Steven Leuthold: The Contrarian’s Contrarian


Jeremy Grantham: “I suppose it’s fair to say, in my sisters account, I have no career risk, she never going to fire me”. Consuelo Mack: Ever since legendary investor Jeremy Grantham told WEALTHTRACK how we kept his sisters money safe during the financial crisis, I have wondered: What about all be other women? Many of them divorced, widowed, or life-long singles, who don't have Jeremy Grantham to call upon. We’ve started a new feature on WEALTHTRACK’s website called WEALTHTRACK WOMEN. On a regular basis investment pros who specialized in advising female clients, will answer questions vital the financial health of women. Look for it on [music] [music] [music] [music] [music] [music] [music] [music] CONSUELO MACK: This week on WealthTrack, contrarian money manager Steve Leuthold invests in businesses many investors consider to be toxic including uranium mining and Chinese water and pharmaceutical companies. Great investor Steve Leuthold explains his unusual choices next on Consuelo Mack WealthTrack. [music] [music] [music] [music] [sponsor announcement] [sponsor announcement] [sponsor announcement] [sponsor announcement] [music] [music] [music] [music] Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack.

Look at just about any market’s performance anywhere around the world since the financial crisis and the U.S. market will come out near or at the top. It’s been a great time to be invested in America. Where would you prefer not to have been over the last five years? One place is China, which as you can see from this chart comparing the Shanghai Composite Index with the S&P 500 has vastly underperformed the U.S. market. If you take it down a level to industry sectors of the market, one area you would not have touched with a ten foot pole is uranium. Stocks of uranium companies as measured by the Global X Uranium ETF have plummeted since the ETF’s launch in late 2010. Why on Earth would I choose to highlight China and uranium? Because those are two of the major areas where this week’s guest is investing. There is a reason he has been called a contrarian’s contrarian.

He is Steven Leuthold and he comes by his independent streak naturally. He hails from Minnesota, what he refers to as the North Country. Indeed for three plus decades he published his monthly “View from the North Country” report for institutional clients. He also founded and ran a leading independent institutional research firm, The Leuthold Group which was known for its quantitative, research and asset allocation. He started an investment management arm there creating seven mutual funds under the Leuthold name and overseeing $5 billion in assets under management at its peak. Then a couple of years ago he decided to call it quits from the tightly regulated mutual fund business, although he remains a major shareholder at his old firm. He also wanted to escape from the pressures of managing billions and his grueling publishing deadlines. Last year he launched Leuthold Strategies, a small private investment partnership geared to high net worth individuals and requiring a minimum investment of $500,000.

With a little under 100 million under management now Leuthold plans to cap it at half a billion. Although most of us can’t invest with him, Leuthold is still worth listening to. I asked him what he is doing differently at Leuthold Strategies. STEVE LEUTHOLD: We look at things differently. We look at investing in themes, and many of those themes are contrary to the consensus, and if you had to run them through a committee, you’d get 10 no’s and one yes, and the yes would be mine, and so I developed the themes. To give you an example of this, for instance a lot of people look at the new high list, and they want to get the stocks that have the best momentum. Well, when we’re initiating a position, we look at the industry new low list, and then we search in those types of industries for some reason that could turn them around and make them look better.

I mean, the airlines were a perfect example two and a half years ago, and then when it comes to time to sell them, well, we also look for a bottoming from a technical standpoint, too, but then when they move ahead then we become momentum investors, and we stay with them as long as they keep going up, because our goal now as we’re running it for individuals is to make sure and try to get long-term capital gains on everything we do. It’s not just the performance numbers. CONSUELO MACK: Steve, in a recent letter to your shareholders, you told them that you expect a steep market correction. Why do you expect that? How steep? STEVE LEUTHOLD: Well, there’s no magic way to determine that. I merely looked at how far the market has gone over the last two and a half years and then we do a value analysis, and we find that the S&P 500 as an example is now in the 90th percentile of its historic valuation in terms of normalized earnings, and the odds of having a large gain from here are not really very good, and so from a value basis we think the market is, at least the one in the United States, is overvalued because it demonstrates that. We’ve had the market go up over the last year, and you’ve had the market go up like 20, 25 percent and corporate earnings have only gone up year over year about two or three percent.

