Barron's Roundtable 2010 Part 3

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Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com See a sample reprint in PDF format Order a reprint of this article now MONDAY, FEBRUARY 1, 2010 YES, IT'S A YEAR -- and maybe a decade -- for belts and suspenders. It began with a bang, as the bull whizzed past Go without even pausing to pick up his $200. Then stocks suddenly stumbled and tumbled, as Wall Street woke up to the economic messes both here and abroad. The members of the Barron's Roundtable warned it wouldn't be smooth sailing for the market -- or investors -- when these Street seers met Jan. 11 with the editors of your favorite newsweekly. No surprise, their concerns about the economy and the markets, aired in the past two issues of Barron's, underly their investment recommendations for 2010, in particular those of this week's stars: Bill Gross, Meryl Witmer, Fred Hickey and Archie MacAllaster. Bill, head honcho at Pimco, the bond powerhouse in Newport Beach, Calif., begins the proceedings with a description of what his firm calls "the new normal" -- slower growth in the years ahead than the abnormal growth of the mid-2000s. Accordingly, he emphasizes "stable, conservative income generation" -- and several bonds and exchange-traded funds that offer appropriately juicy yields. Meryl, a general partner of Eagle Capital Partners in New York, canvasses the earth for intriguing investments, and that includes what's inside it -- namely, salt. This year she shares her upbeat and well-researched views not only of a leading salt producer, but a German biotech outfit and several undervalued insurers. Fred Hickey is the New Hampshire-based editor of the High-Tech Strategist. Just don't mistake it for bedtime reading, or you'll never fall asleep. Fred says he's sworn off short-selling in a world in which central bankers print money, though that is a decision he may yet regret. Instead, he's buying gold stocks big and small, for the coming "crazy" stage of the gold rally, and a handful of technology companies whose true value inexplicably remains hidden. Few folks know their way around financial stocks as well as Archie MacAllaster, head of New York's MacAllaster Pitfield Mackay. The Roundtable ends, in print and person, with his astute analysis of several beaten-up banks BARRON'S ROUNDTABLE The New Normal By LAUREN R. RUBLIN In the final installment of this year's in-depth conversation with Wall Street luminaries, Bill Gross, Meryl Witmer, Archie MacAllaster and Fred Hickey discuss their investment recommendations. Gold, anyone? Barron's Roundtable, Part 3: Investment Picks for 2010 - Barrons.com http://online.barrons.com/article/SB126481834407037651.html#printMode 1 of 14 1/30/2010 4:01 PM

Transcript of Barron's Roundtable 2010 Part 3

Page 1: Barron's Roundtable 2010 Part 3

Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order

presentation-ready copies for distribution to your colleagues, clients or customers, use the

Order Reprints tool on any article or visit www.djreprints.com

See a sample reprint in PDF format

Order a reprint of this article now

MONDAY, FEBRUARY 1, 2010

YES, IT'S A YEAR -- and maybe a decade -- for belts and suspenders. It began with a bang, as the bull

whizzed past Go without even pausing to pick up his $200. Then stocks suddenly stumbled and tumbled, as

Wall Street woke up to the economic messes both here and abroad.

The members of the Barron's Roundtable warned it wouldn't be smooth sailing for the market -- or investors --

when these Street seers met Jan. 11 with the editors of your favorite newsweekly. No surprise, their concerns

about the economy and the markets, aired in the past two issues of Barron's, underly their investment

recommendations for 2010, in particular those of this week's stars: Bill Gross, Meryl Witmer, Fred Hickey and

Archie MacAllaster.

Bill, head honcho at Pimco, the bond powerhouse in Newport Beach, Calif., begins the proceedings with a

description of what his firm calls "the new normal" -- slower growth in the years ahead than the abnormal

growth of the mid-2000s. Accordingly, he emphasizes "stable, conservative income generation" -- and several

bonds and exchange-traded funds that offer appropriately juicy yields.

Meryl, a general partner of Eagle Capital Partners in New York, canvasses the earth for intriguing investments,

and that includes what's inside it -- namely, salt. This year she shares her upbeat and well-researched views not

only of a leading salt producer, but a German biotech outfit and several undervalued insurers.

Fred Hickey is the New Hampshire-based editor of the High-Tech Strategist. Just don't mistake it for bedtime

reading, or you'll never fall asleep. Fred says he's sworn off short-selling in a world in which central bankers

print money, though that is a decision he may yet regret. Instead, he's buying gold stocks big and small, for the

coming "crazy" stage of the gold rally, and a handful of technology companies whose true value inexplicably

remains hidden.

Few folks know their way around financial stocks as well as Archie MacAllaster, head of New York's MacAllaster

Pitfield Mackay. The Roundtable ends, in print and person, with his astute analysis of several beaten-up banks

BARRON'S ROUNDTABLE

The New NormalBy LAUREN R. RUBLIN

In the final installment of this year's in-depth conversation with Wall Streetluminaries, Bill Gross, Meryl Witmer, Archie MacAllaster and Fred Hickey discusstheir investment recommendations. Gold, anyone?

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Visit the Barron's 2010 Roundtable page.

and insurers, some selling nicely below book value, whose glory days might not be over, no matter the market's

current view.

Barron's: Bill, given your concerns about the economy, where

would you invest this year?

