.S. dollar. The next strongest were theNorwegian krona and Swedish krona, the Swiss franc and the euro. The net liabilities of the U.S. to the rest of the world are now25% of GDP. If the current rate stays at 5% of GDP over the next five years, the net liability will increase to 50%. This is notsustainable. Until 1997, the current account deficit ran at only 1.5% of GDP. America's overall market share in export markets fellfrom 25% in 1998 to around 21% now. If the U.S. really focused on sectors where it has a comparative advantage, this wouldn'thave happened. The U.S. is not very competitive.

Gabelli: We are the most competitive nation in the world in agriculture.

Faber: That's not true. Cotton is subsidized. A lot of U.S. agriculture is subsidized.

Gabelli: Some $55 billion of our exports are agriculture. The next big thing is movies and entertainment.

Q:If commodities prices rise, won't that act to the advantage of the U.S. trade balance? If China demands more, won't we be thebreadbasket for China?Faber: The Chinese will be buyers of some agricultural products from the U.S., but the main beneficiaries will be other countries inAsia. For oil, Indonesia. For agricultural products, Australia and New Zealand. And for coffee, Vietnam. The Chinese will become thelargest customers of other Asian countries. And, as such, they will have more and more political power around Southeast Asia.

The main beneficiaries of rising commodity prices are Argentina, Brazil, Russia, Indonesia, Malaysia and to some extent Thailandand the Philippines, Australia, Canada and New Zealand. If you believe that the bear market in commodities ended sometimebetween 2001 and 2002, you should be long currencies such as the New Zealand dollar, which actually performed very well sincethe start of last year. That also holds for the Australian dollar and probably the Canadian dollar.

Q:The Australian and New Zealand dollars are both up about 20%-25%. They're almost becoming noncompetitive, especially Australianwheat versus Argentine wheat.Faber: That's why I recommended Argentina. But currencies in Australia and New Zealand are relatively cheap compared to theU.S.

Earlier [in the first installment of the Roundtable, in our Jan. 13 issue], I said oil would go to $90 a barrel. That is not an actualforecast, but in the long run the demand for oil will rise dramatically in Asia, in South Korea and in Japan. In the case of Japan,between 1950 and 1978, per-capita consumption increased from one barrel to 15 barrels. In the case of South Korea, it increased


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from a barrel in 1965 to around 17 barrels recently.

Q:Wouldn't such a huge rise in the price of oil have an impact on demand?Faber: If the Chinese and Indian economies continue to grow at, let's say, 6% a year, the demand for industrial commodities willbe very strong, especially for oil. In China, consumption has doubled over the last seven years. In Asia, it could easily double overthe next 10 years, and double again. I agree that near term the price is vulnerable. Maybe you short oil if the U.S. goes into Iraq.But I am not sure the war will be won.

Zulauf: The battle will be won.

Faber: The battle will be won, but whether the war will be won is a dif ferent story. One way to play the oil market is to buy oil-service companies in the U.S. -- Schlumberger and Diamond Offshore. In Korea I would look at Posco [Pohang Iron and Steel], avery efficient steel producer, though the price has gone up a bit. In Australia, there's BHP Billiton. In Russia, Tatneft. Also,machinery companies and capital goods companies that produce machinery for both agriculture and mining equipment. Now, I havesome specifics about Asian companies.

Q:Let's hear them.Faber: In 1990, most Asian stock markets peaked, including Japan. Thailand and Malaysia made marginal new highs in '94, andHong Kong made new highs in '97. But most moved in a band until 1997, before collapsing by 90%. The S&P 500, too, could be in atrading range, say between 800 and 1,100, for a number of years before the final selloff. Whether the selloff comes in U.S. dollarterms or through currency depreciation, as happened in Asia, we don't know. But there can be a delayed reaction. Japan peaked

at 39,000, in 1989, and then traded for a while around 20,000, before falling below 10,000.

Anyway, Asian markets have grossly underperformed the U.S. and the industrial markets of the West. Since 1990, in dollar terms,most markets in the region are down by 80%. Now, the opening of China is both a threat and an opportunity for the other Asiancountries. It is a threat in the export markets, as most Asian countries are not competitive with China in manufacturing. Besides,China is implementing huge improvements in i ts infrastructure.

Schafer: With the Olympics coming in 2008, they're really going to improve their infrastructure, which will make them even morecompetitive.