And so all of it’s been a play on psychology in terms of this last move, and we look at this and we say the odds no longer favor things going a lot higher than we are right now. As a result, I think if we were going to have a normal correction and we’ve never had a reasonable correction for the past two and a half years, I think we’re probably due for one. CONSUELO MACK: And you’re getting more defensive in your portfolio. Correct? STEVE LEUTHOLD: Right. CONSUELO MACK: So how do you do that? STEVE LEUTHOLD: Well, we have some themes that are in themselves defensive. For instance, I’ve been worried about a reemergence of inflation for probably six months, maybe longer than that. CONSUELO MACK: And I will say that you’re called the contrarian’s contrarian, and one of your contrarian major themes is this concern about a resurgence in inflation ..

. STEVE LEUTHOLD: And right now … CONSUELO MACK: … where no one else seems to be concerned about inflation, and you’ve got, what, 20 percent of your portfolio in inflation hedge type investments. STEVE LEUTHOLD: But now they have started to be a little concerned about it. CONSUELO MACK: Just. STEVE LEUTHOLD: But I think we sit with ten percent of our portfolio in gold which we view as that, and we have another five percent in a commodities fund that we think is well managed and can be a very effective hedge against inflation. It’s got 20 different commodities in it. They rebalance it. CONSUELO MACK: And this is the GreenHaven Continuous Commodity Fund? STEVE LEUTHOLD: That is right. CONSUELO MACK: And I want our viewers to know also that your holding in gold is GLD, the ETF that actually holds gold. STEVE LEUTHOLD: Right, right. We also had gold with the mutual funds, but there we didn’t have GLD. We had the actual physical gold. We had to go up and look at it. Our Compliance guy had to go up and look at it, but no.

This is the GLD which is I think is just as good, but it’s not derivative-based. It’s based on the actual holdings of gold, and they have to sell gold when they have net redemptions and so on and so forth. So we’re satisfied with that, and we’ve got a little bit of Rio Tinto and we’ve got a little bit of BHP which are traditional kind of inflation hedges. So I don’t know if this is going to happen or not, but I think there is a possibility when we look at what’s happening in terms of the printing presses around the world, whether it’s in the United States or whether it’s in Euro-land or whether it’s in Japan. They’re all printing currencies, and to me when we’ve done studies of inflation, when you start expanding the money supply by too great of a level and artificially which is being done, it has in the past led to inflation and sometimes very, very serious currency debasement inflation, a la Germany or a la Mexico or whatever.

I’m not saying we’re going to go that course, but it’s going to become an increasing fear, and because it’s a fear, the stock market’s going to react to it eventually some time in the next year I think. That’s one of the reasons we think the market could correct by 15 percent. CONSUELO MACK: Another contrarian view, theme that you have as well is China. You’re actually bullish on China. Why China? STEVE LEUTHOLD: Well, it’s pretty simple. Economic growth, whether it’s reduced to six percent or it’s seven and a half that the bulls look at, it’s three to four times what it is in the United States. When you look at the P/E multiples, it’s half of what it is in the United States. So here we have a fast growing economy with management so far that’s been very reasonable in what they’ve done even though supposedly it’s communistic, and to me you’re looking at a country. I mean, I’ve been to China. I’ve spent time in China. I see what’s happening. I see the miracles. I was there in the Olympics and so on.

I see a country that on the international basis is really being picked on in all the things they might be doing that’s wrong, the over extension in the housing area and so on. But if you compare them and then the assets that the government has compared to the U.S., they have the ability to withstand that with government spending. And I think when we look at China, there’s two areas. We have a couple of broad mutual funds we have that are well managed. One is the Matthews Fund. CONSUELO MACK: Matthews Asia. STEVE LEUTHOLD: Yes, right. CONSUELO MACK: They’ve been guests on WealthTrack. STEVE LEUTHOLD: And then you also have Fidelity China Region Fund. Those are well managed, but we are then focusing. We’ve got another five percent in, well, they’re in China water stocks. You think the U.S. has water problems.

If you look at Northern China, you have really serious, serious water problems there, and problems with companies that are recycling waste water. So we have things like Beijing water and other Chinese-focused water stocks. CONSUELO MACK: Sound Global is another one that I saw in your portfolio. STEVE LEUTHOLD: Sound Global is another one. That’s right. In addition to that, we are interested in what China is doing in developing their own pharmaceutical business. They’re starting to kick out some of the U.S. big drug companies that are cooperative agreements, and they’re trying to develop their own. So we’ve got another five percent of the portfolio in some emerging pharmaceutical companies in China that are based in China, and when you look at it, China is spending, oh, like four or five percent at the most of their GDP on health. In the U.S.

