A conversation I had on Monday with a hedge fund manager friend about US Steel (ticker - X) and its electrifying run off the March '03 low, also got me thinking about a conversation I had with the regional manager of the Florida office of a mutual fund firm I worked at in the early 1990's here in Chicago.
Despite the great markets of the 1980's and 1990's, the firm at which I was employed managed to have the wrong business model and ended up with a disparate mix of institutional and retail parts to the firm, some of which included regional portfolio managers for individuals, much like a brokerage firm. Management knew at some point that I wanted to move up from being a fixed-income analyst to a portfolio manager, either for individual separate account money or for a fund, and this regional manager was looking for a "portfolio management type" individual.
Our one and only phone call concluded by him saying, "Brian, I like everything about you (i.e. background, education, experience, etc.) but there is one major problem: you don't have grey hair, because you'll be calling on blue hairs." His point was that he couldn't have a portfolio manager in his early 30's talking to 60 - 70 year old clients about their money, and I couldn't disagree with him. (It wasn't an issue since I didn't want to relocate out of Chicago anyway.)
Ok, now let's return to US Steel, one of the great dog's of the 1990's: after a restructuring of X led to a re-capitalization (I am guessing) in 1991, in May of 1993, X peaked at $46 per share, and then managed to meander lower for the ensuing 10 years, bottoming at $9 per share in March, 2003, at the same time the S&P 500 rose from 445 in May of 1993, to a peak of 1,550 in March 2000 and then a low of 775 in March '03.
So what's the point to all this ? Why the belabored discussion of US Steel relative to the S&P 500, etc. etc. ? (The alternative title to this piece was going to be "Have semiconductor stocks become the auto and steel stocks of the 1980's and 1990's ?" )
The point is that the market leadership of the post 2000 bear market is now exactly what didn't do well in the 1980's and 1990's particularly energy, utilities, basic materials and other "one-off" sectors.
The top three performing sectors in 2006 were telecom, which rose 32%, energy which rose 23% and utilities and basic materials, each which rose 16% - 17%. These three sectors represent about 10% of the S&P 500 by earnings weight and market cap. Granted telecom shouldn't be a stretch for those that managed money in the 1990's, but again as of last Friday, March 16th, the best performing sectors within the S&P 500 were basic materials +7%, utilities +5%, and telecom +2%.
In 2006, the two WORST performing sectors were technology which rose only 8% in '06 and healthcare (of all things, given healthcare inflation) which rose only 6% in 2006.
Only financials had a decent year in 2006, rising 17% after the Fed stopped raising rates.
Again, my point to all this is that having graduated from college in 1982 and basically coming of age with the great stock market boom that ran from 1982 - 2000, I was always taught that financials and technology lead every bull market, and within technology, semiconductors lead tech. (Semiconductors and homebuilders were the worst performing sub-sectors of the S&P 500 in 2006: very unusual for semi's anyway when the S&P 500 was up 15% in the calendar year. )
While at the mutual fund firm referenced in the first paragraph, I was fortunate to befriend some of the old-time equity portfolio managers who were kind enough to give me the time of day and share their expertise with me. The thing was, some of these guys were so old they had managed money in the late 1960's and early 1970's and they were intimidated by technology: one grey-beard even said to me when I asked him about Intel and Microsoft, that "I don't understand the stuff, and if Buffett doesn't want any part of it neither do I."
When I heard Bill Miller the famed head of Legg Mason's flagship mutual fund, say in 2006 when talking about his underperformance that the long-run returns on invested capital for these commodity type companies are below average, (thus, like a lot of growth managers Bill was explaining his underperformance) I couldn't disagree with him, but I also thought, what if that is different now ? What if the steel and gold and copper and industrial stocks now have better returns on invested capital for extended periods of time and the Intel's and Micron's and the Microsoft's of the world are the dogs of the next ten years ?
Has the underinvestment in the 1980's and 1990's in energy, utilities, basic materials and industrials, and the explosion of technology and financials during the 1980's and 1990's now led to a prolonged period of outperformance for these sectors, and will semiconductors now suffer the same fate as steel and energy stocks in the 1990's with overcapacity, and prolonged periods of weak pricing ?
The bottom line is I just don't know, but our client's portfolios now include utility stocks, basic materials and some telecom, although I think energy has a little more downside to work off.
If I would have gone to my clients in the spring of 2000 and said let's sell all the technology, financial and all the classic growth stocks, and let's buy precious metals, basic materials (and let's put 5% of client money into US Steel which has fallen from $46 to $20), utilities, and industrials, the mob outside my office would have been reminiscent of the pitchfork and torch-bearing villagers from the movie "Frankenstein" and yet it would have been the exact right thing for me to do.
The growth stocks of the 1990's have now become the value stocks of 2006 - 2007, and a lot of young turks running hedge funds now know a market only where tech is dead, and commodities rule, and I'm still stumped by the fact that in a year when the S&P 500 returned 15%, so many quality growth companies did so poorly. Since the March 2003 low, US Steel has been a "10-bagger" rising from $9 to $90 per share, and I still can't see buying it for clients.
long most mentioned except US Steel
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