Market Monitor-Michael O'Higgins, President of O'Higgins Asset Management -- NBR Interview

PAUL KANGAS: My guest "Market Monitor" this week is Michael O'Higgins, president of O'Higgins Asset management based in Miami Beach, Florida. And welcome to NIGHTLY BUSINESS REPORT, Michael.

KANGAS: For over three years now you have been one of the most unwavering bears on Wall Street. But in light of stock market's sharp recent decline along with its better action, especially this week, are you seeing a little light at the end of tunnel, are you turning more positive?

O'HIGGINS: Because the two basic conditions that I'm looking for, namely good value and high degree of pessimism, are seriously missing right now.

O'HIGGINS: Still too high. Dividends are too low. Price to earnings ratios are too high. Price to book ratios are too high.

KANGAS: And where would you like to see them get? how much higher before you feel they would be bargains?

O'HIGGINS: Well, bargains you are talking over 6 percent. Typically at market tops we're above 3 percent dividends. So we'd have to go down 20, 30 percent to get to where we've normally been at a top of the market.

O'HIGGINS: Well, it's - probably. We don't deal in certitudes. I'm just a percentage player.

KANGAS: Now you were the originator of the "dogs of the Dow" theory, one year buy the ones that were the worst performers and they'll probably be among the best the next year. Are you following that theory now?

O'HIGGINS: No, because - and I actually backed away from it in the late '90s because I realized that these stocks were not likely to do well in a serious crash-type of scenario similar to '29-'32. From '29-'32 the dogs of the Dow did very poorly.

KANGAS: Well, you haven't been afraid to use the term depression in some of your writings. You really feel that is what we're headed for?

O'HIGGINS: Depressions are a normal occurrence. It's just been so long since we have had one that everybody who remembers is dead. But they are a natural phenomena that occur after several generations of uninterrupted prosperity.

KANGAS: And you think that the bursting of this massive bubble of the '90s is going to cause us to go through how many years of depression or recession, whatever?

O'HIGGINS: Usually, just to put it in terms of the stock market, if you bought stocks in '29, it was 1954 before the Dow made a new high, 25 years later.

KANGAS: All right. So we don't have good years ahead of us as you see things. How do you manage your money? What are you doing with it?

O'HIGGINS: Well, and keep in mind this is how my personal money - all of my personal assets are in my own funds that I manage. We are in separate accounts: 20 percent short the market through the Rydex Anti-Market Funds; 20 percent gold stocks; and 60 percent cash; and my hedge fund is 5 percent short the market and in gold.

O'HIGGINS: I like Newmont (NEM), Gold Corp. (USGL.OB), Anglogold (AU), Gold Fields Limited , those are a couple.

KANGAS: Now tell us more about this extended recession or depression we're going to have. How far down can the Dow go do you think?

O'HIGGINS: Well, in the past in depressions, stocks go down 90 percent. In fact, most everything except gold goes down 90 percent. That's about average.

KANGAS: And there's no other way to use an investment vehicle to get through this thing with even a little profit? Just gold?

O'HIGGINS: Well, I mean, on the New York Stock Exchange from 1929 to 1932, there was only one stock which rose in price and that was Homestake Mining (ph), a gold stock.

KANGAS: It's kind of ironic that on the best week the Dow has had since October of 1982, here we have one of the most unwavering bears. But this is the way you see. And you say, batten down the hatches, buy some gold, keep a lot of cash until we get through this thing.

O'HIGGINS: Absolutely. That's where I've got my money. And I suggest other people do the same.

O'HIGGINS: What people have to realize is that cash is not such a bad thing. You have to survive. Survival is the number one goal. From '29 to' 32 if you just kept your original money, you essentially made 10 times in your purchasing power.

KANGAS: And you think the same thing or something similar is going to happen over the next several years?

KANGAS: OK. Bearish as he is, but he calls them as he sees them. Thanks, Michael.

KANGAS: My guest "Market Monitor" Michael O'Higgins, president of O'Higgins Asset Management.

From the National Post, March 15, 2003:

The long and the short of it

Michael O'Higgins still betting on gold and against stocks

William Hanley

Financial Post

BAL HARBOUR, Fla. - Michael O'Higgins chuckles. "I hope I'm not ruining your lunch," he says after outlining why he still thinks the stock market has much further to fall as a depression threatens in the wake of the biggest speculative boom in history.

We're sitting on the shady side patio at Cafe Carpaccio in the posh enclave of Bal Harbour just north of Miami on a hot Florida day, a fountain burbling coolly nearby. You could call it the Third Annual O'Higgins Carpaccio Lunch Money, the venue and timing being identical for three consecutive years. And the message from the man himself has not changed much, either, from the winter of 2002: Short stocks; buy gold.

