Barrons-RT June 2012

7/31/2019 Barrons-RT June 2012

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tend to have better revenue and earnings than the economy overall. We are expecting mid- tohigh-single-digit profit growth.

One thing we're happy about is the addition of two capable new governors to the Federal ReserveBoard, bringing it back to full strength. The Senate just confirmed the appointments of Jerome

Powell, an investment banker and lawyer, and Jeremy Stein, an MIT-trained economist andHarvard professor. The regulatory environment is changing, and it is good to have people at theFed who understand the impact of regulatory changes and which are most likely to be effective.

Good point. How about some stock picks for the second half?

Our analysts likeWells Fargo[ticker: WFC]. Financial stocks were among the best performers inthe first quarter and among the worst in the second. Wells has a commanding market share inseveral areas, including a 41% share of the mortgage-finance business, up from 23% in 2010.The bank has emphasized this business, and some competitors have reduced their exposure tomortgage finance. Wells has shown good discipline on the expense side. Also, it localizes risk

management in individual business lines. The stock trades for 9.5 times this year's expectedearnings and yields 2.7%. Return on equity is 12%.

Pfizer[PFE] has been reformulating its business. It has been selling off businesses in which itdoesn't have a competitive advantage, such as nutritional products. The stock sells for 10 timesthis year's expected earnings and yields 4%.

How is Pfizer's new-drug pipeline?

Investors have been waiting for Pfizer to prove again that it can generate interesting new drugs.A Food and Drug Administration panel recommended approval of a new Pfizer treatment for

rheumatoid arthritis in May.

Pfizer had $26.5 billion of cash at the end of 2011. Management has said it wants to return themoney to shareholders. Our analysts think the company will buy back $4 billion or $5 billion ofstock this year. Pfizer might make some strategic acquisitions, as well.

Thank you, Abby.

FELIX ZULAUF

Is there a good word from Europe?

ZULAUF: Adjusted for inflation, Italy trades at levels last seen in Mussolini's era. Greece tradesat 1.5 times the Shiller P/E ratio [the market's current price divided by the past 10 years'inflation-adjusted earnings]. Most European markets are good value but that doesn't make youany money. The structural framework is wrong and cyclical dynamics are still pointing down.

Structural? Cyclical? Please explain.
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There is too much debt in the industrialized world and the financial system is virtually bust. Realdisposable personal income is stagnating or declining. Employment participation keeps headingsouth. This produces a chain reaction: Weaker consumer demand in the West weakensmanufacturing in places like Asia, which weakens natural-resource producers such as Australiaor Brazil.

As for the euro, it is a misconstruction. As I said in January, I expect the disintegration to beginin the second half of this year. That should lead the world into financial and economic chaos. Mytwo major themes into 2013 are euro disintegration and China weakness, due to the bursting of areal-estate boom.

Sounds like a fun year.

The global economy is weakening cyclically on top of a highly fragile credit system. It is anexplosive cocktail. The tower of debt is compounded by the gigantic over-the-counter derivativesmarket. In the past 10 years the notional value of derivatives worldwide has grown from $100

trillion to almost $800 trillion. The numbers are mind-boggling. If something goes wrong in thereal economy, it could shake the whole credit system dramatically. It is a dangerous situation.

Investment/Ticker Price 6/6/12

Cash

LONG

Gold (spot price, per ounce)* $1,619.30

Yield 6/6/12

Australian 3-Year Bond Future** 2.25%

SHORT

iShares MSCI Emerging Markets Index Fund/EEM $38.03

*Buy when gold prices fall below $1,500.** September 2012 contract.

Source: Bloomberg

How will policymakers react?

They have exhausted a big part of their resources. Governments around the world have realizedthey carry too much debt and need to tighten fiscal policies. Even the U.S. will wake up to thisafter the election. Monetary policy, or so-called quantitative easing, doesn't produce economic

growth, given current systemic circumstances. But it may prevent the credit system fromimploding, if provided in massive quantities.

So what will happen next?

The euro is not the real problem but a trigger and compounder of the structural problems. Itcould only work if the euro zone entered a fiscal and political union, which won't happen, asEuropeans aren't prepared to give up national sovereignty. Politicians therefore will go from one
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compromise and quick fix to the next, with the crisis deepening until some nations at theperiphery won't be able to stand the economic pain anymore. They will want their old nationalcurrency back, and devalue to adjust the external accounts.

China won't be able to save us, as it did in 2009. The Chinese will lower interest rates but their

actions will be reactive and lag. If my thesis is right, we must assume things will go awfullywrong in the next 12 months and the system will be at risk of collapsing. Most U.S.-focusedinvestors might not understand it as they see corporations doing well.

How bad will things get?

The potential exists for a broad-based nationalization of the credit system, capital controls anddramatic restrictions on financial markets. Some might even be closed for some time.

Good heavens!

We are witnessing the biggest financial-market manipulation of all time. The authorities haveintervened more and more, and thereby created this monster. They might change the rules whenthe game goes against their own interests.

We are in a severe credit crunch. It starts when the weakest links in the system can't finance theiractivities. Then you have a flight to safety into Treasuries and German bunds, compounded by aquasi-shortage of good collateral. That's why bond yields have fallen so low. This isn't aninflationary environment but a deflationary one.

How will the U.S do in your scenario?

On a relative basis, the U.S. could do best. It has more of an affinity for freedom than socialist-minded Europe, and if the U.S. is clever, it could become energy self-sufficient by developingnatural gas and shale oil.

What is an investor to do in the face of this unpleasant news?

I am sticking with my January recommendations. In the short-term, equity and commoditymarkets are making a low. They are oversold. The euro zone will come up with new quick fixeslater this month and markets will attempt to rally. But I see a cyclical bear market continuingwell into 2013.