Faber: So, how do you play China? In addition to the commodity markets, you buy companies that will benefit from the rising tideof Chinese tourists into Southeast Asia. The Chinese will also have a Palm Beach and an Aspen and a Cte d'Azur one day. Youbuy real-estate and construction companies in China. A beer company, Tsingtao, has had some past problems, but has been

increasing its market share. In the past few years, it's gone from 2% to 12%. The P/E is 13, it yields about 5% and it i s listed inHong Kong under the symbol 168. But I don't like Chinese companies, by and large.

Neff: Are most of them owned partly by the government?

Faber: Yes. Most have performed badly. But if you want to invest in China, People's Food is a stock to look at. It's listed in HongKong, and sells for about HK$5. It's reasonably well run and yields 5.7%. The company buys slaughterhouses in China anddistributes meat and sausages. Brilliance China Automotive is a producer of minivans. Again, it's a controversial company, but ifsomeone wants to be in China, this is one of the plays.


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The growth of tourism is a no-brainer. Only 1% of the Chinese population travels overseas currently. That's 10 million visitors. InJapan, it's around 40%, in South Korea and Taiwan, around 13%. In China the numbers could rise to 5%-10% over the next five,10, 15 years. Then you're talking about 50 million to 100 million travelers. Plus, a huge domestic traveling industry is developing.Travelsky provides information-technology solutions for the Chinese air-travel industry. The stock hasn't performed very well,moving sideways in the past two-three years. But the valuation is relatively low, at about 11 times earnings.

Q:What is the valuation, or P/E, of the whole Chinese market?

Faber: That's not so easy to measure, because the A-shares market is still quite expensive. The B market and the H market -- Hbeing state-owned enterprises in Hong Kong -- trade for about 10 to 12 times earnings. Most of the companies that went publicwere state-owned companies that were not particularly well -run. The very profitable companies are still private.

Neff: Why are we going through these companies if you don't think they're attractive investments?

Faber: If you want to invest in China, these names are the best of the crop. And Tsingtao, actually, could be quite a strongperformer. There are also some closed-end funds listed in Barron's that invest in China, such as the Greater China fund, run byBarings.

I have another friend in Asia, Jimmy Lai, who came to Hong Kong at the age of 13. He produced garments for the Limited stores,and then started a company called Giordano International and became quite famous. He was forced to sell his majority stakebecause he was very critical of the Chinese government in 1989, during the Tiananmen uprisings. He then started Next magazine

in Hong Kong, and thereafter a daily paper called Apple Daily News, in which I have a biweekly column called "Sex, Investment andNight Life."

Q:Sounds like your kind of column, Marc.Faber: Within one year he was either No. 1 or No. 2 in the Hong Kong daily-paper market. This is an achievement to gain that kindof market share in one year.

MacAllaster: Is this an English-language magazine?

Faber: No, Chinese. Next is now the most successful magazine in Hong Kong. But that market became a bit small for him, and hemoved to Taiwan and started a Next there. That magazine, too, is becoming very successful. His company, Next Media Limited, islisted in Hong Kong. It sells for eight-nine times earnings estimates for 2004. Jimmy Lai has a head harder than the walls of thishotel. He is one of a small crop of new entrepreneurs in Asia who didn't come from family wealth but built it up themselves and

succeeded in a very unusual way. You will see more and more of this Asian new guard, and they will change the politica l system indue course.

Gabelli: What does the stock trade for?

Faber: It's HK$1.78. Moving on, in Singapore, I find Singapore Telecommunications quite interesting. It has performed quitemiserably. It's selling for about S$1.23 and yields 4%. The Singapore dollar will actually appreciate against the U.S. dollar, so this isa rebound candidate that may be quite attractive. It is in fixed-line and mobile telephony and is also branching into Asia, so there


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isn't a huge risk. I am qui te positive about Indonesia, which I mentioned a year ago. Since then, the market has gone up by morethan 30% in dollar terms. I like PT Telekomunikasi Indonesia, which is listed in New York under the symbol TLK. It sells for aboutfive times earnings. In a country with 200 million people, the growth prospects are reasonably good. If you get a rebound intelecommunications stocks, this one will participate as well. It yields 4% and the market cap is about $4 billion, so it's quite a largecompany.

Neff: Does it specialize in service or capital equipment?