Gross: Pimco is a "new normal" company. We believe the new normal means slower growth in the years ahead,

including the second half of 2010. There are three reasons for this. One is deleveraging -- paying down debt -- a

process now under way. No. 2 is re-regulation, which hasn't taken place yet. No. 3 is de-globalization. Various

countries around the world will produce slower growth than what we've grown used to, and this leads to lower

returns on assets. We are beginning to see evidence of these things in the bond market, where yields on 10-year

Treasuries are around 3.5%. The G7 economies [economies of the world's most industrialized nations] could

grow 4% to 5% in the first quarter or half of 2010, so the new normal isn't an immediate outlook. It is a

longer-term, you-better-be-careful type of outlook.

A year ago Pimco's recommendation, and mine, was to shake

hands with the government -- that is, buy what the government

was buying. The U.S. and other governments have purchased

$1.5 trillion to $2 trillion of assets, which has propelled not just

the bond and mortgage markets, but all asset markets higher. In

a sense, the global economy has been salvaged, and we are all

the better for it, at least in the short run. This morning we talked

about the possibility that government stimulus ends. In that

case, all investors, not just bond investors, should seek

safe-harbor assets and be careful about which government they

shake hands with. Money should gravitate away from

governments that abused their deficit privileges, such as the

United Kingdom and maybe the U.S., to those such as Germany that have much lower deficits. All risk assets

have benefited tremendously from the liquidity push. From this point forward, be careful if liquidity is

withdrawn in the U.S. and U.K. A bird in the hand -- that is, dividends -- is to be favored relative to the growth

rate in the bush. In both fixed income and equity, look to stable, conservative income generation.

Where do you expect to find it?

Gross: Despite my criticism, my picks are U.S.-oriented and speak to generating stable income in two ways.

The first is through closed-end funds that, as a class, can benefit by using leverage. They can borrow 35% to

50% of the value of their assets at near-zero percentage rates, and reinvest in their asset class at 5%, 6%, 7%,

8%, even 9%. This isn't a time to leverage up but a time to use mild leverage if you can benefit by being a

borrower as opposed to a saver. We like Reaves Utility Income Fund [ticker: UTG]. Utilities are a stable

source of income, although they have had ups and downs. Electric utilities currently yield about 5%, plus or

minus. I know nothing about Reaves from a management standpoint, only that the closed-end fund has a

market value of about $500 million. They did well in the past 12 to 18 months. They weren't forced to liquidate

any positions. The fund yields 7.25%, compared with 4.5% to 5% on most electric utilities.

How does Reaves manage that?

Gross: The extra comes from borrowing at near-zero and

investing at 5.5%. And dividends are taxable at only 15%. Is this

Brad Trent

The Final Four: Bill Gross, Meryl Witmer, ArchieMacAllaster and Fred Hickey tell where to invest in2010.

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Bill Gross's Picks

Closed-EndFunds

Ticker 1/8/10Price/Yield

Reaves UtilityIncome Fund

UTG $19.14/7.5%

Pimco CorpOpportunity Fund

PTY 14.60/13.0

BONDS

GMAC 8% due2031

$95/8.5%

AIG 8.25% due2018

93/9.1

Source: Bloomberg, Pimco

MERYL WITMER

General partner,Eagle Capital Partners, New York

ARCHIE MacALLASTER

Chairman,MacAllaster Pitfield MacKay,

a perfect investment? Will it let you sleep at night if we have

another crisis? No. But it is a decent way to generate income in a

slow-growth environment where the premium should be on stability.

What would happen if interest rates rose?

Gross: That's not good. The dividend would become less safe, and maybe vulnerable. We are forecasting that

the Federal Reserve keeps interest rates in the 1% range for the next 12 to 24 months. At some point, investors,

or even Main Street, may force the Fed to give them something more. Most of the time we view rates from the

standpoint of what borrowers and banks need in order to regenerate capital. Rate policy is never determined by

the yield Main Street needs on CDs [certificates of deposit] in order to survive. At some point there could be a

compromise, but it isn't one the Fed is used to making or even thinking about. Interest rates can't stay at zero

forever, but they are going to stay low for a long, long time.

Does Reaves sell at a discount to net asset value?

Gross: It sells close to net asset value. My next pick is Pimco Corporate Opportunity [PTY], a closed-end

fund. Don't place an order the day these comments are published. The same goes for Reaves. These are thinly

traded issues, and you don't want to overpay if people bid them up. I have recommended Pimco Corporate

Opportunity in the past. I have been managing the fund for six months or so, but I've been watching over the

nest like a mother hen for a long time. The market cap is $1 billion, and the fund invests primarily in

investment-grade corporate bonds. About 20% is in less-than-investment-grade bonds, but this isn't a junk

fund. It is a high-yield fund. The typical investment is in shake-hands-with-the-government-type bonds, issued

by the likes of AIG [ American International Group], Sallie Mae [SLM] and GMAC. These companies are

either mildly government-sponsored or government supported. This closed-end fund has tripled in the past 12

to 15 months. Shares have gone from about 5 to 15. But here's the key: It yields close to 13%. That includes a

special dividend. Dividends are determined by the board.

Cohen: What is the yield without the special dividend?

Gross: The special dividend was 58 cents a share. The regular

dividend is $1.38, so the 12-month yield based on that is about

13%. Next, I have two bonds, including one I recommended last

year. Some problems in the bond market have to do primarily

with the terrible performance of the rating agencies. Not only

didn't they downgrade debt in a timely fashion, but having

downgraded, they don't upgrade when circumstances change.