I would hold lots of cash, preferably in U.S. dollars. While I expected Treasury yields to hitbottom in the fall, I would take some profits and not buy new bonds. Sell the rest in the fall, anduse a stop-loss order to protect profits if you bought the 10-year when it was yielding 2.20% inJanuary, as I recommended. Stick with Australian three-year government bond futures. This is adirect bet on China's weakening, and short-term rates could fall further. I also continue torecommend buying gold if it breaks below $1500. That could lead to a quick shakeout into the$1300s, but gold will offer protection in coming years because it is true money.


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Do you see any opportunity in equities?

Only on the short side. I would continue to short the EEM, oriShares MSCI Emerging Marketsindex fund, which is a bearish play on stocks as well as currencies.

Thank you, Felix.

MERYL WITMER

How is the market treating you, Meryl?

WITMER: Pretty well before May. A lot of our stocks are cheap. The exodus from the markethas created bargains. You have to stay unemotional and analytical, and try to find companiesthat, in the long run, will generate free cash and increase in value. Usually, when stocks getcheap like this, things get better. There is also the possibility of a change in leadership in the U.S.If it looks like [Republican presidential candidate Mitt] Romney is going to win, people could

get bullish.

Will the market tank if Romney looks to be losing?

Much will depend on the congressional elections. Valuations are good and in the end shouldprovide support. Many people are short-term oriented. But when you are investing you arebuying part of a company, and a good test of the validity of the investment is whether, if themarket were to close for 10 years, you would still be happy owning that company. You can haveall kinds of emotions about the market and individual stocks, but if you buy a great business withexcellent managers who allocate capital carefully, you will make money in the long run.

How does the economy look to you?

The economy will have a tail wind from increased domestic oil and gas production. That will bea big driver of growth. Manufacturing is being repatriated to the U.S. Retailers want a shortersupply chain, and with the cost of production increasing in Asia and high unemployment here,jobs are coming back. Also, unlike in much of Europe, you can run your business efficiently andlay off people if you need to. If businesses move back here and employment picks up, it becomesa virtuous cycle. Europe has to change its labor and benefits laws. Some European governmentswere bad parents. Their policies didn't foster a work ethic, and now many people feel entitled.

Meryl Witmer's Picks

Company/Ticker Price 6/6/12

Gildan Activewear/GIL $24.59

Phillips 66/PSX 31.53

Source: Bloomberg

Which great businesses are you buying?
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Gildan Activewear[GIL] is benefiting from retailers' search for shorter supply chains. It has 122million shares and is trading for $24.50 a share. It has very little debt. They make T-shirts,sweatshirts, fleece for the wholesale market, and socks under the Gold Toe and other brands. Thecompany is vertically integrated; it buys yarn and converts it into fabric at low cost inmanufacturing plants in Honduras, the Dominican Republic, and Bangladesh, and then

manufactures garments. Its main sales channel is the wholesale screenprint market, where itsmarket share has grown organically in the past 10 years from 10% to 65%. With a recentacquisition, it will exceed 70%.Hanesbrands [HBI] just announced it is exiting the U.S.wholesale market. That is another plus for Gildan.

Cotton prices spiked last year. How did the company manage through that?

The stock fell from the high $30s as cotton dropped to about 70 cents a pound after spiking tomore than $2. Gildan's customers are small and the company decided to take the hit itself whenprices plummeted. As a result it will earn about $1.30 a share in the fiscal year endingSeptember, instead of $2.60. Next year, as the high-cost cotton moves out of their inventory,

earnings should rebound to between $2.50 and $3 a share, and grow thereafter. Gildan has beenperennially capacity constrained and recently completed a big addition that will increase capacityby 40%. If it can utilize that capacity in the next few years, earnings will be 40% higher, to $3.50to $4 a share.

How will they grow the business?

They will be able to enter the national accounts channel, selling to non-retailer consumer brandslikeNike[NKE] andDisney[DIS]. They will also increase sales of branded underwear, T-shirts,and fleece at retail, and grow sales internationally. Gildan also is moving into some performance-type shirts, which are more profitable. There could be some improvement in the branded-sock

business. It is currently about break-even, but Gildan is moving production to its low-costfacilities.

Gildan has a great management team that owns about $250 million worth of stock. In ourresearch checks we discovered that several customers personally own shares. The company'sproduction costs are 20% below competitors. A business of this quality could have a 15price/earnings multiple, as opposed to a P/E of eight to 10. Gildan has the potential to tradebetween $45 and $60 a share.

How about another name?

Phillips 66[PSX] was spun out ofConocoPhillips[COP] in April at $32 a share. It has threesegments: oil-refining, chemicals, and midstream. The two nonrefining segments are worthroughly the current stock price, which is $31. The refinery business has sub-segments that, ifrecognized, would trade at much higher P/E ratios than the four to six times earnings refiners gettoday.

The chemicals division consists of Phillips' 50% share of a joint venture withChevron [CVX]called CPChem. The JV makes ethylene and polyethylene from ethane and naphtha. It has a
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proprietary process that produces a higher-quality product at lower cost. It also licenses thistechnology to competitors. The business has an advantage in having 80% of its capacity in theU.S. because its main feedstock, ethane, is in oversupply. With increased production of naturalgas and the build-out of fractionation plants to separate ethane and other liquids, the price hasfallen dramatically. CPChem sells into the world market, where competitors are using higher-

priced naphtha. It earns a healthy spread.

What does that mean for Phillips?