, it’s 18 to 19 percent, and there’s a lot of room for growth, and they also want to establish themselves as the pharmaceutical center of Asia with their own products, and to us it looks like a real opportunity, and they’re going to pour a lot of money in developing that thing , and the same in terms of the water conservation stocks. The one big thing that the China leadership has said, and they’re responding to the people is this whole thing about air pollution in China where the measure of air pollution in Beijing is eight times that of Los Angeles, and you had a million and a half people per year die from bad air. CONSUELO MACK: In China. STEVE LEUTHOLD: In China. That’s right, and if you look at the average life span in China, in Northern China, it’s fallen by five and a half years.

CONSUELO MACK: It’s stunning. Because of pollution. STEVE LEUTHOLD: Because of pollution, and that leads us right to nuclear power which is another thing that, although the U.S. is paranoid about radiation poisoning and so on and so forth, they’re not paranoid in China. I mean, you’ve got 49 plants that are now under construction, nuclear plants. There’s another 71 that are in the planning stage, and the same is true in India that has the same pollution problems. I mean, the government in China has said, “This is our major problem. This is the thing that we really have to deal with, that the public is most concerned about here.” CONSUELO MACK: And they’re doing it. STEVE LEUTHOLD: I hate to sound like a bull on China, but I am. I think over the next three years it’s going to be the best performing major stock market in the world. CONSUELO MACK: And you heard it here first from Steve Leuthold on WealthTrack.

STEVE LEUTHOLD: Well, I said the same thing last year, though. CONSUELO MACK: Maybe this year it will come true. Steve, another big investment theme, and you’ve just alluded to actually a couple of them, is clean energy which sounds very PC until you find out that you, Steve Leuthold, as you just mentioned, are investing in nuclear, companies that are involved in nuclear plant design and uranium. So explain the nuclear piece as a clean energy theme. STEVE LEUTHOLD: Well, it is because … you know, some people may think that’s radiation pollution. I mean, that’s what people have phobias about. CONSUELO MACK: Fearful of. STEVE LEUTHOLD: But there isn’t any air pollution. There’s not any particulate like you’re getting from coal or anything like that. So the people that look at it in terms of air pollution rate it the cleanest that they can possibly have, and we’re seeing this become extremely important for countries that are faced with a huge, huge pollution problem.

I mean, we’ve addressed part of that here in this country, but you have a long way to go in India, or you have a long way to go in China, and so I think that can be viewed as the cleanest of clean energy. Now, solar and wind may be as good, but they can’t produce the amount of electricity that you can see. Even England has hired AREVA to come in and build a new nuclear plant in England. CONSUELO MACK: Now this is a French nuclear plant designer. STEVE LEUTHOLD: Right, right. CONSUELO MACK: AREVA. STEVE LEUTHOLD: Like Arriba! No, it’s a French company. It’s owned not all by the French government, but they own like 40, 45 percent of it. That makes us a little hesitant, but we like the business that they’re in, and they have a really good reputation around the world in terms of designing nuclear plants and so on. CONSUELO MACK: And then there’s a uranium miner based in Canada also that you own called Cameco.

STEVE LEUTHOLD: Right, which is probably the one the institutions would buy because it’s the biggest publicly held uranium miner. The Russian government is bigger. The Canadian government is probably involved in more of that than other people because that’s where most of the mines are, and you also see it in countries in southern Europe and in Africa. So there’s a lot of nuclear yellowcake which is what we’re talking about around to be buying. The problem is after the Japanese disaster, Fukushima, which was like three years ago, the Japanese which are perhaps understandably more concerned about nuclear power because of what had happened to them in World War II, but they have been really reluctant to restart some of their reactors that they should have been restarting by now, and as a result they have part of their stockpile that they’re selling into the marketplace. So before that event you were seeing nuclear yellowcake selling for about $90 a pound, and now it’s down to about 28 to 30 dollars a pound. CONSUELO MACK: Wow. Cyclical. STEVE LEUTHOLD: And most of the miners are unable to make money at it at those levels.