Take GMAC. It is 54%-owned by the government, which has

invested $20 billion in the company. To think the government is

going to let GMAC go down the drain when it has 20 billion

bucks to lose is sort of a stretch. Yet because GMAC was associated with General Motors, which defaulted,

Standard & Poor's downgraded its credit to triple-C. [S&P upgraded GMAC'S debt to B last Wednesday.] Most

investors can't invest in triple-C-rated debt.

Witmer: Such restrictions aren't the rating agencies' fault.

They are investors' fault.

Gross: That's true. We like the GMAC 8% due 2031. It was a $5

billion issue. The bonds yield 8.5%. That is a lot for a company

Chris Casaburi

Bill Gross

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New York

FRED HICKEY

Editor, The High-Tech Strategist,Nashua, N.H.

SCOTT BLACK

Founder and president,Delphi Management,Boston, Mass.

FELIX ZULAUF

Owner and president,Zulauf Asset Management,Zug, Switzerland

BILL GROSS

Founder and co-chief investmentofficer, Pimco, Newport Beach,Calif.

MARC FABER

Managing director,Marc Faber Ltd., Hong Kong

ABBY JOSEPH COHEN

Senior investment strategist and president,Global Markets Institute,Goldman Sachs, New York

OSCAR SCHAFERManaging partner,O.S.S. Capital Management,New York

MARIO GABELLI

Chairman,Gamco Investors,Rye, New York

that is 54%-owned by the government. What would investors pay

for Fannie Mae [FNM] and Freddie Mac [FRE] debt? They

are 90%-owned by the government. But the rating agencies

never downgraded Fannie or Freddie, for fear the government

would run the agencies out of town. Instead they downgraded

GMAC and AIG, another bond I'm recommending, which

created huge disparities in the market. Fannie and Freddie

10-year paper yields about 4%, whereas GMAC and AIG yield

8.5% to 9%, simply because the rating agencies don't think they

are in the same situation. But they are close to the same thing,

when you think about.

MacAllaster: Do you like bank preferred?

Gross: I recommended bank preferred stock last year. As a

class it was trading for 60 to 70 cents on the dollar. Now many

preferreds are trading at par, or 100, but they are still good

investments. I have many bank preferreds in my personal

portfolio.

My last pick is an AIG issue, the 8.25% due 2018. They yield

8.5% today. AIG has received billions of dollars in government

support. The government has invested $45 billion in AIG

preferred stock. With that kind of support beneath you , it is a

comfortable situation, especially given the yield. The

government put billions of dollars more into companies like AIG

than it ever put into GM.

There is a difference. Saving General Motors was a popular

idea. It kept workers on the job. That's not the case with AIG.

Gross: All I'm saying is the government would lose almost $50

billion if it decides AIG no longer is worth supporting. It is a

game of chicken. You either call the government's bluff or you

don't.

Faber: Would you buy other AIG bonds?

Gross: Debt of the holding company is the safest. Probably the best value are bonds of AIG's International

Lease Finance.

Faber: GMAC also has an 8% of 2018 that seems to yield even more.

Gross: If you are more conservative, go with the 2018.

Thanks, Bill. Meryl, you're on.

Witmer: My first pick is Compass Minerals [CMP], which trades at 72 a share. It has 33 million shares and

debt of $500 million. Recently volatile results in potash have obscured the long-term positive trends in its salt

and potash operations. Compass owns perhaps the best rock-salt mine in the world, in Ontario, next to Lake

Bill Gross: WhatWill Drive the MarketIn 20103:08

Bill Gross, founder andco-chief investment officerat Pimco and Barron'sRoundtable member, believes the direction ofshort-term interest rates, inflation and quantitiveeasing will be the driving market forces in 2010.

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Huron. The reserves are huge, and unlike most salt mines, capacity can be increased easily due to the width of

the salt seam. Compass expanded this mine from 2.5 million tons in the 1980s to seven million tons, and it is

expanding it to nine million tons. Transportation is cheap and easy over the Great Lakes, to the snowbelt states.

Compass also owns mines in Louisiana and the U.K, and evaporation facilities in the U.S. and Canada to

produce consumer and industrial salts. These are used in food processing, water softening, chemicals and

agriculture. Compass has the leading consumer-salt brand in Canada, Sifto.

Is the salt market growing?

Witmer: Volume usage grows just 1% to 2% a year, and pricing

grows about 3% a year. But Compass' revenue has grown 11% a

year, and its profit 14%, since 2003. That is because the

company has one of the only easily expandable mines, and

captures most of the growth in the rock-salt market. The salt

industry has consolidated, with just a few players selling a

product that is economic to sell only to a limited geographic

area.

Compass also produces sulfate of potash, or SOP. It is a

specialty fertilizer that typically sells at a premium of $150 to $200 a ton to commodity potash. This potash is

used to grow green vegetables, avocados, pecan and citrus trees, potatoes and other specialty crops, which

account for 4% of harvested acreage in the U.S. but 40% of crop value. It isn't used on commodity crops such as

corn, soybeans and wheat. Compass produces about half its potash at the Great Salt Lake, using solar and wind

evaporation. It is expanding its evaporation ponds, and has leases on virtually all the commercially viable SOP

production areas of the lake. It also has a nascent document-storage business in the U.K., with virtually

unlimited storage capacity in an old salt mine. That could become a very valuable business in its own right.