Phillips' 50% of PCChem could earn $1.30 a share this year. These earnings deserve to be valuedat a 10 multiple, or $13 a share. The midstream segment owns and operates natural-gasprocessing facilities and fractionation plants, and a large and valuable natural-gas pipelinesystem. It also owns 50% of a master limited partnership. It should have free cash flow of $1.20to $1.30 a share and about a dollar in earnings once it finishes up a couple of projects. It is worth17 times free cash flow, or more than $20 a share.

So you get the refining business free?

Right. Refinery operations earned $4.17 a share in 2011 and could earn $3.75 in 2012. There arethree segments. The specialty-marketing business, which operates gas stations, earns about $500million after taxes. Then there is an extensive pipeline asset base separate from the midstreamsegment, which, if spun out into an MLP, could earn $400 million. Combined, these businessesearn about $1.40 a share and should have a trading value of $20. That leaves the basic refineryoperation, which is over-earning.

How so?

Its midcontinent refineries use West Texas Intermediate oil as a feedstock, which is trading at abig discount to Brent crude, given the lack of capacity to move WTI out of Cushing, Okla., to theGulf of Mexico. For at least a couple of years, until more pipelines are built, midcontinentrefiners will have a big cost advantage. Then that will shift to the Gulf, benefitting Phillips'refineries there. The remainder of the refining business is worth at least $10 a share, and possiblymuch more. Add up the pieces and subtract $9 a share of debt, and you get a target price of $50for Phillips.

One more thing: I liked Brian Rogers' line from the January Roundtable that "the world doesn'tend that often." People get caught up in worrying about big-picture things, but when valuationsare cheap and the world population is growing, companies with good assets and low-costproduction advantages, like Gildan and Phillips 66, will do well. Perhaps they will get cheaper,but you want to buy when you see a good price, not when you have perfect economic certainty.

Good advice. Thanks, Meryl.

BRIAN ROGERS

Is the year playing out as you expected?


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ROGERS: Pretty much. Most of the economic underpinnings suggest a continued, modestrecovery. Investors gradually have regained confidence, and the S&P 500 rose about 12% beforeits recent setback. You could argue the market was fairly extended after its big advance. I didn'tthink Greece, and Europe generally, would re-emerge as such a critical issue. I thought theGreeks would behave better. There is concern about growth in China, and Brazil's problems have

surprised me a bit.

Now everyone is talking about the fiscal cliff, but I believe sanity will prevail in Washington.The payroll-tax cuts probably get extended. I assume the Republicans retain control of the Houseand gain control of the Senate, and that President Obama is re-elected. President Clinton movedto the center in his second term, and Obama will do the same.

What do you see for Wall Street?

The market probably will have two more risk-on, risk-off trading cycles this year. It will behigher at year end than now. It could be up more than 10% this year, which would argue for a

5% gain in the second half. You can't buy the 10-year Treasury here. We won't have a thirdround of quantitative easing. Bernanke has been vocal about keeping rates low, but we don't needit. We have to take the training wheels off the bike at some point and see if we know how to ride.

Emerging markets offer great opportunities. It is best to buy them through an emerging-marketsfund. Those markets all have higher expected growth rates than ours in the next few years, andvaluations are pretty compelling, even in Brazil.

What is ailing Brazil?

The banks have had credit issues. Foreign capital has been flowing into the Brazilian economy in

a global grab for yield, which has been disruptive. Now the currency is weakening so there willbe capital outflows. Commodity prices also are under pressure.

Brian Rogers' Picks


Emerson Electric/EMR $45.94

JPMorgan Chase/JPM 33.07

Thermo Fisher Scientific/TMO 50.11

Microsoft/MSFT 29.35

Juniper Networks/JNPR 17.48Murphy Oil/MUR 46.92

Source: Bloomberg

In fixed income, I like the credit spreads on high-yield bonds because credit conditions arefavorable. Yields are about 600 basis points [six percentage points] above Treasury yields. Instocks, we like good companies with low valuations, good dividend yields, and good dividend-
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growth prospects. Earnings estimates could be under pressure in the second half, not from costpressure but revenue pressure.

Care to update your stock picks?

We like our January picks, although I am removingIngersoll-Rand[IR]. Nelson Peltz's TrianFund Management established a stake in the company recently and said it will seek ways tomaximize shareholder value. The stock popped higher.

Emerson Electric [EMR] took 2012 earnings estimates down to the $3.35 to $3.50 range. Itcontinues to buy back shares and could earn $4 a share in the fiscal year ending September 2013.They are 35% exposed to emerging markets, which has been a head wind, but the valuation isattractive.JPMorgan Chase[JPM] is my biggest disappointment.

You're not alone there.

It lost 10 times in market value what it suffered in losses from its recent trading error. The sharesare trading around tangible book value, but earnings will still be strong.

Thermo Fisher Scientific[TMO] had good first-quarter earnings and continues to buy backstock. It operates in good business niches and sells for 10.5 times earnings.Microsoft[MSFT]reported good earnings and its shares are also inexpensive. The company will raise its dividendthis year, perhaps to $1 a share from 80 cents. It yields 2.8%.Juniper Networks [JNPR] is down$3 a share since we met in January. But I hate to sell things when they are down, especially asthe fundamental case continues to build. Subtract the company's approximately $5 a share of netcash and the P/E multiple is low.

Do you have any new recommendations?

Murphy Oil[MUR] gets little attention. The company has a $9 billion market capitalization andlittle debt. It sells for less than 2.5 times Ebitda [earnings before interest, taxes, depreciation, andamortization]. Shares are at $47, down from $100 several years ago. You get 2.3 barrels of oilequivalent for each share. Murphy is a midsize global oil and natural-gas exploration andproduction company. It has a refining business but is getting out of the marketing business. It isbased in Arkansas. There is significant family influence, but not control, and the stock isinexpensive relative to many large-capitalization energy companies.

