The last great bear? At a time when most of them are in hibernation, Laurence A. Tisch, chairman and CEO of Loews Corp., still insists that the market is greatly overvalued. "People don't realize this is a unique period in American financial history....We've gotten to such an extreme in the market that a correction would be of such major proportions, it could do economic harm to the country," Tisch says. "That's the sad part."
Most professional investors know Tisch's longtime dark view of the market. But few appreciate the extent to which he has been putting his money where his mouth is. Regarded as a conservative value player for decades, he has been pursuing an extraordinarily daring strategy for over a year at Loews, a holding company of which the Tisch family owns about a third of the stock. He has been using company money to make huge bets against the bull market. They include shorting equities, shorting futures contracts on the Standard & Poor's 500-stock index, and buying put options on the S&P.
So far, his timing has been lousy. In 1997, these bets that the market would fall cost Loews $917.7 million. Loews' 1997 pretax earnings of $1.59 billion were 40% lower as a result. The first quarter of 1998 was even worse. Trading losses totaled some $533.4 million, basically wiping out the quarter's earnings. Overall, the past five quarters produced close to $1.5 billion in trading losses. And the bad news is continuing. The latest Securities & Exchange Commission filing for the quarter ending Mar. 31 says: "The company continues to maintain these positions and has experienced additional significant losses."
Loews' annual 10-k filing estimates that if a variety of adverse events occurred, such as a 25% rise in the stock market, Loews could lose as much as $1 billion from short-selling. It appears that Tisch, in effect, has been been making ever larger bets as the market advances. Trading losses were only $31.4 million in 1995 and $145.3 million in 1996.
"Don't get me wrong. It's not pleasant. I'm not happy about [the losses]," says Tisch. "Look, I've been wrong so far." But he defends his shorting strategies as a proper activity for a public company with major securities positions: "In the long run, I think we are doing the prudent thing."
EXCESSES. So what gives Tisch the courage to continue along this bloody path? After weathering several market downturns, Loews' CEO insists that the market's current valuations are far beyond the extremes reached before the crash of 1929. Tisch points out that the NASDAQ index trades at a multiple of 70 times earnings, when the normal price-earnings ratio, according to him, should be about 18 times.
Tisch is convinced that the corporate-accounting excesses of the 1990s will finally come home to roost. He questions the quality of earnings, pointing to such things as the overuse of write-offs, the wholesale granting of stock options, and the very generous use of accounting to inflate earnings.
Tisch has made money shorting the market before--in the 1987 downturn and during Japan's 1989 decline. He won't say what individual stocks Loews is shorting. But he does say that his recent strategy has been slightly more conservative. Instead of mainly shorting the S&P futures contract, he is also buying more puts on the S&P. That is still a bet on a market downturn, but it involves less risk if the market should skyrocket. The loss on buying puts is limited to the amount paid for the put, whereas shorting S&P futures entails almost unlimited risks.
And what if the market tanks this year, as Tisch is expecting? Tisch says if it slumps by 20%, he will more than recoup the losses of the past five quarters. A 30% or 40% decline would make the company a couple of billions of dollars, he says.
Tisch has plenty of defenders. Warren E. Buffett, chief of Omaha's Berkshire Hathaway Inc., is one. "While I don't try to time the market much myself," says Buffett, an old friend of Tisch, "I hope Loews shareholders behave in the same way that I hope Berkshire Hathaway shareholders behave--and that is you look at a batting average over time...all nine innings."
Paul Spraos, publisher of Swaps Monitor, which covers derivative trading, says Loews' strategy of shorting the market is relatively rare among large corporations. "Obviously their strategy wasn't the greatest so far," says Spraos. "But at least they've done what they should have in telling shareholders what they were up to....They were actually very informative in their annual report."
Others are less kind. Says one hedge- fund manager: "I would argue that if he wants to be shorting the market, he probably shouldn't be a public company. I don't think that is the kind of risk most shareholders want you to take."
Loews' disparate collection of businesses is as rare as his trading practices. The holding company, with $20 billion in revenues, has an 84% stake in CNA Insurance, a 50% stake in Diamond Offshore Drilling, 98% of Bulova Watch, and 100% of Loews Hotels and Lorillard Tobacco. Over the past 15 months, the paper value of Loews' stakes in Diamond, CNA, and other equity investments rose close to $4 billion. In CNA's case, much of the stock appreciation was the result of another controversial move: buying bonds in 1994 when the bond market crashed, which nearly doubled CNA's book value.
Tisch is a confirmed bottom-fisher. His moves have usually been controversial but ultimately very lucrative. For instance, when Tisch started buying offshore-drilling rigs from virtually bankrupt companies in the late 1980s, the industry was so out of favor that assets were selling at close to scrap-metal prices. Loews' interest in Diamond is now worth about $3.5 billion.
CLOUD OF SMOKE. But Tisch also has been accused of selling things too early, such as bank stocks in the 1990s, and of missing the bull market as a member of New York University's investment committee, which was conservatively invested in fixed-income securities.
Despite the mammoth increase in the market value of Loews' two public companies, Loews' shares still only trade at a multiple of nine times projected earnings. Over a 25-year period Loews' shares have doubled the S&P. But largely due to the cloud of tobacco hanging over its stock, Loews in recent years has underperformed the S&P (chart).
For some, Loews may be attractive precisely because of its short positions. Mark Hollingsworth, president of Dominion Capital Advisors in Hampton, Va., an adviser for pension funds, says he can't buy derivatives for many of the accounts he manages. "If Loews is carrying a billion dollars' worth of downside protection," Hollingsworth says, "they start to look attractive as a hedge for investors like ourselves."
Tisch feels he will eventually be vindicated. "I don't want to be a genius--and I don't want to be a bum. I just want to be around with a sound financial company," he says. So far, Loews has paid a high price for Tisch's belief in the bear.