Tell us about earnings.

Witmer: There is some variability due to the weather and potash pricing. Compass should earn about $5.20 a

share for 2009 and $6 this year. The company has earnings power of $8 to $9 in 2011 or 2012. The stock sells

for about 72. My earnings estimates reflect capacity additions, normalizing potash volumes and small price

increases in salt. Every 10% increase in the price of salt yields $2 more in earnings.

MacAllaster: What is the earnings breakdown between potash and salt?

Witmer: It depends on potash prices, but it is about one-quarter potash and three-quarters salt. Compass

should trade at a minimum of 13 times earnings. Our one-year target is 100 a share, or more.

My next pick is a Dutch insurer, Delta Lloyd [DL.The Netherlands]. It trades in Amsterdam at 17 euros

[$23.57] a share. It came public in November at €16, with Aviva [AV], the U.K. insurance company, selling

41% of its stake. It still owns the rest. There are 166 million shares. The company caught my attention as a

potential investment when, on the roadshow, the CEO said "we will be delivering sustainable value for

shareholders through a long-term focus." That means "we will make you money and pay it out in dividends."

That's the kind of guy I like.

What sort of insurance does it specialize in?

Witmer: It operates under Delta Lloyd, OHRO and ABM Amro. Life and pension insurance account for 75% of

Chris Casaburi

Meryl Witmer

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Meryl Witmer's Picks

Company Ticker 1/8/10Price

CompassMinerals

CMP $73.81

Delta Lloyd DL.Netherlands €17.16

Genworth MICanada

MIC.Canada C$26.00

Stewart InfoSvs

STC $11.13

Biotest BIO3.Germany €37.51

Source: Bloomberg

its business. It also has an asset-management arm that manages its own assets and retail mutual funds. Its core

markets are the Netherlands and Belgium. It has a strong focus on costs, and capital strength. Ninety percent of

core capital is tangible. And Delta Lloyd has great risk management. The company has grown 10% a year in the

past decade through organic growth and acquisitions. It has a 30-year exclusive agreement with ABN Amro. In

general insurance, it has strong niche positions, and with the Dutch government withdrawing from some

income and disability coverage, that opens opportunities in private insurance. Delta Lloyd could earn about 13%

over time on tangible book value, or €2.60 a share. It should trade at 10 to 11 times earnings. Our one-year

target is €26 to €28 a share.

Genworth MI Canada [MIC.Canada] is another insurance company. It trades on the Toronto Stock

Exchange. Genworth Financial [GNW] took it public July 7, as the U.S. company needed capital.

MacAllaster: Genworth Financial used to be owned by General Electric [GE].

Witmer: Genworth Canada insures consumer mortgages in Canada, whose residential market is safer than

ours. It isn't overbuilt. Lenders have had tougher underwriting standards because they retain most of their

mortgages. Proof of the difference can be seen in 90-day delinquency rates. In Canada they are below 0.5 basis

points [half a percentage point], and in the U.S. they are over 400 basis points.

The Canadian consumer also is different from the U.S. consumer, and not as comfortable with debt. The

mortgage borrower is on the hook for life, and the insurer can garnish his wages in perpetuity. The only way to

escape a secured loan is by filing for bankruptcy, and in Canada little in the way of owned assets are retained.

Also, given Canada's national health system, there are few medical-related bankruptcies. The competitive

dynamic is different, too.

How so?

Witmer: Genworth Canada's main competitor is CMHC, a Crown [government-owned] corporation. Before the

financial crisis, Genworth Canada had grown its market share to nearly 50%. Then it lost share, partly because

it was owned by a U.S. parent with a low stock price. Even though the companies were separately regulated,

lenders were concerned. Plus, the Canadian government guarantees 100% of CMHC's insurance policies but

only 90% of Genworth's. As fear of implosion recedes, Genworth Canada is regaining market share. And, there

is a chance Ottawa brings its guarantee to 100% for all players in the market. Genworth Canada could earn 2.50

Canadian dollars to C$2.80 a share in 2010, and the stock is C$26. It should trade at 10 to 11 times earnings

and earn about C$3 a share in 2011. Our target is C$34 to C$37 a share. The stock yields 3.4% and the dividend

may increase soon.

Schafer: Mortgage-interest payments aren't deductible in

Canada.

Witmer: Good point. Canadians are incentivized to pay down

their mortgages, and they do. My next stock is Stewart

Information Services [STC], which trades around 11. Stewart

is one of three major title-insurance companies in the U.S. The

others are Fidelity National [FNF] and a soon-to-be-spun-off

subsidiary of First American [FAF]. Title-company results

have been poor in the past three years due to losses stemming

from fraud and poor underwriting in the mortgage-boom years.

Before that, underwriting losses averaged around 5% of

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premiums. It was a nice business. The industry has taken most of the hit with regard to losses bubbling up from

the past. More important, the regulatory pendulum is swinging in its favor, and properly so.

How do you mean?

Witmer: Title companies can write business directly or outside agents can write the business, giving title

insurers a negotiated percentage of the premium, usually 10% to 30%. Some states have mandated increases in

the percentage of premium kept by the title companies. Also, state insurance commissions are putting through

rate increases for title insurers because they want the companies to have increased liquidity. They want no

chance of another title company going bankrupt, because the states would have to backstop the policies and

their own budgets are in deficits.