"There's never been an instance of a central bank or government being able to reverse a post-bubble deflation." O'Higgins smiles. "Maybe this is the first. But it doesn't look like it is the way things are going."

That means that things have been going just fine for him and the clients of O'Higgins Asset Management Inc., headquartered just down the road in Miami Beach. While the recent decline in the gold price and, before that, in gold stocks has hurt short-term performance, holders of O'Higgins funds enjoyed returns of 35% in 2002, 127% in the three years to the end of 2002 and 369% in the five years to the end of 2002 versus a five-year loss of 5.5% for the Dow Jones industrial average.

And there's more where that came from, O'Higgins says, with financial distress and a looming depression never looking so good if you're making the right bets on the markets.

What, we're wondering, goes well with a lunchtime filled with happy talk of depression, of uplifting ideas about how to prosper in down days. We reckon it has to be something substantial, so we order the swordfish pizzaiola, a meaty grilled fish steak with a pizza-like sauce that actually works.

It comes with mashed potatoes and vegetables. Our guest sticks to the annual luncheon script, ordering a Riviera salad with shrimp, just as he did on a hot day last year.

What has worked in the markets -- and what O'Higgins reckons will keep working -- is the belief that things will get worse before they'll get better, that demographics are squaring off against stocks. He outlines why the millions of Baby Boomers on the verge of retirement, who have learned the hard way that they can't risk relying on stocks to fund their retirements, are going to have to save more, which is bad news for an economy fuelled by consumer spending.

"At 20% a year, your money doubles in three-and-half years. At 4%, you double your money every 18 years. It means you've got to save a lot more money."

Such acute reasoning has put a lot more money into O'Higgins Asset Management, which has doubled the money it manages to more than US$200-million in the past year. (Clients need to bring at least US$1-million to invest.)

Mike O'Higgins was a top performer long before he created a stir in the early 1990s with his book Beating the Dow, which outlined the Dogs of the Dow strategy. Essentially, "Dogs" entails building a five-stock portfolio using the highest dividend-yielding and lowest-priced among the 30 issues in the Dow average. But there are many variations.

He moved to Miami Beach seven years ago from Albany, N.Y., where he began his investment management career in the early 1970s and earned a reputation on Wall Street as a canny money manager. He moved on from the original "Dogs" strategy in the mid- to late-1990s by championing bonds, a strategy he outlined in the book Beating the Dow with Bonds: A High-Return, Low-Risk Strategy for Outperforming the Pros Even When Stocks Go South, published four years ago.

His concentration on zero-coupon treasury bonds also proved a winner, beating the Dow even during the bull market in stocks. But he thought it was time to move on -- this time to gold -- in late 2001. "I got out almost perfectly. I took the money and ran. Gold going up was a negative idea for bonds. Sentiment is still overly bullish on bonds and interest rates."

What is interesting to him is the fact that there have been only two instances in which easing by the Federal Reserve did not work to turn the economy and the market around: The early 1930s and now. "The only thing that's up in both cases is gold," he says, noting that Homestake Mining rose strong from 1929 to 1932 even as the average blue-stock was falling 90%.

O'Higgins is still looking for the Dow - now near 8000 - and gold - around US$350 - to meet at some point, whether it's 6000, 3000 or even lower. Even at the long-term average Dow-gold ratio of 11:1, gold could go considerably higher. He's looking for US$400 an ounce by year's end or sooner, and war in Iraq could play a major role.

"My guess is the result of the war will be the opposite of the Gulf War. When the bombs started dropping, the market went up 20% in a month after falling in the lead-up. War was overly discounted. This time, I wouldn't be surprised if we go up in anticipation of the war and go down in the aftermath. Prices were a lot lower then and it was a single incident. This is totally different. It's being set up as a crusade and it's going to be very expensive and long-lasting."

So far, the widespread ownership of real estate and the ability to refinance homes has helped offset much of the damage from the three-year bear market in stocks. "It's had the effect of delaying the actual crunch," O'Higgins says. "But how many times can you refinance your house and take the money out and spend it?"

Though he and his clients have profited from his dark view of unfolding events, he's not particularly happy with the way the world is going. "It's sad and it's going to get sadder," he declares as the surprisingly modest bill arrives.

Looking around Carpaccio at the beautiful people on this beautiful day, we find it's difficult to contemplate a completely unsunny scenario. But we do note that this year, there are no jostling lineups at Carpaccio, that traffic is extremely light in the Shoppes at Bal Harbour. As we say goodbye, Lunch Money makes a mental note to check out the action next year when we meet Mike O'Higgins again.

whanley@nationalpost.com

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.