Faber: Service. I also like pharmaceutical companies in Asia, because the per-capita consumption of pharmaceuticals is a tinyfraction of what it is in the U.S. or Western Europe. My pick is Indopharma. The company has a market cap of about $80 million. Ittrades for six-seven times earnings and yields 9%. About 50% of the company is still owned by the government, which will mostlikely sell its share to a foreign pharmaceutical company. They will sell it for a significant premium to the present share price, sothere is little downside risk.

The competitive advantages of Thailand are tourism and hospitality, as well as agriculture. The county has experienced a crisispost-1997. The economy is expanding slowly. The housing market is ready to be strong. The property market in Thailand willimprove, and the Thai banks as a group are attractive -- Siam Commercial Bank and Thai Farmers Bank in particular. Lastly, theIndian stock market performed well last year. I am the chairman of a fund that was up 28%. It may be easier for foreigners tomake money in India than China, because there's less competition. This is a market to focus on in 2003.

Q:In other words, we should buy your fund?

Faber: I'm chairman of the Indian Capital fund. Companies to look at include Reliance Industries, State Bank of India and Dr.Reddy's Laboratories. These are stocks people can buy easily.

Q:Are there other closed-end funds you'd recommend?Faber: Sure. The Asia Pacific Fund, Greater China, India Growth. The India Fund sells for a 16.7% discount to net asset value. IndiaGrowth sells at a 5% discount. Indian Capital, of which I'm the chairman, is run by John Thorne. It buys more special situations inIndia. Then there are regional funds. Claire Barnes runs the Apollo Investment fund and was up 38% last year in Asia. As I've said,emerging markets and commodities are beginning to outperform the U.S., and this outperformance will continue for a long time --maybe five or 10 years.

Q:Thanks, Marc. Meryl, your turn.Witmer: My first stock is Dade Behring, symbol DBEH. It's a $16 stock. It has 40 mi llion shares outstanding, and a market cap of$640 million. It trades in the pink sheets. They filed their 10(k) with the SEC and in a couple of weeks, with 400 shareholders, willmove to the Nasdaq.

Q:What does the company do?Witmer: This is a classic razor/razor- blade business. They are one of the leading manufacturers and distributors of in vitrodiagnostic products worldwide. In other words, they make the machines and reagents used to test blood and other bodily fluids toaid physicians in diagnosing, treating and monitoring patients. These are commonly used tests for glucose, cholesterol, drugs,cardiac function and blood-clotting ability. They are typically performed in hospitals and reference labs. The machines are therazors, and the reagents [the chemicals used in making analyses] are the blades. Dade's revenues are about 87% reagents,consumables and service. A machine typically is placed in a lab under a five-year contract, and most machines can only use the


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manufacturer's reagents. This is what assures a steady stream of revenue and profits year in and year out.

Dade has a very strong market position in small and medium-sized hospitals where,according to our research checks, the products and the company are very well thoughtof. The company doesn't have a strong position yet in high-volume hospitals or thereference-lab market. Dade's machines are superior to the competition's because oftheir size and the number of tests they can perform. Dade's machines perform bothchemistry and immunochemistry tests, which al lows a hospital to have one operator per

shift instead of two. This is a great savings, as an operator typically makes about$80,000 a year. The machines are also very cleverly designed. They automatically dividea sample for multiple tests, so the operator has to do very little.

Q:Tell us about the company's financials.Witmer: Annual revenue is about $1.3 billion. My conservative Ebitda [earnings beforeinterest, taxes, depreciation and amortization] estimate is about $240 million in 2003,growing to $255 million in '04, and $275 million in '05. Growth is driven by increasedmachine placements,and more testing, in general. Tests are growing 5% to 7% a year,helped by the aging of the population and better tests. Dade invests a lot of money inresearch and development, which is how they add incremental tests. The company alsohas a net operating loss carryforward that lasts practically forever, about 30 years, andadds about $12 million a year to after-tax free cash flow. Depreciation and amortizationare expected to be about $120 million, and capital spending is about $100 million to

$105 million, which adds another $12 mil lion to after-tax free cash flow over reportedearnings per share.

Q:What do they earn per share?Witmer: Dade will have about $1.20 of free cash flow a share this year, growing to$1.38 in 2004 and jumping to about $1.82 in '05, when it should be able to refinancesome very high-cost debt that pays 11.9%. I dilute free cash flow per share for the

seven million options that were issued to employees upon the company's emergence from bankruptcy [in October 2002]. Theoptions strike at just under $15 a share. If all the options are exercised, the company would net over $2 a share.