Stewart also has a hidden asset: tax benefits. The company said it has a $35 million refund from the extension

of net-operating-loss carrybacks enacted by the Obama administration. It should have about $75 million in all,

worth about $4 a share. Add that to tangible book value of $11.50 a share, and you get a true book value of

$15.50. The business should earn 10% to 15% on book and have normalized earnings of $1.50 to $2 a share. At

11 a share it is a real value. Our price target is 15 to 20.

My last pick is a German pharmaceutical company, Biotest

[BIO3.Germany]. I'm recommending "preferred" shares, which

is a misnomer. They have rights similar to common shares, and

a better float. The stock sells for €37.50. There are 11.7 million

total shares outstanding. The company has two main segments:

plasma proteins and biotherapeutics. Its plasma products are

immunoglobulins, clotting factors and albumin -- all made from

human plasma. The immunoglobulins are used by people with

immune deficiencies, sepsis and various orphan diseases, and by hepatitis B patients after a liver transplant.

The clotting factors are used mainly by people with hemophilia.

Biotest's products are sold mainly in Europe and Asia, but they should have U.S. approval for their main

products early in 2011. The biotherapeutics segment is a research and development company, with no revenue.

It has three drug candidates, with indications for rheumatoid arthritis, psoriasis, multiple myeloma and lupus.

The rheumatoid arthritis and psoriasis markets are well north of $10 billion. The Biotest drug BT-061 is very

promising, as it is active early in the inflammatory cascade and doesn't suppress the immune system like the

drugs it would compete against. BT-061 is in Phase II trials now. Since Biotest's equity capitalization is about

€400 million, the upside would be huge if this gets approved.

Does the company have enough cash?

Witmer: It does. It just sold a business for €45 million. The sale pre-funds a few more years of research-

and-development expense. The biotherapeutics business is spending about €18 million a year on R&D. The

plasma business is a cash cow, and is worth more than the current stock price. Biotest should have after-tax free

cash flow of about €4 per share. That alone could have the stock trading around €48 a share. Plus, if

biotherapeutics were a standalone business with the cash, it would trade at €70 million to €100 million, adding

another €6 of value per share. Add that to my €48 for the plasma business, and you get a price target of €55 a

share.

Is Biotest a takeover candidate?

Meryl Witmer:Mix of Salt andPotash Outperfoms2:23

Meryl Witmer, generalpartner at Eagle CapitalPartners and Barron'sRoundtable member, discusses Compass Minerals, asalt and potash maker, whose shares are expected toperform well over the next several years.

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Fred Hickey's Picks

Company Ticker 1/8/10Price

Mkt Vectors Jr GoldMiners

GDXJ $28.21

Newmont Mining NEM 49.62

Sybase SY 43.78

Novell NOVL 4.62

Symantec SYMC 18.37

Microsoft MSFT 30.66

Source: Bloomberg

Witmer: Before the financial meltdown, the family that controls the voting put it up for sale. Then the stock

price fell and they decided not to sell. Biotest would be a great takeover candidate for someone.

Thank you, Meryl. Let's hear from Fred.

Hickey: I have a couple of gold recommendations and some

tech names. I'm not shorting anything because I don't want to

short in an environment where the Fed is printing money, unless

prices go really crazy. Gold has been up for nine years and is

going higher. I still have a significant position in bullion and the

gold ETF [exchange-traded fund], GLD [ SPDR Gold

Shares], but I want to move more into gold stocks this year.

They have lagged the price of gold in the past two years. The

price of gold went up 30%, and the stocks fell about 7%, on

average. In most gold bull markets, the stocks will outperform by at least 2-to-1.

That hasn't happened this time because the companies' costs have risen as fast as the price of gold. In the third

quarter of 2009, the average realized price of gold for the companies I track was $965 an ounce. Their

exploration and development costs ran close to that. But this is changing, because the price of gold finally broke

through $1,000 an ounce and leaped to $1,200 in 2009's fourth quarter. It is near there now, after backing off a

bit. The average realized price for my companies is going to increase from $965 an ounce to more than $1,100.

A $135-an-ounce increase will fall through to the bottom line. Gold stocks that have been underperforming are

probably going to outperform now.

Did hedging restrain the performance of some companies?

Hickey: AngloGold Ashanti [AU] had some hedged books, but other than that, there are no more hedges of

significance in the business. I like the large gold stocks and small and intermediate miners, as well. Marc

recommended NovaGold Resources [NG] this morning, but I am not as brave as Marc is. There is a way to

get exposure to NovaGold and other small and medium-sized gold stocks through a new ETF that came out in

November: Market Vectors Junior Gold Miners, or GDXJ. It includes 55 names. The largest position is

under 5%, so you get a lot of diversification. A lot of these companies have lost money. They have negative cash

flow. But as the price of gold rises, investors get interested in the more speculative areas of the market, and

bigger gold miners start taking over other miners. This is a safer way to play it. The expense ratio is 60 basis

points. Market capitalizations of the companies in the ETF range from $200 million to $5 billion. There is also a

mix of silver miners here.

Such as?

Hickey: There's Hecla Mining [HL] and Silver Standard

Resources [SSRI]. I have a bigger position in the large miners,

which you can buy through the GDX [Market Vectors Gold

Miners], but you want to have a position in the juniors in the

future. As this bull market matures, it enters different phases.