Murphy will probably earn $5.75 a share

this year. It yields 2.5%. People are worried about oil prices falling but a lot of the concern isreflected in the shares. Oil has come down as the global economy has weakened, but as soon asgrowth expectations pick up for emerging markets, the price will rebound.

Thanks for the update, Brian.

SCOTT BLACK
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11/23

What do you make of the market, Scott?

BLACK: The S&P 500 trades at 12.4 times my estimate for 2012 profits: $103, up from $96.44last year. The market is cheap by historical standards, especially with today's low interest rates.Also, corporate balance sheets have more than $2 trillion of cash. That's it for the good news.

The U.S. economy is sputtering. The consumer accounts for 70% of the U.S. GDP, andconsumers are in trouble. Personal income is up just 2.1% year over year, and personalconsumption is up 1.8%. Inflation is 2.3%, which means real income is negative. The only waypeople can defend their standard of living is by withdrawing savings, and the savings rate hasfallen to 3.4% from 4.9% last year. The unemployment rate is 8.2%, but U6, which counts thosewho have stopped looking for work or are marginally employed, is 14.8%. The industrialeconomy is holding up better. Then there is the rest of the world.

Which looks even worse?

Europe is in a recession and countries that export to Europe are slowing. Europe accounts for16.3% of China's exports, 15.5% of India's, and 9..3% of Malaysia's. Asia's slowdown is curbingdemand for energy and commodities. There is no quick fix for the problems of Greece, Spain andItaly. The German chancellor, Angela Merkel, advocates austerity, but too much of it causesmajor recessions.

The world is in terrible shape and the market won't rally much. I like Ben Bernanke. He savedthe economy from another depression. We will see QE3 because the economy is anemic, butBernanke is pushing on a string in his efforts to use monetary policy to spur growth. The U.S.needs a fiscal policy along the lines of the Simpson-Bowles plan [formulated by the NationalCommission on Fiscal Responsibility and Reform], including a combination of tax hikes and

spending cuts. But Washington is too partisan to act.

Scott Black's Picks


Qualcomm/QCOM $58.41

Triangle Capital/TCAP 20.91

Source: Bloomberg

Cheer us up with some good stocks.

Qualcomm[QCOM], if you back out cash of $14.65 a share, is trading at 10.8 times earnings, itslowest P/E in years. The shares are $55.12, and the market cap is $97 billion. The stock yields1.8%. For the year ending in September, they will have $19.3 billion of revenue and $3.28 inearnings per share, net of stock-based compensation. We modeled 13% revenue growth for fiscal2013 and after-tax earnings of $7.26 billion, or $3.75 a share. Delphi could never own this kindof stock in the past.
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12/23

Qualcomm, which makes chip sets for cellular telephones, is a money machine. It will generate$7.8 billion of free cash flow in fiscal 2013. Its technology-licensing business contributes 34% ofrevenue and has 89% margins. Return on equity will be 20.5% next year. Working-capitalmanagement is terrific. It takes only 7.5 cents in working capital to support an incremental dollarof revenue.

Do you see much growth in wireless?

The market will grow 5.7% compounded annually from 2011 to 2015, to 7.6 billion users. The3G and 4G market, which Qualcomm dominates, will grow 15% annually over five years, to 3.4billion. Qualcomm isn't a good company; it is a great company.

People are desperate for yield.Triangle Capital[TCAP] is a business-development company thatspecializes in mezzanine financing. It trades for $20and has a $545 million market cap. It pays a$2 dividend and yields 10%. It distributes 98% of earnings to shareholders. It sells for only 1.3times book value.

What exactly does it do?

It provides subordinated debt to smaller companies that typically can't borrow more from banks.Triangle is based in Raleigh, N.C. It currently has $580 million of loans spread across 67companies in 28 industries. Its sweet spot is loans of $10 million to $13 million, and its loanbook is regionally diversified. This year interest income will total $86.4 million. Interest expensewill be $14.4 million, and net investment income, $56.7 million. The company could earn $2.12a share this year.

Is Triangle's lending history good?

The company took $619,000 of loan losses in 2007 and wrote off $5.48 million of loans in 2010.The dividend has been growing at a 10.4% compounded annual rate in the past few years andthey never borrowed to pay it. In a bad recession, however, they would be vulnerable on thelending side.

That makes sense. Thanks.

BILL GROSS

Everyone loves Treasuries. How much longer will the romance last?

GROSS: Treasuries are overvalued and getting more so as the global economy delevers. This isa long-term process and has been reflected in the stock market for several years. Not justindividuals, but banks and insurance companies and other institutions that hold trillions of dollarsof risk assets are trying to "de-risk." The market believes U.S. Treasuries and German bunds arewhat we call the cleanest dirty shirts. They represent stable return of principal.

Though little return on principal.
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13/23

German two-year notes yield zero percent. You're getting negative returns. Ten-year Treasuryyields are 1.6% and will go as low as inflation expectations take them. Delevering promotesslower growth. If investors believe inflation is dead, yields on five- and 10-year Treasuries cango lower.

I would dispute such expectations. Helicopter Ben [the Fed chairman earned this nickname aftersuggesting the government could quash deflation by printing money and dropping it fromhelicopters] has promised to produce 2% inflation or more. To me, that means yields are close toa low. Investors might do better in TIPS [Treasury inflation- protected securities].

Will the Fed launch another round of quantitative easing?