So you set down a lot of the production. Now some things are going to happen over the next three years, especially with the new plants coming on, and with maybe China or maybe Japan restarting because they’re finding that their electrical production which is now based on LNG primarily is far, far too expensive, and electricity rates have gone up like two and three-fold. So I think that long- term this is a three-year play. This is going to take some time, but there is a growing demand, and there is currently a very low supply of what they need to fuel the … I think there are about 700 reactors in the planning stage, not just in the building stage. So you’re going to see … CONSUELO MACK: Demand pick up for both of those areas. STEVE LEUTHOLD: Maybe even in the nuclear phobic United States. I don't know. We do have another part of that clean energy which is more conventional, and that’s we’ve got about 12 percent or 13 percent that is in natural gas, and natural gas is not super clean, but it’s a lot cleaner than what we’re looking at now, and it’s a good step I think toward dealing with our own air pollution and other countries that can afford and develop natural gas.

I mean, we’re not the only one that can do this. We’re not the only fracker around, you know, and so that’s the other step, and that’s kind of the intermediate step. Those stocks are pretty cheap, and they’re pretty productive, and we like that area too. It’s not as radical as the nuclear but that’s a longer-term bet. CONSUELO MACK: Airlines quickly have been a major investment, a very successful one over the last couple of years, and you have said to shareholders may now be a sale candidate. STEVE LEUTHOLD: We looked through all the industries and the ones that were at the bottom of the heap, and airlines were at the bottom of the heap. People said, “They’ve never made any money. I wouldn’t touch an airline,” and so on and so forth. You heard all this, but you were forming a pretty good relative strength bottom in the group. So we started looking at it as to why we might consider buying this, and we went through some of the rationale, and they seemed really cheap, and we bought them, and it’s like once in a while you strike gold. CONSUELO MACK: With Delta and American.

STEVE LEUTHOLD: And American, and we did have Southwest. We had five or six different airlines at one time, and now we’ve concentrated it in the two best performers, and now we don’t see any sense in bailing out just because they’re overpriced as long as they keep going up and, therefore, we’ve become from value investors to momentum investors with this particular group. CONSUELO MACK: And when they stall, you will get out. STEVE LEUTHOLD: Yes, we will. CONSUELO MACK: So Steve, we ask every guest at the end of WealthTrack if there’s one investment that you could own in a long-term diversified portfolio, what would it be. So what would you recommend for our one investment? STEVE LEUTHOLD: Well, right now I would recommend an inflation hedge, and that would be the fund that we talked about earlier.

CONSUELO MACK: Which is the GreenHaven Continuous Commodity Fund. STEVE LEUTHOLD: That’s right. That’s right. We just have invested in that for the first time in the last two weeks, because we went through and we looked at all the different potentials that are ETFs that everybody could use, and this one is based on 20 commodities and is equally weighted and rebalanced in those 20, and it includes food as well as minerals and metals and so on and so forth, and it’s probably the best balanced one that we’ve ever seen in looking at them. So I hate to be running a commercial for them, but it is really. It deals with a lot of the problems a lot of the commodity ETFs had in the past. CONSUELO MACK: So Steve Leuthold, thanks so much for joining us on WealthTrack.

It’s great to have you back. STEVE LEUTHOLD: It was my pleasure. CONSUELO MACK: At the close of every WealthTrack we try to give you one suggestion to help you build and protect your wealth over the long term. This week’s action point recalls one of my favorite pieces of advice from one of the great financial journalists of the last century, who appeared exclusively on WealthTrack. The late Peter Bernstein told us that you are never truly diversified until you own something you are uncomfortable with. So this week’s action point is: own something you are uncomfortable with, within reason! My choice would be gold, which Bernstein considered to be a core portfolio position, in small amounts, to hold as an insurance policy against disaster. It is also considered to be an inflation hedge. Steve Leuthold’s choice of SPDR Gold Trust is as good a way as any to own the metal. It’s also a lot cheaper than it was at it peak in 2011. Next week we will sit down with a WealthTrack regular and widely followed strategist.

Nuveen Asset Management ’s Bob Doll will join us with his investment outlook and strategy for his large cap funds. Also in our new WealthTrack Women section we will have updated financial advice specifically for women from our panel of women financial advisors. Have a great weekend and make the week ahead a profitable and a productive one. [music] [music] [music] [music] [sponsor announcement] [sponsor announcement] [sponsor announcement] [sponsor announcement] [music] [music] [music] [music].