As he awaits the next broad market rally...whenever it arrives...Fred Richards is eyeing a number of names that he sees as having price potential. He also says the agricultural sector is one to watch in the future, but housing-related stocks and banks are areas he’s avoiding.
Kate Stalter: We’re speaking with Fred Richards from Strategic Investing in Richardson, Texas. Fred, thanks so much. Great to be speaking with you today.
Fred Richards: My pleasure.
Kate Stalter: Let’s start off with your take on the current market conditions, given the volatility we’ve been seeing. What do you believe individual investors need to know about right now?
Fred Richards: Well, I think we may be undergoing what I would call a sea change of the investors’ mindset. The volatility is showing that that you’ve got this big clash between those investors who are hopeful for the economy to improve, and the reality of the situation, which is that it isn’t improving very much or it might not be improving at all.
This all goes back into the March timeframe, when we really started talking about the debt ceiling. Then in May, Geithner, the Treasury Secretary, began tapping the federal pensions and various other things to keep us underneath the debt limit. Then on May 25, he says that we have an August 22 default date.
Then a few weeks later, on July 20, Bernanke, the Fed chairman, said he’s going to do whatever is necessary. Then, on August 1, the debt ceiling was increased in stages, with $424 billion now and the supercommittee was basically authorized to propose cuts in taxes.
Then at 10:08, on August 2, when Obama signed the debt increase, almost worldwide on the Greenwich time clock, the markets started to tank.
And on August 3, Geithner comes out and says, “Well, we spent $238 billion in one day,” which is a little over a half of what he was authorized to do in the debt-ceiling increase.
Then on August 5, S&P reduced the AAA rating to AA+ after the market closed, and people said, “Holy, holy, what happened here?”
And I think you see as we’ve gone into the last two or three weeks, the constant fight between the forces of hope and the forces of reality, trying to decide which way the market’s going, whether it’s going to go up or down...we’ve been in this trading range for some time, until the floor broke open in early August and things have gone south.
Now whether we’re going to get another floor here, I don’t know.
Kate Stalter: With all that then, Fred, what are you recommending to your clients or to individual investors? What’s the best course of action at this moment?
Fred Richards: Well, there are two things. One is, be very cautious. This is a market which could go either way.
Of course today we have the situation where Gadhafi appears to have been removed, and that will release the Libyan oil eventually. So you’ll see a gain in the market. Here again, it’s a hope rally, and that creates a problem.
So I’ve been recommending to my people for a long time that hard assets like gold, silver, platinum, and some of the agricultural commodities were the place to be, as opposed to equities, as such. If you don’t like to play those games, then just sit in cash, because you saw what happened the last three weeks.
But the gold stocks like Newmont Mining (NEM), Agnico-Eagle Mines (AEM), and some of the others, Barrick Gold (ABX), they really haven’t caught a bid, whereas gold has just gone—I won’t say parabolic—but it’s moving higher. Silver has outperformed it in a sense in the last couple of weeks, on a percentage basis.
But those hard assets are telling us something, probably that the fiat currencies are not the place to be. So we are looking at putting our money into agricultural commodities. As I just came back from basically two weeks and 5,000 miles out to the west, I did not see very many areas of where the crops look very good, except for where irrigation was there.
And I see a whole bunch of things wrong with the agricultural community from a supply standpoint. We went into this year with low supplies, they’re going to be even lower, and maybe some of the agricultural commodity and food-supply people are the places to be, because they’re going to be at a premium going forward. That includes potash, and the ammonia manufacturers, and that type of stuff.
Kate Stalter: Any names that people might want to take a look at in the agricultural sector?
Fred Richards: I would say all of the potash producers are places that you ought to be looking at, as well as some of the agricultural commodity people that are the seed manufacturers like oh, Pioneer, which is now [a subsidiary of DuPont (DD)], and some of those people.
Those are the ones where you really want to be looking at, because next year is going to be a very critical year, irrespective of the production this year. Because we’ve got an increased population and throughout the world we have had major crop disasters, and those have not helped the overall supply problem.
Anything connected with food is going to be a place to take a look at, and select the ones with the top quality people.
Kate Stalter: Anything in particular that individuals should make sure they avoid right now?
Fred Richards: I’d say you’d want to avoid anything dealing with real estate and banks.
Those are my two dis-favorite things, unless you want to short them. We haven’t seen the bottom of the housing market, and hence all the other things that go into the new homes and that type of stuff. It’s going to be probably another five to six years before this stuff gets walked out.
Then if you look at the banks, basically, the Fed has been stealing from savers to recapitalize the banks, and at some point in time the savers are going to say, “No more.”
Right now, if you’ve got $1 million in cash, you might be able to get $5,000 a year in interest.
Kate Stalter: Right, not such a good deal right now.
Fred Richards: Not such a good deal. So if you’re not getting compensated, eventually all these savers are going to start saying to the people who got their CDs, “Give me my money, give me my money.” And I’m going to take it and put it in a mattress or someplace else.
Because the consumer price index numbers are going, shall we say, up...and it’s not at 2%, it’s closer to 12%. Anybody who goes to the grocery store will tell you that.
So when you look at those numbers, if you’re only getting $5,000 or $6,000 per your $1 million of CDs, something’s wrong.
Kate Stalter: Let me wrap up with asking you about this, Fred: I know that you are an investor who tends to track growth leaders in better markets than this current one. You had mentioned earlier some of the agricultural sector names, as well as some commodities.
Looking a little further ahead, maybe in anticipation of the next rally—whenever that might be—is there anything else on your watch list that people might want to research?
I also like McDonalds (MCD), just because of the world growth, and then I like also O’Reilly Automotive (ORLY). Those are the ones that I really take a look at and keep on my watch list, and hopefully they’ll turn into something I can invest in.
Of course, you know, I’m a long-term investor, so some of my investments go back quite a ways. But I have a hard time in this market to really get excited until I see a good chart base forming.