Another QE or two is just around the corner. Either the European Central Bank, or the Fed, orboth will try to pull one more rabbit out of the hat. Are these maneuvers successful? Onlypartially. The more numbers you add to "QE," the weaker the thrust. But their historicalplaybook says lower interest rates are the way to restimulate economies, and if that doesn't work,

you buy Treasuries and push rates even lower.

Is this the right step?

It is necessary medicine. You can't cure a debt crisis with more debt, but you can buy time andkick the can down the road. The only way to cure a debt crisis is to grow out of it, which wedon't seem to be doing, or haircut investors [force investors to incur losses] through defaults ornegative real interest rates, which is happening. Policymakers are doing the best they can. This isa long-term workout, and double-digit returns are a thing of the past. The entire developed worldis overindebted.

Bill Gross' Picks


Siemens/SI $82.28

Sanofi/SNY 34.39

Bond Yield 6/6/12

Mexican Bonos 7.75%, due 11/13/42 7.25%

Source: Bloomberg

How long will it be before the economy can stand on its own?

A decade. We are in quicksand and the Fed is on dry land extending a hand. We have backedourselves into this for the past 30 years by making ridiculous bets on dot-coms and subprimemortgages and the like. We should have stopped, and the Fed should have stopped us by keepinginterest rates higher over the past 10 years. Now we will be on life support for at least a decade.It doesn't matter which party is in power. Romney might advocate tax cuts to rejuvenate theprivate sector and Obama wants to soak the rich. But neither will cure our debt crisis.
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14/23

How will the economy perform in the near term?

The U.S. can trundle along with 1% to 2% growth, absent a catastrophe in euro land and adramatic slowdown in China. It is hard to envision the economy growing much faster than 2%,and that isn't good for corporate profits or employment. Banks are holding back from lending,

the private market isn't willing to invest, and the public is shifting money from stocks to bonds.The only investor is the government. This country hasn't invested in its own growth for the pastfive years.

Where do you recommend investing?

We recommend clean-dirty-shirt countries such as the U.S., Canada, Brazil, and Mexico.

Mexico's debt-to-GDP ratio is half that of the U.S., and its long-term government bonds yield7.5%, as opposed to our 2.55%. We like the Nov. 13, 2042, issue of Mexican bonos, yielding7.3%.

Among stocks, we like companies with safe, predictable cash flows that can diversify salesglobally and thus cushion profits, and that yield about 3%.Siemens[SI] is a great way to preparefor a euro-land rebound. It is Germany's GE. It yields close to 5%.Sanofi[SNY], a globalpharmaceutical company based in France, trades for eight times earnings and yields 5%.

Thank you, Bill.

MARIO GABELLI

What does the second half of 2012 look like?

GABELLI: If President Obama wanted to get reelected, his priority should have been creatingjobs and offering clarity about the economy. These are "works in progress." The independentvoter is uncertain about the direction of this country. If it looks like Obama will be re-elected andthe Democrats will win the House and Senate, stocks could have a sharp selloff.

There are other speed bumps: a leadership change in China, the problems in Europe, the end ofOperation Twist [the Federal Reserve's move last fall to depress long-term bond yields by sellingshort-term Treasuries and buying long-dated bonds]. There are questions about oil prices,consumer spending, and second-quarter earnings. About 20% of S&P 500 earnings are tied toEurope. With the euro at $1.24 today, down from $1.43 a year ago, those earnings will be 14%

lower. In January there's the fiscal cliff

automatic tax hikes and budget cuts. The good news isU.S. 10-year Treasury rates are very low.

Mario Gabelli's Picks


Gaylord Entertainment/GET $39.72
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15/23

Kellogg/K 48.37

Smart Balance/SMBL 7.40

Pep BoysManny, Moe & Jack/PBY 8.76

National Fuel Gas/NFG 44.47

Source: Bloomberg

Where will stocks end the year?

To echo my comments from January, the market will be up 5% to down 5% for the year, with alot of volatility. Companies with ample cash flow, dividends, good business models, and lowdebt will find ways to surface shareholder value. I thought we would see more financialtransactions, but uncertainty also extends to the boardroom. The underlying concern remains thesame as in the pastthe U.S. is deleveraging and must grow and remain competitive while doingso.

On a more positive note, the automotive market is doing well. Housing is stabilizing and startingto improve in some areas. Some state and local governments are doing better. Some willcontinue to struggle.

Where are the values in this market?

We look for companies with great cash flow that could be subject to a new dynamic.GaylordEntertainment[GET] is a hotel and convention-center operator. Cash flow is improving in theirNashville, Florida, and Texas operations, and the Gaylord National, in the Washington, D.C.,area, is stabilizing. Robert Rowling, the Texas billionaire, owns 22% of Gaylord through TRTHoldings and would like to buy more. Gaylord has a poison pill [anti-takeover strategy] that

expires in August.

The company has decided to pursue one of the potential strategies I laid out when Irecommended it in January. Unless acquired by another company, Gaylord is on track to convertto a real-estate investment trust, or REIT. The stock is up 50%, to $39, since the JanuaryRoundtable, and it has 10% additional upside between now and year end.

Kellogg [K] is a new name for us. The stock is $48 and there are 358 million shares.Management is buying Pringles fromProcter & Gamble[PG]. Pringles has great distributionaround the world. Kellogg is paying $2.7 billion, and will pick up about $1.5 billion of revenuein 2013 and $275 million of Ebitda. The stock is selling for 13 times next year's estimated

earnings of $3.75 a share, which can grow by 8% or 9% in the future. The company is a greatcash generator. In the short run the cereal business could suffer as consumers trade down to storebrands, but Kellogg will do well in the next few years.

How about another name?