Q:Is the balance sheet okay now?Witmer: It's okay. The company got rid of about half its debt. Debt is now a little under$800 million. Ebitda is $240 milli on and interest expense is $70 mil lion. That's decentcoverage.

Schafer: The problem is, the company doesn't report any money in earnings per share. Ifyou fully tax them and take into account the interest costs, they earn 80 to 90 cents.

Witmer: The depreciation and amortization is overstated, and in time will more closelyapproximate actual capital spending. And an NOL with a 30-year life should legitimately beadded to earnings. It adds va lue. It's a great company. The hospitals love it. At the end of2004, beginning of 2005, Dade is coming out with a high-volume machine for reference

Meryl Witmer

Meryl Witmer's Picks


Dade Behring DBEH $16.90

Investment TechGroup

ITG 23.25

Interactive Data IDC 13.78

Hunter Douglas HDUGF 29.75


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labs which may be superior to anything out there. The high-volume lab market is abouthalf the total market. Dade does not compete in the immunochemistry area in the high-volume market. Their growth shouldaccelerate greatly when they do. My target in two years is a 15 multiple. I'm putting a high multiple on the $1.82 a share in freecash flow in 2005, plus the $2 they'd net in options proceeds, which yields a price target of 29.

Q:What is your next pick?Witmer: My next two stocks are down because of pessimism about the U.S. stock market. For the first time in a few years I feelthe market is not overvalued, and could gain 5% to 15% a year for the next couple of years. When confidence in the markets is

restored, I think we'll see a resurgence in these two stocks. The first is Investment Technology Group, symbol ITG, and the other isInteractive Data, IDC. ITG is a full-service trade-execution firm that uses technology to lower the cost of trading. It has anelectronic stock-crossing system called POSIT, which we love as investors in small- and mid-cap stocks. The POSIT system handlesabout 600 shares a month and gets paid two cents a share on each side.

ITG also has client-site electronic trading products that manage trades and route orders automatically. The company's productsimplement trading strategies automatically. These systems trade about 900 million shares a month. The trading desk trades about300 million to 400 million shares a month. ITG has steadily grown its share of trading volume on the exchanges from about 2.3% in1999 to 3% in 2002. The stock has gone down recently as volume on the exchanges has fallen.

Annual volume on the New York Stock Exchange has grown from five billion shares in 1975 to 308 billion shares in 2001. Nasdaqvolume has grown from one billion shares in '75 to 471 billion shares in '01. That's 17% growth annually for the New York StockExchange over those 26 years, 21% over 10 years and 24% over five years.

Q:But these numbers were swelled by the bubble, so there's really no way to normalize them.Witmer: There have been only three years in which volume did not grow. If the market does OK this year, then volume growsagain. And ITG has kept growing its share of trading volume.

Q:What did the company earn last year?Witmer: To get a sense of the possible earnings, I looked at the last two quarters of 2002. The company reported 39 cents in thethird quarter and guided investors to 33 cents, the low end of the expected range, in the fourth. Annualizing these quarters, whichhave been weak, you get $1.44 a share. To the $1.44 I add about 14 cents from cost-cutting. They have a European division that'slosing about 15 cents a share. So, for core EPS, I get $1.73. If it gets to 2% of share-trade volume only in England -- and Englandis following the U.S. model in terms of growing nicely every year -- that would add 20 cents to earnings per share over time. Thatstill leaves the whole Continent as a potential future market. ITG also recently purchased a soft-dollar firm that has goodrelationships with many hedge funds. Hedge funds account for about 25% of trading volume and are not well covered by the ITGsales force yet. This acquisition should give ITG an opportunity to grow its volume in this area. ITG has about $6 a share of cash

and no debt. If trading volume continues on its historic growth path, ITG could trade closer to 35 or 40 a share. The stock is 22now.