The final phase is the crazy phase, when gold hits new highs and

investors gravitate to the smaller names.

Does the junior ETF include South Africans? Hickey: I'd stay

away from South African miners because of country risk. Of the

Chris Casaburi

Fred Hickey

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companies in the junior mining index, 62% are Canadian, 21% are U.S.-based, 12% are Australian and only

1.9% are South African. Also, I like the silver exposure. Silver typically does well in the later stages of a bull

market in precious metals.

MacAllaster: Actually, silver has done better than gold.

Hickey: But it is still undervalued relative to gold. Silver, platinum and palladium did well because people were

anticipating an improvement in the economy, and these precious metals have industrial exposure.

My second pick is Newmont Mining [NEM], a large gold miner. It has lagged in recent years because its

production has been in decline, and that's the case with the whole gold industry. It is difficult to find gold and

produce it. There are environmental issues. Declining production is an underlying positive for gold. In 2010,

however, Newmont will see a change. The company is bringing on the largest gold mine in Australia. Newmont

produces about 5.2 million ounces a year, and this mine will produce a million ounces a year, for 24 years. Also,

Newmont will have the benefit of higher gold prices. It also has been cutting costs. The stock sells for a little less

than 50. The company is expected to earn more than $3 a share this year, but that is conservative. In the third

quarter of 2009, they made 79 cents, versus estimates of 55 cents. The new CEO, Richard O'Brien, is trying to

keep expectations low. Newmont is going to blow away expectations in the current quarter, and as long as gold

is $1,100 or higher, you'll see some big numbers. Newmont could earn $4 a share in 2010. Put a P/E of 15 to 20

on it, and you have a significantly higher stock price.

What about 2011?

Hickey: That will depend on the price of gold. If gold goes to the levels I expect, it could earn $5 or $6 a share.

Faber: The stock is at the same level as in 2003. The gold price is up three times. This is a very cheap stock.

Hickey: Earlier today we talked about the underlying demand trends in tech. Industry researchers and

companies expect an improvement in enterprise spending after a period of underinvestment. In the personal-

computer market, we are looking not at the 2% to 3% growth seen in 2009 but at 12% to 13% growth. PCs are

getting old. Microsoft's [MSFT] Windows 7 operating system will be another sales driver. Even a company like

General Motors is going to update all its PCs in 2010. That's 100,000 PCs alone.

That said, tech stocks had a big run in 2009. While the Standard & Poor's 500 was up 23.5%, the Nasdaq

Composite was up 44% and the semiconductor sector was up 70%. And that's not off the lows, but for the whole

year. Many stocks now have big P/Es. Amazon.com [AMZN] sells for 80 times earnings. That's dangerous if

the market sells off, as some people here expect. I am trying to find companies that haven't performed as well

and aren't as overvalued on a P/E basis. They won't decline as much if a correction occurs.

Are there any?

Hickey: Sybase [SY] is one. It trades for just under 44 a share,

and has been reinventing itself. It used to be exclusively an

enterprise-database software company that competed with

Oracle [ORCL], but now it is in all sorts of hot new areas. It has

a serious position in enterprise-mobility solutions, such as

business software for BlackBerries. It provides software used in

e-mail, mobile banking and other areas that require you to go back to a database to check sales or inventory

numbers, or whatever.

Fred Hickey:Tools of the Fed FeedMarket Growth2:59

Fred Hickey, editor of TheHigh-Tech Strategist andBarron's Roundtablemember, believes the Fed's fiscal moves have helpedrally the market. In 2010, he expects gold stocks tooutperform gold.

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CRN Tech, a well-respected trade magazine, ranked Sybase as one of the top 10 tech companies that reinvented

itself last year. The magazine praised its anywhere-mobility office software, which integrates business e-mail

workflow with Apple's [AAPL] iPhone platform. Sybase is working with big partners like SAP [SAP] and IBM

[IBM]. It did very well last year in a difficult spending environment. It didn't miss earnings expectations, unlike

so many other companies. In fact, it raised guidance three times, and in the third quarter, the most difficult for

technology companies, it reported record revenue, operating margins, net income and cash flow, up 95% year

over year. [On Jan. 28 Sybase reported another record quarter and year, earning $2.48 for the full year.] CEO

John Chen, has been at Sybase for a long time. He is a very good manager of costs. And yes, the stock went up

75% last year, but the forward P/E is only 16.9 times. That isn't expensive for a company with this potential. The

price-to-sales ratio is 3, also not expensive. There is talk Sybase could be a takeover candidate.

Gabelli: What is the market cap?

Hickey: It's $3.6 billion. My second tech name isn't as sexy, though CRN Tech also chose it as a winner among

companies reinventing themselves. It's Novell [NOVL]. It sells for 4.62, and was a real laggard last year, up

only 7%. I owned the stock in the late 1980s and shorted it after that. When I first bought it, Novell was known

for its flagship local-area-network product. That business has been tailing off, and has been a drag on results.

The company moved into the open-source Linux operating system a few years ago with the purchase of SUSE

Linux, a highly rated product and that has been growing. It also has strengths in network security and identity

management. One Novell executive has called Novell the arms dealer for cloud computing.

What is the company's financial condition?

Hickey: That's the best part. Novell has a $1.6 billion market valuation and no debt. It has a billion dollars of

cash, and an enterprise value of $600 million. The company earned around 30 cents last year. The forward P/E

is 14 or so. The enterprise-value-to-revenue ratio is 0.7, which you can't find anywhere in the software world.