Smart Balance[SMBL] trades for $7.40, and there are 60 million shares. The company has about$100 million of debt. It markets low-fat milk and healthy margarine spreads. I am recommending
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16/23

it because they bought a Canadian company called Glutino, which makes gluten-free products,and Udi Healthy Foods, another gluten-free brand. There is a rising awareness of the benefits ofgluten-free diets. Euromonitor, a market-research firm, said gluten-free foods were a $2.5 billioncategory in 2010, and are likely to grow to $3.5 billion by 2015.

This could be a game-changer for Smart Balance. The company will generate $330 million ofrevenue this year and $370 million in 2013, with earnings going from 25 cents to 35 cents.Revenue growth will accelerate in the next couple of years. Smart Balance is positioning itself tobe part of a larger company. We are about two years away from a transaction.

We have done well in the past with auto-parts companies.Pep BoysManny, Moe & Jack[PBY]collapsed recently. The stock is $8.50, down 50% in the past month.

What happened?

It is a busted leveraged buyout. Business isn't good. Pep Boys has more than 700 stores. It sells

tires at a time when the consumer is pinched and does auto-repair work that is somewhatdeferrable. This has created an air pocket in results. The company has $150 million of net debt,including a $50 million breakup fee. Its 2011 first-quarter 10Q gave some insight into the valueof its real-estate holdings, which are worth about $700 million. The company has more than$100 million of tax-loss carryforwards. When the arbitrageurs dumped the stock, I startedbuying.

What is the attrraction?

There are 250 million cars on the road in the U.S. They are aging and will need repair work,which can be deferred only up to a point. Pep Boys just reported an awful quarter. But it could

earn 70 cents a share next year and $1 a share in 2014.

National Fuel Gas [NFG] is a Buffalo, N.Y.-area utility which I recommended in the past.Natural gas has dropped to $2.40 per thousand cubic feet from $4.40 per Mcf. National Fuel Gasbought significant acreage in what is known as the Marcellus shale area. The utility has about750,000 customers and generates good cash flow. It is worth about $17 a share. They have amidstream business -- pipelines -- that is worth about $20. The balance of the company is theMarcellus acreage. Assuming gas prices rise to $4 to $4.50 per Mcf two or three years from now,the stock could be worth close to $80, up from $44. The company pays a dividend of $1.46 ashare and yields 3.3%.

Thank you, Mario.

MARC FABER

Are things really as bad as they look?

FABER: The global economy has slowed considerably. Europe is in recession, and growth inU.S. GDP might owe more to statistical aberrations than reality. In Asia, the Chinese economy
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17/23

has been decelerating sharply, which impacts China's trading partners and industrial commodityprices. Lower demand for commodities hurts commodity producers, whether in Argentina,Brazil, Africa, or Russia.

Will things get worse before they get better?

Yes, possibly much worse. Central bankers will argue that more stimulus is needed. But thecrisis has occurred in large part because governments have grown excessively large. The privatesector produces growth. When government is 40%, 50%, 60% of the economy, the economywon't perform well. If you cut government spending meaningfully, you produce more growth,although this can be painful in the near term. Canada took this course in the mid-1990s. Theoutlook is grim for the federal deficit in the United States. Regardless of who wins the election,there will be compromises. But spending cuts will be back-end loaded and tax increases will bepostponed. We won't see a federal deficit below a trillion dollars for a long time.

What will the stock market do for the rest of this year?

Most markets peaked in May 2011. The S&P 500 fell to 1,074 by Oct. 4 from 1,370. Then wehad a strong rebound with the index making a new high at 1,422. This high wasn't confirmed byother indexes, such as the Value Line Index, the Russell 2000, and the Dow Jones Transportationindex. The S&P 500 is vulnerable at this level. I anticipate further weakness in the second half ofthe year. Corporate profits will disappoint. Some 40% of S&P 500 earnings come from overseas,and a large proportion are generated in Europe.

There is no resolution to the problem in Europe because no one wants to accept austerity. Thebest outcome for Greece probably would be to exit the euro zone. But the new Greek drachmawould depreciate by 50% to 70% against the euro. The Greeks don't want their pensions paid in a

depreciating currency. Nor do they want austerity, as their pensions and government salarieswould be cut by 50%.

Marc Faber's Picks

Investment/Ticker Price 6/6/12

Gold (spot, per ounce) $1,619.30

Goldcorp/GG 40.24

Singapore REITS*

Mapletree Comm Trust/MCT S$0.92

Frasers Centrepoint Trust/ FCT 1.63K-REIT Asia/KREIT 0.98

Mapletree Logistics Trust/MLT 0.98

Ascott Residence Trust/ART 1.06

Cache Logistics Trust/CACHE 1.03

Parkway Life/PREIT 1.81

*All shares trade in Singapore Source: Bloomberg
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18/23

How will the stalemate end?

The breaking point could be three, four, five years away. The world is heading toward a majorcrisis. In the meantime, central banks can continue to print money and markets might move up.Since 2009 stocks around the world have more or less doubled. But the economy hasn't

performed well, and the typical household hasn't been helped. With quantitative easing, moneyflows into the hands of relatively few people. I am very negative about the outlook longer term.

It is safest to buy U.S. Treasuries because the U.S. can print money. It will pay the interest. Butyou are earning only 1.6%, and the cost of living is increasing by about 5% a year around theworld. You are getting a negative real return.

So you're recommending equities, despite the poor backdrop?

I still like my January investment picks. As a group, Singapore REITS look OK. Among them Ilike Mapletree Commercial Trust [MCT.Singapore], Frasers Centrepoint Trust [FCT.Singapore],

K-REIT Asia [KREIT.Singapore], Mapletree Logistics Trust [MLT.Singapore], AscottResidence Trust [ART.Singapore], Cache Logistics Trust [CACHE.Singapore] and Parkway Life[PREIT.Singapore].

