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The Day Trader in Winter

By Robert Barker One year later, and a loss of 56% in the Nasdaq since its March 10, 2000, peak -- what do you do with your money? If you're George Henel, day trader and periodic BusinessWeek Online diarist (see BW Online, 10/22/99, "Diary of a Day Trader, Part 1"), you sit on your cash and wait.

Henel, who trades from an alcove off the kitchen of his home in Buffalo, N.Y., is a former Internal Revenue Service attorney who has been day trading since 1997. He does it with a difference, however, favoring cheap "value" stocks over the momentum numbers played by so many other day traders. He credits that bias with having helped him score his best year ever in 2000, when he claims to have made more than 200%, after costs, on his money.

So far this year, Henel says he's up nearly 50%. That's one reason he's sitting out today's market, where he sees plenty of danger despite any given day's rally. To delve into why he's on the sidelines, I spoke with him by phone just as a winter storm had delivered its white, frozen product to his doorstep. Here are edited excerpts of our conversation:

Q: You've been out shoveling snow. I know you're in Buffalo, so that means you've got some heavy weather, but does it also reflect your feelings about the cold market?

A: Yes. I don't think the full brunt of this is over yet. I hate to be a fellow who has a bad message -- they always kill the messenger! But I think there are still problems here that [lower] interest rates cannot fix.

Q: Such as?

A: The basic problem, as I see it, is probably the dollar.

Q: Please explain.

A: First of all, I don't think we're going back to a market like we had. The market we had was the result of low interest rates, a lot of heavy IPO-, Internet-related and high-tech activity. This allowed for a build-out of the high-tech infrastructure, which created a lot of wealth and demand for high-tech products, which I don't think is going to be here this cycle.

Q: Why not?

A: The biggest problem as I see it is there's too much capacity -- production capacity, service capacity -- everywhere I look. I just don't think you can have a high dollar like we have, almost at record highs against the euro and the yen, and have every other country in the world dump their products here, and expect us to consume all this stuff. We already have a very, very low [national] savings rate.

Q: An example?

A: Here in Buffalo, we're close to the Canadian border. People [are] going across into Canada, paying the bridge toll, just to have their [cars'] oil changed in Canada, because it's cheaper.

Q: Is that all?

A: This is a minuscule thing, but if you extrapolate it.... O.K.: I flew to New York City recently on Jet Blue, a great airline.

Q: A public company?

A: I wish it were. It's an incredibly [well] run airline. Now, they buy new Airbus aircraft, a brand new one, every five weeks. These planes have all-leather seats and a TV in each seat. Excellent service, and now, United (UAL) is buying the [Airbuses], too.

Q: Your point?

A: Why are all of these American companies buying foreign products? It's because of the strong dollar. It's cheaper to buy these things, and it has gotten to the point where we're becoming uncompetitive in a lot of areas. And I really think the whole secret to the stock market is a lower dollar.

Q: So how would this unravel, then? We've been going on this way for a long time.

A: I see the market as going back to something it was many years ago. I see a definite trend in [value] stocks that are showing positive trends now, stocks like Phelps Dodge (PD), General Motors (GM), companies that have assets, that have real earnings, real operations, real products. And they even have dividends.

Q: George, I have to interrupt you.

A: O.K.

Q: Many of your other forecasts have panned out nicely, but you're describing a company very much like J.C. Penney (JCP), which you were high on, and we all know what has since happened to J.C. Penney -- losses, layoffs, and store closings. So that kind of stock is not necessarily a lock, is it?

A: Well, that's not the type of company that I would really label a value company.... When I traded that, it was more because of the dividend. And to be honest, it was before I became aware of the real change that was taking place in the retailing industry.

Q: What do you mean?

A: What happened to J.C. Penney is symptomatic of the problem that I just described -- overcapacity. I think it's all an uphill battle in retailing because there are just too many retailers, too much retail space.

Q: Last spring, you also talked about much higher natural-gas prices on the way, and that definitely panned out. Do you think there are still stocks in the energy industry worth investing in?

A: I have my eye on the gas stocks. The natural-gas problem I don't think will be solved for three to five years. I was hoping on getting some warmer weather here early this spring to get a pullback in these stocks.... I would be looking to buy something like a Burlington Resources (BR) under $40. I think that could be a takeover at some point.

Q: Much like Barrett Resources (BRR), I suppose, the target of a takeover bid by Royal Dutch/Shell (RD) this week. What about oil stocks?

A: In terms of integrated oils, a lot of these stocks aren't that cheap anymore. Some of the [brokerage] houses are recommending these now. I'm a little leery.

Q: So what's an active investor like you doing -- besides shoveling snow?

A: I'm not doing much. The last two weeks I've kind of sidelined myself. I really feel there's a lot of potential danger here. A lot of people are losing tremendous amounts of money, and they think the tech stocks are going to bounce and come back. I don't see that.

Q: What are you keeping an eye on, then?

A: I would be watching stocks that would benefit from a weaker dollar.

Q: Examples, please?

A: Stocks like Caterpillar (CAT), Cummins Engine (CUM)...

Q: Big exporters, eh?

A: Yeah. All of these stocks have been killed by the high dollar.

Q: Would you be looking at Coca-Cola (KO) as well?

A: I don't know about that. That's a little more in the consumer area, and I haven't really looked at that. Paper stocks [are] a good example of what to look for. Back in October, I gave a speech and [pointed out] that all of these stocks then were all trading at their book values. And stocks like International Paper (IP), and Weyerhaeuser (WY).... I think at that time International Paper was $26. It's now $40. Weyerhaeuser was $36, and it's now $56. You have to look for stocks that have assets behind them and are selling in a reasonable relationship to book value.

Q: George, when did you trade your first stock?

A: Back around 1966.

Q: So you saw the horrible bear market of 1973-74. Are you saying that market is back?

A: The only thing that's different now is that there's a tremendous amount of money sloshing around. We can, on any given day, generate a rally for no reason whatsoever. But that doesn't mean it's sustainable for long periods of time.

Q: So do you just keep your money in a money-market account?

A: To be honest, I'm sidelining a lot of money. I've put money in CDs. I'm anticipating much lower rates.

Q: Some of the bulls on Wall Street point out there is a ton of cash on the sidelines waiting to come in. If all that flooded in, would that change your mind?

A: The gurus on Wall Street have their own scenarios, [but] if you really watch the way the recommendations come out, they're not without rhyme or reason.

Q: What do you mean?

A: As oil and gas prices were moving higher, there were few people on Wall Street that actually recommended these stocks. Instead, you had houses coming out and recommending companies that had in many instances alternative-energy products on the drawing boards, like Plug Power (PLUG). And it just blows my mind when I see this.

Q: See what?

A: I really think it all operates on the "greater-fool" theory. If a stock earns a penny last quarter and two pennies this quarter, that's a 100% increase. The media [and] everybody hypes it as a 100% increase in earnings and that the stock is well worth $120 a share.

Q: What are you getting at?

A: I would like to just sit around a table with a roll of pennies and trade people pennies for a $100 bill. If you look at this from this perspective you'd see how ludicrous it really is. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BW Online.

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