Their competitors sell at tremendous valuations. The SUSE product line competes with Red Hat [RHT], which

has a P/E of 73 and sells for eight times sales. If Novell gets a lift from enterprise spending and its new product

categories continue to grow, you could see some revenue growth. Reduced costs could help the bottom line. It

may take a while for the story to play out, but the risk/reward is nice.

Symantec [SYMC] is a third company that could benefit from enterprise spending. It trades for a little over 18

a share and the P/E is about 14, very low for a tech company. Based on estimates for the fiscal year ending

March 2011, the P/E is 11.85. Symantec also did relatively well through the downturn. Revenue and earnings

dropped by single digits, and they earned $1.57 a share in fiscal 2009. The company operates in three areas.

Norton AntiVirus is 31% of revenue, and it has a 53% market share. Norton could get a big lift from the launch

of Windows 7. The rest of the business is divided between enterprise storage and security. The storage business

has done well, and should get a lift as enterprise spending increases. Symantec is very profitable. It had 82%

gross margins in the September quarter [and 83% margins in the December quarter, reported Jan. 27]. It has

some net cash. The company generates a lot of cash from operations and recently announced a $1 billion share

buyback. With the Windows 7 push and a pickup in enterprise spending, you could see revenue growth again.

The stock has significant upside.

Black: What is their competitive position in enterprise security relative to Checkpoint Systems [CKP]?

Hickey: Checkpoint is a major player but Symantec is the leader. We talked about the attractions of Microsoft

this morning, and it is my last pick. It is in the midst of a powerful product-upgrade cycle, and Windows 7 hasn't

even hit its P&L [profit and loss statement] yet. We could see some dramatic numbers in the next reported

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quarter. [Microsoft earned 74 cents a share for the December quarter, reported Jan. 28. That was up 57% year

over year, and beat estimates by 25%.] In the September quarter they beat estimates by 25%. The other big

growth engine is Microsoft Office 2010, which will be shipped in the June quarter. And, at the end of the year

they will introduce Project Natal, which generated a lot of excitement at the Consumer Electronics Show. It

incorporates motion-sensing cameras and lets you play X-Box games without controllers. The game guys can't

wait for this product. They think it will be a huge boost to their industry.

Gabelli: It's a plus for Activision Blizzard [ATVI].

How high could Microsoft's stock go?

Hickey: It could go into the mid-40s, from 30.

Black: That would take the P/E above 20, based on estimated earnings for fiscal 2011.

Hickey: But Microsoft is going to continue to beat earnings estimates. It reduced headcount by 5,000

employees last year. The big gain they got in the third quarter was from cost cutting more than revenue growth.

Now they'll get revenue growth.

Gabelli: What is the earnings forecast for the full fiscal year?

Hickey: The estimate for the fiscal year ending June 2010 is $1.83 a share. They could exceed it by quite a bit.

The tax rate on dividends, now 15%, could rise after 2010. Do you think Microsoft will declare another special

dividend this year?

Hickey: It would make sense. They have $36 billion of cash. The yield on the regular dividend is close to 2%.

Cash flow will be enormous in coming quarters.

What are your thoughts on Apple?

Hickey: It is probably the best-positioned technology company. I was bearish on Apple [AAPL] but changed

my tune when I saw the app store a couple of years ago. Since then I have only been long, and I won't short it,

even though the stock has gone up to 200 a share. I would rather buy it after we get that correction we talked

about. The P/E is a little high. But it is going to be a great quarter for them. The PC and the iPhone business are

very strong. They are going to gain share in the smartphone market.

Thank you, Fred. Archie, it's your turn.

MacAllaster: The market is pretty fairly priced. I don't know

whether it will end the year higher or lower, but I do see

bargains in the financial sector, particularly in some

medium-sized life-insurance companies. Life companies tend to

write longer-term contracts than property and casualty insurers.

This was a simple business for many decades. Life insurers

basically grow their assets over a long period of time and

earnings tend to follow, though not in lockstep. Many life

companies were penalized in the stock market along with other

financials. They were knocked down to unbelievable prices. Even big companies like MetLife [MET] and

Prudential Financial [PRU] were selling under 20 a share at one point, and Pru was making $5 a share.

Chris Casaburi

Archie MacAllaster

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I'll start with Protective Life [PL]. It is selling for 18 and pays a 48-cent dividend, after cutting the dividend

from 90 cents. Book value is 26.36. Protective is selling for about 5.7 times estimated 2010 earnings of $3 a

share. The company hasn't earned less than $3 in the past six years. In 2007, earnings topped out at more than

$4 a share. Most of these companies had their best earnings year in 2007. The previous high on the stock was

about 50, in '07.

My second name is Hartford Financial Services [HIG]. It took a real beating. It used to sell up around 90 to

100 a share.

And now?

MacAllaster: It's around 26. The company earned $9.23 a share in 2007 and paid a dividend of $2.12. Now it

pays 20 cents. Book value is $38 per share, though it was a good deal higher. They were expected to show a loss

for 2009, but after writedowns they will make about $1 a share. [Hartford raised its guidance Jan. 12 on core

fourth-quarter earnings, to $1.45 to $1.60 a share.]

