Danielle Park, President and Portfolio Manager, Venable Park

Al Alper: My name is Al Alper, and I'm interviewing Danielle Park, who is President and Portfolio Manager of Venable Park Investment Counsel Incorporated.  I was wondering if you could tell our readers and investors about your own background; the economic environment we're in today, your thoughts on where our readers should put their money and when you think the market might recover.

Danielle Park: Thank you. Originally I was trained as a lawyer; I practiced for a number of years and was then recruited by an international securities firm in the '90s.  I worked on the sell side there for about six years; became a charter financial analyst and then a portfolio manager. Then I left to co-found my own independent firm, Venable Park.  We manage money for individuals, segregated accounts.  We don’t run funds.  We don’t sell people products.  We manage capital, and we're fiduciaries, so our focus is on making sure capital is not destroyed with each market cycle.  We don’t just passively put money in and hope for the best.

My partner's a technician, a CMT, so we use technical and fundamental guidelines to help control risk around the market cycle.  In 2007 I wrote a book called Juggling Dynamite that was talking about the incredible risk factors that were building in all asset classes that we were measuring around the globe at that point: currencies, commodities, equities, bonds, real estate, antiques.  It was incredible the in-flows of capital that were going into all of it.  All driven by a sort of speculative fervor fueled by low interest rates.

Near the peak, we found that we couldn’t find anywhere that wasn’t egregiously over-priced on our metrics.  So we moved fully into cash, high-quality bonds and some US dollar T bills.  By May 2008 we had no equity exposure.  Given the declines over the past 18 months, our rules served to protect our capital very well and we made nice gains through 2008, and our accounts are positive year to date. 

But the thing that I was trying to talk about, when the book came out and on my blog ever since, jugglingdynamite.com, was the reality of market cycles.  In 2000, for example, technology was pronounced as death to the business cycle.  Because of technology many people came to believe that there could be perpetual world growth, and in fact, of course, that was false.

Then when you had the sort of feverous peak in '07, again, there was commentary to the effect that China and India had eradicated the business cycle and now there would be perpetual world growth.  We knew that had to be highly unlikely.  In fact, never before in history had such a thing actually been true.  So as it's turned out, the business cycle is alive and well.  Unfortunately, many people have lost heavily again because they were not paying attention to it. Even on a business level, people that run companies tend to fall in love with an earnings growth story that gets better during the expansion. It goes up year after year, and they start adding more employees, adding more infrastructure, building more stuff, taking on expansion projects.  They don’t plan for the downturn.

So, when it hits, they're left flat-footed.  They realize, "Oh no, now we have too many employees, too much capacity, and too much debt.  We were planning on having another banner year and in fact 40 percent of our revenue has vanished."  So, it's really fundamentally key for people to understand that growth is never straight up.  Consumption and spending is a cycle.  It takes about five years for the whole thing to complete.  You get roughly three or four years of expansion, and then you get a contraction.  You can't precisely predict the timing; but even if you're roughly accurate about timing, even if you get a third of it right, chances are you're going to do so much better than people who are just blindly riding the wave. 

So, it's been reaffirming to note that prices that seemed crazy in 2006-2007 were in fact crazy, and they have now come back to reality. Now at our firm, we're actually feeling more optimistic than most because we haven't suffered losses; because our clients are happy, because we're mindful of where support might be in terms of a turn in the overall economy. A lot of our downside targets have already been hit.  Like when oil was at 147 we thought secular support was at $40.00, and it roughly went there – 35 –and now we're saying – we're starting to see some promising targets.  We're not talking about reverting to the bubble-like prices of 2007, but we believe that after a 60 percent bear market that's gone on now for more than a year and a half, we're closer to the end of this particular cyclical contraction than not. We're starting to see some inflows into things like commodities that have been down by 70 percent, Canadian financial stocks, which lost more than half their value.  I'm still not keen on the American financials right now, but dividend-paying stuff and corporate bonds have started to get some inflows.  Energy looks like it's stabilizing here.  Those are all reasonable things that would happen in coming out of a bottom into a recovery phase.

So, that's all sort of positive.  I think we're getting into a time when it will be rewarding again to hold risk assets, but you have to be really careful about the exposure because I think we're still in a secular bear period that will go on for another seven to ten years.  This means that markets are likely to be basically range-bound, similar to what we saw '66-‘82.  Each business cycle we will get an expansion perhaps even 80 to 100 percent gains on the overall equity indices, but then you'll get a real hard contraction again, which will probably retest the prior cycle lows.  So the lows of '02 and '09 are likely to be the same retest zone for markets in the next down cycle some 3 to 5 years from now.