I am also warming to gold shares. Gold corrected to $1,522 last December from $1,921 inSeptember. It rebounded to $1,795 in February and is back down around $1,600. The correctioncould last longer, but given that governments will print more money, gold is relatively effectiveas a currency. My preference is physical gold, but I would also own some gold shares, whichhave been decimated.Goldcorp[GG] is attractive because most of its properties are in the U.S.,Canada, and Mexico. The company isn't exposed to regimes that are talking about nationalizingresources. In general, stock markets are oversold. The U.S. government-bond market is

overbought. The U.S. dollar is overbought, and gold is oversold near term.

Thanks, Marc.

OSCAR SCHAFER

Oscar, when will this economy get its act together?

SCHAFER: I used the phrase "bumble along" in January because deleveraging in the developedworld will continue to cause slow growth. I don't know if we'll have another recession, but withthe fiscal cliff coming, that is what the market is worried about. With the federal deficit so large

and interest rates so low, the private sector must provide the stimulus to the economy. Yetcompanies and consumers have little confidence, especially given what is happening inWashington.

If politicians focus on curbing the deficit, the U.S. could become the best place to invest, andstocks, which are now cheap compared to most other asset classes, could surprise to the upside.There is a chance that we could begin an extended bull market.
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19/23

Are you kidding?

When I mention this, most people are surprised. That makes me think I'm more right than wrong.Recent stories have highlighted a resurgence in manufacturing in the U.S. in industries such assteel and televisions. With industries moving back here and energy independence just around the

corner, the U.S. could once again shine. Better growth will lead to higher tax revenue, which willlead to deficit reduction and a better atmosphere. Then the U.S. will be the best place to investnot only relatively, but absolutely. I'm basically a conservative fellow who thinks the glass ishalf-empty. But things are starting to look half-full.

How does that affect your investment decisions?

In the current slow-growth world, I look for companies that can shrink their share count, whichincreases earnings per share.Xerox[XRX] is an example. The market considers Xerox an old-line tech company with secular challenges. But evaluating it as one doesHewlett-Packard[HPQ]orDell[DELL] completely misses what has happened in the past few years. A better analogy is

IBM[IBM]. Today Xerox is in the process of a transformation that will make it look verydifferent from the old copier company.

Oscar Schafer's Picks


Xerox/XRX $7.44

Covanta Holding/CVA 15.96

Source: Bloomberg

Under the stewardship of Ursula Burns, a tough, no-nonsense CEO, services have come torepresent more than 50% of revenue. The company specializes in business-process andinformation-technology outsourcing, and handles such diverse things as managing toll-roadpayments, Medicaid payments, and alimony disbursements. These are long-term contracts andsolidly profitable.

You recommended Xerox in the past, but the stock has yet to recover from a selloff in 2008.

Why will it perform better now?

The transformation is right on schedule. Declining stock prices beget declining stock prices.People don't understand this situation yet. Xerox successfully has integrated ACS, the services

provider it acquired in 2010, and has begun to see accelerated growth. This half of Xerox grew9% year over year in the latest quarter. The traditional print business faces challenges as peopleprint less, but some of the decline is offset by an increase in color printing.

Xerox can grow its revenue by 2% to 3% a year, which isn't a lot. But the stock trades for onlyseven times earnings, and the free-cash-flow yield is 17%. Xerox is using about 75% of its freecash to buy back shares and pay dividends. Free cash flow will approach $2 a share by 2014.Apply its current multiple and the shares could double. Downside is minimal. Major transitions
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20/23

are never easy, and there was a lot of skepticism around IBM's transition away from hardware.But the early signs at Xerox are encouraging.

What else appeals to you these days?

Covanta Holding[CVA] has been ignored and misunderstood. It falls between of the cracks of awaste company and an energy company. As a result, it doesn't get much attention from WallStreet. We have known the management team for years. Covanta is a leader in generating energyfrom waste. The company has a $2.1 billion market cap and owns and operates 41 waste-to-energy facilities in North America, four in China, and one in Europe. It processes more than 20million tons of waste annually in North America. It recycles 430,000 tons of metal and generates10 million megawatts of electricity each year.

The company has long-term contracts to dispose trash and is paid by the ton. This accounts formore than 60% of revenue. Covanta sells the energy that is generated and the metals that arerecovered from the trash-disposal process. I won't describe it as an exciting growth company, but

like Xerox, it is a reliable free-cash generator.

How fast is it growing?

We expect the company to grow by 4% to 5% annually and generate $250 million to $300million of free cash flow per year. This equates to more than $2 a share of free cash for a stockthat is trading below $16. You're getting a 13% to 14% free-cash-flow yield on a stable business.Compare that to where bond yields are. Given its stable cash flow and the long-term nature of itsassets, Covanta could catch the attention of private-equity investors focused on infrastructure.

The board and management recognize the value in their own shares. In less than two years the

company has returned $600 million to shareholders in buybacks, dividends and specialdividends. The current yield is almost 4% and management is committed to buying back sharesand growing the dividend. In the meantime, you get an option on some large developmentprojects in Europe -- one in Ireland and one in the U.K. If the company proceeds with theseprojects, Ebitda will grow significantly when the plants come online. If they don't move forward,we suspect they will accelerate share buybacks and increase the dividend.

What is restraining growth?

Covanta sells some of its energy on the open market, and when natural gas prices are so low,energy prices are depressed. As older contracts roll over at lower rates, this becomes a head

wind. Investors also worry about how state and municipal budgets will impact long-termcontracts. If anything, there is greater demand for Covanta's services as new regulations makelandfill disposal increasingly challenging.