Hartford was the only one of this group that received TARP [Troubled Asset Relief Program] money. It sold a lot

of annuity business on a very poor basis. A lot of people thought the company would go bankrupt. The stock sold

down to 3.33 a share. The earnings estimate for 2010 is $4 to $4.50 a share. Over a period of two or three years,

these companies will be able to make at least as much as in their best year because they are writing policies

differently now. All of them changed their annuities contracts. That's where the problems were.

Witmer: Are the same guys running Hartford now?

MacAllaster: No. There is a new chief executive who has been there for four or five months. Guess where he

came from? Bank of America! But he is a good guy. Hartford is more speculative then most of my names. I also

like Principal Financial Group [PFG]. It is based in Des Moines and sells for 25.67 a share. It pays a

dividend of 50 cents a share and book value is $27.88.

Gabelli: That's book as of Sept. 30, 2009?

MacAllaster: Yes. The estimate for last year is about $1.30 a share, and for this year it's $2.90. The stock sells

for about 8.9 times 2010 estimates. Principal earned $4.26 a share in 2007 and paid a dividend of 90 cents at

the time. At the end of the latest quarter the company raised its dividend by a nickel a share, to 50 cents, after

having cut it. We hope they all do that. This is a large company, with $120 billion of assets. It has been around a

long time. The high on the stock was 70 a share in 2007.

Next, I like FBL Financial [FFG], the old Farm Bureau Life, out in West Des Moines. It sells for 19 and pays a

dividend of 25 cents a share. Book value is $27.88. Estimated earnings for last year are $1.20 a share, and the

estimate for this year is $2.50. The stock sells for 7.6 times '10 estimates. The company earned $2.73 in 2007

and paid out 48 cents a share then. The high on the stock, the same year, was 42. FBL has assets of about $14

billion, so it's a somewhat smaller company.

Every portfolio manager who wants a stake in the life-insurance industry ought to own both Prudential and

MetLife. Prudential sells for about 53 a share and has a book value of $50. Total assets are about $500 billion.

The earnings estimate for 2009 is $5.50 to $5.75 a share, and for 2010 it's almost the same -- $5.50 to $6. The

dividend's high was $1.15 a share, cut last year to 58 cents. This year it was raised to 70 cents.

Where is the stock?

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Archie MacAllaster's Picks

Company Ticker 1/8/10Price

Protective Life PL $18.15

Hartford FinancialServices

HIG 26.22

Principal FinancialGroup

PFG 25.67

FBL Financial Group FFG 19.29

Prudential Financial PRU 53.56

MetLife MET 38.25

Wells Fargo WFC 28.86

Supervalu SVU 12.87

Source: Bloomberg

MacAllaster: The previous high was about 100 a share, and the stock now trades at 53. Prudential is a buy at

10 times 2009 estimates. MetLife sells for 38, down from an '07 high of 71, and the dividend is 74 cents a share.

Book value is $34 per share. The estimate for this year is -- let's call it $4.20 a share. This is a quality company.

So is Wells Fargo [WFC], among banks. Wells suffered 50% dilution by taking over Wachovia and selling

stock to the public, which increased assets from just over $400 billion to more than $1 trillion. After a 50%

dilution of shares, it has 150% more assets. Management knows how to run this business, and they will make a

lot of money on that trillion dollars. Two or three years from now Wells has the potential to earn $5 or $6 per

share. Previously they had earnings power of $3. The stock is 28.

What is the bank's real-estate exposure?

Black: They bought Norwest Mortgage, one of the largest

mortgage originators, and they hold a lot of those mortgages.

MacAllaster: No question, they own a lot of commercial

mortgages, too. But even if the commercial mortgages go

belly-up and borrowers can't pay interest on them, people in the

buildings are paying rent all the time. You might have to write

them down 20% or 25%, but they aren't going to zero.

Gabelli: Archie, the number floating around is that about $1.5

trillion of loans are coming due on commercial real estate in the

next two to three years, and the appraised value of the property

is about a trillion dollars. Currently, banks are lending only 50% of appraised value. Somebody has to take a hit.

MacAllaster: Wells Fargo has written down loans.

Black: They've been taking big provisions for loan losses across

the board.

MacAllaster: My last pick is Supervalu [SVU]. I

recommended it last year, as well. It lost 13%. Kroger [KR] had

a very poor quarter and all the supermarket stocks sold off.

Supervalu now sells now for about 12.80. It looks like the

company will earn about two bucks for the past year. It is a cheap stock, selling below book value of $14 a share.

Supervalu is a big company, with $45 billion of sales. It has a lot of debt, but it is paying down debt. It sells for

about 6.25 times earnings. The company earned as much as $3 a share at the peak, and it will get back there.

That's it.

Faber: One more thing: I am surprised nobody mentioned anything today about investments in Japan. It is still

the second-largest economy in the world. There are some very good tech companies in Japan. As a contrarian

play, I would buy the Japanese ETF, iShares MSCI Japan Index [EWJ].

Japan has the biggest debt problem in the world.

Faber: The government has a debt problem but it's offset by a high level of savings among the people. If you're

bearish on the yen you should be bullish on Japanese stocks.

Thanks, Marc and Archie, and everyone.

ArchieMacAllaster: MarketDecline BeforeRebound1:36

Archie MacAllaster,chairman of MacAllasterPitfield MacKay and Barron's Roundtable member,believes there will be a market correction in 2010before it rebounds later in the year. Expects shares oflife insurance stocks to rise.

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