That's what a secular bear is like, and if you know that you can plan for it and control your exposure around that.  Eventually, once people have paid down enough debt and built up savings again to a reasonable rate from 0 to 10 percent of disposable income, you'll get into a more prosperous economic condition that will be more like a secular bull climate.  But we won't likely be there for several more years.  Correcting the period of prior excess takes years, not months.

Al Alper: So, actually, you're thinking that at some point it will be the right time again to invest in say stocks and maybe energy.  Now, what do you think about the timing, and what areas do you see becoming the right ones to look at and invest in?

Danielle Park: Well business cycle study gives you a sense of what sectors lead and at what point in each cycle.  So, we know that coming out of the bottom, financials and techs need to lead the overall economy.  Up until recently they've been in freefall.  The semiconductor index peaked in 2000 at 105 and fell to 15 in the contraction of '02.  It rallied to 35 in this expansion and then back to 15 in the 2008 contraction.  There is good support in this area for a base and they seem to be breaking out recently.  That's a positive sign.  But when I say they're breaking out, I expect they may go back to the 35 range from 15, which is a lovely return as long as you weren't holding it all the way down. 

Many commodity prices have been decimated by 70 percent 'cause there was a lot of speculative bubble in the pricing.  Long-only commodity units and index funds brought in a sort of false demand to commodities 2006-2008.  In addition they enjoyed inflows due to their inverse relation to the U.S. dollar that was falling for seven years.  These all fueled very dramatic increases in commodity prices, which people misinterpreted as demand from China and India, etcetera. 

They said, "Look at this demand, it took copper from $0.67 to $4.00 and its going higher.”  But this wasn’t sustainable, it wasn't fundamentally sound growth.  It was speculative growth and credit. 

Anyway, all of this brings us to a more realistic time.  We won’t see people rushing back to credit-mania spending, but people still need clothes, they still need energy, they still need to eventually buy a new car again.  Commodities and energy are late cycle leaders.  They may have made their bottom here.  Its reasonable that they might stabilize now, especially the base metals and industrial commodities; but I wouldn’t expect them to be peaking again soon; probably not for three- to five-years depending on how much of an expansion we get this cycle.

So we are tracking the early cyclicals closely for signs of money in flows.  At the moment we're 10 percent invested on the equity side, which we just added in February.  So far we're in a rally; but we are not ready to declare the end of this bear market just yet.  It may indeed just be a bear market rally before we get another retest.  We watch our technical measurements every day to see whether the money flow remains positive.  If capital starts to flow back out again we will move back to cash again if necessary to wait for another correction.  Eventually though the bottom will come.  If we've been forming that bottom for nine to ten months, historical precedent suggests the bottom gets finally put in, and then you get on with the recovery.

Al Alper: Now, many experts are saying, "Put your money in gold.  It's going to go to the 1,000 and 2,000.  What are your thoughts about that?

Danielle Park: Well, bullion, of course, has a special place in people's hearts, and I understand that.  If they want to have a portion of their net worth that they park in bullion, that's really for the ultimate rainy day philosophy of making sure you have some currency that's not paper.  I understand that, people should do whatever they think's prudent for their own exposure there.  But as far as speculating in gold going from 1,000 to 2,000 or whatever people were saying last year when it hit 1,000, I think it's highly unlikely. 

There were bubbles around the world in all assets and now gold has corrected the least of all.  That doesn’t make me feel great about gold.  That makes me think there's a much further potential for correction.  The other factor when you look at who's doing the buying in the gold market at the present time, leading buyers have been ETFs and new commodity index type products that have come out in the past year.  The financial industry's fabulous at rolling out the wrong product at the wrong time because they're selling based on what has been hot.  Meanwhile Indian buyers, traditionally the largest, have fallen right off.  If it keeps up, indexes will be the primary driver of demand in 2009, above jewelry.  This is not healthy sustainable demand. In our work, 650 would be a correction test for gold bullion, and we're at something like 900. 

As far as the U.S. dollar, it's still in an uptrend.  I know people have pronounced it dead, but it's not.  Someday it may, indeed, no longer be a benchmark currency, but I don't think it's anytime soon.  Eventually perhaps we'll get a new replacement for the world currency. Historically, eventually every currency has been replaced by another as the benchmark, but I don't think it's this year or next year.  So, the whole long-term secular argument for gold is rather weak.  And more importantly we can’t afford to wait 15 to 20 years to see if secular arguments hold up.  For real life, time frames have to be much more practical, this year and the next year, these are what matter most.  We can’t afford to loose money and then hope it comes back over years of waiting.  People have finite time frames to work with, and investment strategies must reflect that reality.

Al Alper: Well, thank you very much.  I appreciate the discussion.  I appreciate your thoughts and your knowledge and your willingness to share it with my audience.