By Marie Cabural. Originally published at ValueWalk.
- [From The Archives] Century Partners Barron’s Interview — Part One
- [From The Archives] Century Partners Barron’s Interview — Part Two
- [From The Archives] Century Partners Barron’s Interview — Part Three
Continued from part three…
“B: What’s your current view of the Market?
Harpel: Short-term, we think we’re within 10% of the bottom of this particular move. Long-term, however, we still feel we’re in the midst of a major bear market. The fact is that the basic forces that created the current situation still exist.
Pressures on the debt and equity markets are still with us and the lack of liquidity will create additional difficulties for the market during a period of economic. Long-term governments yield 200 basis point more than cyclical stocks, whereas cyclicals yielded more than governments at both the ‘62 and ‘66 bottoms. In other words, debt instruments still represent an attractive alternative to stocks, particularly for tax-exempt investors like pension funds.”
Harpel then goes on to discuss P/E multiples. Specifically, Harpel believed that at the time, P/E multiples deserved to be at very low levels due to “the tremendous deterioration in the quality of reported corporate earnings.”
“During the past five years, companies as diverse as the steels, airlines and computer lessors lengthened their depreciation. In many cases, corporations are now reporting lease income as sales. The large indebtedness of most companies also strongly argues that their earnings should be accorded lower multiples. These are problems that are going to take years to work out.”
While this forecast, made during 1970 may have seemed appropriate at the time, over the next decade, to 1980, the S&P 500 average P/E slumped from 15.8 to 7.4. Over the same period, the S&P 500 rose 23%.
Century Partners: Bearish outlook
In 1970, Century Partners was fairly bearish on the market’s outlook, although it was neither long or short the market in general. Century was using its favorite hedging method; cash.
Another method the fund used, as an alternative to shorting, was to buy bonds. Century Partners used this strategy in the latter half of 1968 when Hokin and Harpel were concerned about market pressures.
“B: Did you turn to bonds as an alternative to shorting?
Harpel: Yes
B: Did you make money?
Harpel: We got out basically even. We were ahead for a while, but then the stock market started to move back up, inflation seemed to be resuming and the bonds we brought went down to about what we paid for them. We didn’t make money, but it was a successful operation in terms of what we learned. For some reason, we presumed that the people in the bond business possessed a certain shrewdness that mortals like us didn’t have. We were wrong. The time to buy bonds is when the so-called bond experts are bearish. You should be selling when they’re bullish.”
B: Are they bearish now?
Hokin: Yes. Most of the bond men we talk to feel interest rates will stay at these levels for some time…We don’t fully agree. As we see it, the liquidity squeeze will keep interest rates from falling as rapidly as they otherwise might, but at some point in the next 12 to 18 months they’re going to come down.”
Century Partners
What would cause Century to think differently about the market? A high level of mutual fund redemptions.
Harpel believed that if the level of mutual fund redemptions exceeded the level of inflows the market would collapse.
As a result, businessmen and consumers, who had no dealing with the market, but got wind of the declines, would curb spending, which would in turn squeeze the life out of the economy.
At this point, Century would look to switch to bonds and cash as a hedge.
Sign up for ValueWalk’s free newsletter here.