Q:That would seem to be a not ungenerous valuation for a trading stock.Witmer: If you back out the $6 in cash, it's now around 10 times core earnings. That's a reasonable valuation. As for Interact iveData, it is one of the best businesses I've ever owned, with one of the best managements. IDC supplies financial and businessinformation to institutional investors worldwide. It is the leading provider of end-of-day pricing, dividend and corporate-actioninformation. It provides real-time and historically archived data for use in portfolio pricing and analytics, as well as valuationservices to institutional equity and fixed-income portfolio managers. Its core competence is its extensive database expertise and


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technology reserves. Its computers are tied in directly with its clients' computers, so switching providers is very low on the list ofIT-department projects. And IDC is great on customer service. The company has a dominant market share. Its business is notdirectly trading-volume sensitive, as it gets paid on a price-per-security basis. In the dismal environment of last year, it grew about8% organically, and more than 12% including a small acquisition. It has a few new products that enable U.S.-based mutual fundsthat own foreign stocks to price their funds accurately, and not get taken advantage of by traders who try to arbitrage the mutual-fund price versus the foreign market.

Q:If Wall Street stops growing, the number of potential users is limited.Witmer: The company is somewhat sensitive to the number of funds, because it has contracts with clearing firms and mutual-fundcompanies. But it also has new products. IDC raises prices a little every year and continues to add markets and buy competitors.When the company does an acquisition, it is ruthless about cutting costs. It gets great returns on capital invested in acquisitions.

Gabelli: Do they do pricing for hedge funds?

Witmer: They price each security. It is up to the fund manager to price his overall portfolio. After-tax free cash flow per shareshould be about a dollar in 2003, growing to about $1.15 in '04. IDC is trading for about 11 times free cash flow, once you back outthe cash on its balance sheet.

This is a great bargain. Reported earnings are a little lower than free cash flow per share. The stock should trade at 17 times free-cash-flow multiples, plus its cash. I have a $22 target in about year, and i t's currently 14. Pearson owns about 60% of thecompany.

Faber: Where was the stock two years ago?

Witmer: I first bought it at 5, and it has been as high as 20. Now it 's at 14, and the numbers have grown a lot in the interim. Itshould never have been at 5.

Q:It probably shouldn't have been at 20 either.Witmer: That is probably right. It should have been at 15 at that point. Moving on, we talked earlier today about the fact that theAmerican consumer took a breather in the fourth quarter, which hurt consumer-sensitive s tocks. Virtually everyone who has amortgage outstanding has refinanced, and many are using the savings to lower other debt. My next pick is in the beaten-downconsumer sector because consumer spending has a shot at starting to grow in mid-to-late 2003. Hunter Douglas, listed on theAmsterdam Exchange, is one of our cheapest stocks. The company manufactures and markets window coverings and has about a40% market share, compared to its nearest competitor, Newell Rubbermaid, with about 16%. The company has a 65% share of thehigh-end market. Hunter is a very cheap stock.

The company has an investment portfolio whose cash value is listed on the books at $360 million. Some believe the market value is$80 million to $100 million higher. It is invested in a wide variety of hedge funds and investment funds.

B ' O li Th Vi i Thi R d bl P III S i 17 19


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From left: Marc Faber, Scott Black, Abby Joseph Cohen, John Neff, Art Samberg, Barton Biggs, Archie MacAllaster, Oscar Schafer, FelixZu l au f , Meryl Witmer, Mario Gabelli

Faber: Actually, I know the family quite well. Their business in China is profitable. The company is very good. It is very clean.

Witmer: They know how to run a business. The stock trades at &euro:28 a share. My earnings-estimate range for this year is&euro:2.90 to &euro:3.20 a share, though that estimate does not include any earnings f rom the investments. In '02 the companyis going to report &euro:2.70 to &euro:2.90 a share. If you assume a 12 multiple on the low point of my numbers and add thecash, you get a target of &euro:43 a share. On the high end, you get a one-year target of &euro:50.

Q:Do they report their earnings from their portfolio?Witmer: They do not, but starting in March they will report it at market value, which is good.

Black: What percentage of their revenue goes through Home Depot?

Witmer: Not much. You can go to a Home Depot or a Lowe's on the low end, but i t is a pain to ins tall. The Mom and Pop s torescome in and measure, and you get a window covering for anywhere from $100 to a $1,000.

Gabelli: How much of their business is in the U.S.?

Witmer: About 50% or 60%. They manufacture here and in the Netherlands.

Faber: But you are assuming a strong housing market.

B ' O li Th Vi i Thi R dt bl P t III S it 18 19


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Witmer: Well, people change blinds when they move. And in the American economy, as you can see from cable-TV turnover, 1%-1.5% of the people move every month.

MacAllaster: They run it like a private company.

Witmer: They do, and they should take it private.

Q:And we should take ourselves to dinner. Thank you all.

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