Thank you, Oscar.
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21/23

FRED HICKEY

You were worried about the world in January. Are things worse now?

Hickey: In every instance, from Europe to China to India to Brazil, things have gotten worse.

Even the U.S. is preparing to succumb. The policies prescribed to boost the economy aren'tgoing to be successful. Piling up trillion-dollar deficits for four consecutive years and imposingsignificant tax hikes at year end don't encourage confidence, and when that is lacking, businessesdon't invest. If the Republicans win the White House and both branches of Congress in theNovember elections, tax increases slated for next year will be reversed. But that is a big if. Weare also going to hit the federal debt ceiling again. There will be a lot of turmoil in the next fewmonths.

The Fed's policymakers meet June 19. Is another round of quantitative easing coming?

It is highly likely, in June or later in the summer. Greece will hold elections June 17. Turmoil

there could force the Fed's hand. Also, the U.S. has had three poor employment reports in a row,which will give the Fed cover to do what it wants. When they print money again, there will be asharp rally in the market. The risk is it won't last. You want to invest aggressively as soon as youknow QE3 will happen. After the rally has gone on for a while, you want to sell. Governmentsare manipulating economies by suppressing interest rates. They are spending way beyond theirresources. You aren't investing here for economic reasons, but based on what the governmentwill do next.

The U.S. government is trying to delude people into thinking we can get out of our financialmess in a painless way. Bernanke studied the Depression but learned the wrong lesson and isapplying the wrong cure. Eventually we will have to bring our budget into balance, address long-

term entitlement spending, and endure a period of austerity.

Fred Hickey's Picks


Agnico-Eagle Mines/AEM $40.93

Hecla Mining/HL 4.66

Canadian Dollar $1=C$1.03

Source: Bloomberg

These views suggest you still like gold.

Central banks are printing money around the world. Excess money and negative real interestrates create a perfect environment for gold. The price of gold has fallen by more than $300 anounce from September's high of $1,921. The excess enthusiasm has been taken out. It is hard tobelieve you can have so many disbelievers in the 12th year of a bull market, but that is the case. Icut my position nearly in half. But all this will change when the market gets a hint of QE3. Byyear end, we could see $2,000 gold.
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22/23

Are you buying bullion or mining shares?

I sold and repurchased some bullion. Mostly, I am buying mining stocks because of their severeunderperformance relative to the price of gold. I likeAgnico-Eagle Mines[AEM], a gold stock,andHecla Mining[HL], a silver stock. Both were hammered by gold's decline and a mine

shutdown.

Agnico-Eagle hit a high of $88 a share in December 2010. Now it is $40. The company has sixmines, and one of its best, Goldex, in Quebec, was shut late last year after some rockmovements. Agnico wrote off the full value of the mine, but it is likely to be worth something.I'm not a market technician, but the stock chart looks excellent. A bottom is forming. That isbecause they will realize some value from the mine. The company earned 59 cents a share in theMarch quarter. They generated tons of cash. They increased the dividend and paid back about10% of their debt, which is now about $840 million.

What is the dividend yield?

The stock yields 2.1%, and is cheap. The company will have one more weak quarter. Once goldgoes up, and Goldex returns to production, earnings will rise. Analysts look for Agnico to earnabout $2 a share this year and $2.32 in 2013, but those estimates look low and don't account forany contribution from Goldex. The company could earn as much as $3 a share.

What is your target price for the stock?

It could go to $70, or higher if gold prices go to record highs.

Hecla is the largest silver producer in the U.S., and has been operating for more than 120 years.

Shares spiked to $11.33 as silver was climbing to near-$50 an ounce. Now they are trading for$4.25. The company has only two producing mines, in Alaska and Idaho. After 8.5 million manhours of operation without problems, the Idaho mine had two fatalities last year, and federalregulators shut it down. Hecla could resume production by early 2013. As investors startanticipating the reopening, the stock price could pick up later this year. Higher silver prices andthe resumption of production will propel earnings. Silver is trading at $28 an ounce, and couldtop $50.

Any other recommendations?

Hold cash, but don't put it in the U.S. dollar. I would buy Canadian dollars. Canada has a stable

government and isn't printing money. Debt as a percentage of gross domestic product is far lowerthan in the U.S. They are cutting tax rates, and their corporate rate is 15%, versus 35% in theU.S.

You have been expecting technology stocks to bottom. Any sign of that yet?

Tech has been in a bear market since 2000. Big tech companies are heavily exposed to theinternational slowdown, and recent earnings reports from Hewlett-Packard and Dell were
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23/23

gruesome. The CEO ofNetApp[NTAP], a storage company, said the data-storage business ischallenged even though storage accounts for the biggest part of IT [information technology]budgets. I said in January that the bottom might come in October. We are heading in thatdirection.

I am bullish longer term on Dell, although I don't own it now. The company is in transition and isincreasing its exposure to networking and storage and some newer growth areas. It is stillgenerating good cash flow and income. I would even consider buying Hewlett for some of thesame reasons. Microsoft still is the best short-term play in tech and will benefit from a newproduct cycle as Windows 8 comes out across different platforms. It pays an 80-cent dividendand has a cheap stock. If I see the Fed printing more money, I will buy more Microsoftimmediately.

Why are you so bearish on cloud-computing stocks?

They are highly priced and could fall sharply.Salesforce.com[CRM] trades for about 70 times

earnings and doesn't earn much if you consider stock-based compensation. I don't trust thebusiness models of social-networking companies likeGroupon[GRPN] andZynga [ZNGA]. It isdangerous when a virtual hammer sells for more than a real one. I likeFacebook[FB] but thereis a lot of good news in the price.
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Barrons-RT June 2012