The World, According to Gartman

EACH MORNING, A HARD-CORE group of savvy investors eagerly await The Gartman Letter. In a few pages, publisher Dennis Gartman eruditely dissects currencies, commodities, bonds, stocks and politics here and abroad.

Subscribers include major institutional investors, brokerage firms and many leading hedge-fund managers. Distribution is global and extends across Asia, Australia, Europe, the Middle East, North and South America.

During a recent phone interview, Gartman shared his thoughts on topics ranging from rising grain prices to falling stock values. He even threw in a short primer on the history of bear markets. Here are some excerpts:

Barron’s Online: The Gartman Letter offers a world view of the markets. This is a lot of ground to cover. What should keep investors awake at night?

Gartman: It’s something rather parochial in scope: the huge increase in grain prices, although this may seem awfully minute. And, also the problems in the American banking system that are forcing a larger and larger number of banks to question margins that they normally fund for grain elevators, and exchanges in the futures markets, causing the banks to be slow in making those margin calls. That’s what’s keeping me awake right now.

Lately, wheat has gone from being $3 a bushel in the course of the year to, in the case of spring wheat, more than $17. Instead of a $30 million margin call, maybe you had 17 times that. I am concerned about that.

Food prices are going up, and that is putting strains on the banking system and on the commodities exchanges. If we have trouble in subprime lending, we don’t need problems at one of the commodity exchanges or among the commodity-market hedgers who are normally of inordinately small concern.

Now I am concerned, and perhaps that concern is misplaced, but you asked what keeps me awake at night, and this circumstance does. We haven’t had a problem yet, and the real movement in prices has been in spring wheat, which is a relatively minor crop, but if we should have a drought this summer in corn where you have 1.3 billion bushels, and grain prices go up a buck or two, the strains on the banking system, and the strains on the exchanges, and the strains on grain elevators will become very real.

Q: Are U.S. stocks cheap?

A: No. They’re expensive. They’re on their way to getting cheap, but they’re not there yet. It’s a bear market. It started in October, and it’s a global bear market. Things are slowing down and price-to-earnings multiples that look good now will get cheaper.

As the “e” of the “p and e” starts to decline, price-to-earnings multiples are going to ramp back up. What looks cheap now in a price-to-earnings ratio is not going to look so cheap. At the bottom in 1974, and again in 1982, the price-to-earnings ratios went almost to infinity. Back in the summer of 1974 and in the bottom of 1982 there was no “e.” The projections of “e” were almost nil. “E” is going to start diminishing.

Q: You say investors should think like fundamentalists, and trade like technicians. Will you give us an example?

A: This means that I want to understand the three or four reasonably elegant, but simple, fundamental reasons why something should be going up. But then I want to see in fact that it is going up. Then I’ll trade. If I’m bullish on something for a fundamental reason and it’s going down, it’s nonsense to say the market is wrong and your ideas are right. How filled with hubris is that? It’s dead men trading when you see that. They just don’t know it.

Q: What are your positions?

A: On balance we are long “stuff,” and short retail. We’re long raw materials. We’re long Converted Organics (Ticker: COIN), Petroleo Brasileiro (PBR), Cash America International (CSH), Walt Disney (DIS), North American Palladium (PAL), streetTracks Gold Shares (GLD), Stillwater Mining (SWC), Hovnanian Enterprises (HOV), Genesee & Wyoming (GWR), General Moly (GMO), San Juan Basin Realty Trust (SJT), NVR (NVR) and Caterpillar (CAT).

We’re short [as of Friday] ProShares UltraShort S&P 500 (SDS), General Motors (GM), DryShips (DRYS), Google (GOOG), CME Group, Apollo Group (APOL), and Target (TGT).

Q: You spend a lot of time discussing commodity prices. Why is that important to stock investors?

A: All commodity prices are important. You have to know what raw material costs are doing. You may have been able to escape that in the 1990s but you can’t now. China’s demand for stuff is strong and it’s not going away. Gold prices are now on center stage.

The fact that a small commodity market like spring wheat exploded from $3 to more than $17 is important. Wheat is at a premium to soybeans. It’s shocking. It was thought such a thing could never, ever happen. However, it did. It shows you the tenuous nature that exists out there in the word of raw material prices — that which seems to be absolutely laughable and utterly impossible is now a reality.

Now, throw into that the stupidity of the ethanol program. What could be dumber than taking food off the table and putting it in the tank of the car? We’ve had years of very good weather, and last year for the first time we had the first bad year of weather on a major international crop: the wheat crops around the world. And this is what you ended up with: more than $17 spring wheat. If we have even the slightest problems in the corn areas of the U.S. and Canada, we could have $6 corn swiftly and easily.

Q: As you travel around the world visiting with subscribers and delivering speeches, what do most clients ask?

A: The first question they ask is if we are we really in a bear market. The corollary to that is we’re really not in one until prices go down 20%. And I laugh and say, you don’t start taking action on something until it has gone down 20%? Heaven help you. Here, trading for my account, we’re scared of everything all the time. We have no courage here — none. We hedge everything; we have our stops in; we know where we are wrong, and we respect the market’s ability to take all of our money if given the chance.

The other thing they ask is can we really go into a recession. And I say, yes, I think we’re there. I think we’ve been there.

Q: Do you follow analyst recommendations?

A: No. I follow my own recommendations. I read other guys’ stuff. The motor analysts of Merrill Lynch, or Lehman, or UBS, or Deutsche Bank are going to know more about the auto industry than I’m ever going to know, so I have to read what they say. But they get caught up in the minutiae. They do have problems seeing the forest for the trees. In a bull market, the market doesn’t care where earnings are going. It knows earnings are always going to be higher next week, next month, next quarter. In a bear market, the market doesn’t care about earnings because it knows the earnings are going to be worse next week, next month, next quarter.

In a bull market, all news is bullish, even bad news; and in a bear market, all news is bearish. It doesn’t matter.

Q: Is there anything you want to say that I haven’t asked you?

A: In closing, I want to leave the public with three thoughts. Cut your losses. Then, secondly it’s important after you’ve cut your losses, to cut your losses. And thirdly it’s really important that you cut your losses. Most people cannot do that. Even if they can, they won’t. They just won’t. They fall in love with their stocks. They like the story. Golly day, we’ve loved Apple (APPL). But at the moment we’re short Apple. Why? Because it’s going down. I guess the thing we do reasonably well here is we have nothing that we love, and we’re frightened of everything.

Q: Thank you.