Nearly Every Wall Street Desk Reads This Man! An Interview With Dennis Gartman

Dennis Gartman: First,
I came out of graduate school at North Carolina State University and
was the economist for Cotton, Inc. (“Cotton keeps America
feeling comfortable” and all that). I began analyzing cotton
usage, demand and supply — the normal aspects of commodity trading —
and understood what was going on in the cotton futures market. I wrote
a few articles at the very beginning of the advent of the derivatives
markets and financial instruments.

I
explained to a lot of people: “Hey, you guys in financial
instruments are going to have these wonderful new instruments, this
new futures market. You’ll be able to have a number of interesting new
products that you’ll be able to develop because of those futures
market. You’ll be able to make mortgages two or three or five years
forward at a fixed price; (at that time with volatility in interest
rates) you’ll be able to hedge those interest rates, you’ll be
able to put caps and collars and things. But please don’t get too
heavily excited about it, because they’ve been doing it in the cotton
market for 100 years.”

And
from those articles, I went to work for what was then NCNB (North
Carolina National Bank) because they said they needed somebody who
understood futures. Clearly, I didn’t understand much about banking
but I might have understood a bit about the futures market. I stayed
there for a number of years and wanted to move to Chicago and get a
seat on the Board of Trade. I had a seat back in the old South Room
when the bond futures were, literally, in their very infancy. I stayed
at the CBOT until 1984 and started writing the newsletter about 1986
and have been doing it ever since.

Connors:
How would you describe your approach? It’s really a
combination of fundamentals and technicals. Is that correct?

Gartman:
Yes, I think that there’s
great merit (as I like to say) in stealing from both schools.
I’ve learned over time that, at least for me, if I can have four or
five reasonable fundamentals that make common sense to me — they
don’t have to be too terribly arcane — but that I can get my arms
around and fully understand — let’s say something that tells me I
wish to be bullish on — whether it’s the British pound or whether
it’s equities or whether it’s the gold market. As long as I have a
handful of decent fundamentals that make sense, then if I see that the
market’s telling me that indeed that is indeed the right thing to be
— that if you have bullish fundamentals and the market’s acting
bullishly, it’s probably easiest to put on a bullish position and
defend it. So I try…as I get older, the simpler I find the stuff,
the less arcane I want it to be, and the better I find that it works.
So yes, I would say that I steal blithely from both schools of
thought.

Connors:
What four or five fundamental things would you like to see
going on at the same time?

Gartman:
Well, for example, I’ve tended
for the last year and a half to be almost always bearish
on the Japanese yen. Clearly, Japan needs a weaker yen. I think
that they want to sponsor a weaker yen. They need to continue to put
liquidity into the system — liquidity that they aren’t putting into
the system or that they haven’t put in, I think, in an effective
manner. The government has made it abundantly clear that it will err always
upon the side of weakening its currency and in fact when it has
intervened… normally, intervention in favor of one’s currency rarely
works, but intervention against your currency — since you’re
the central bank, you can create new yen at a moment’s notice — will
probably tend to work, on balance.

You
look at the problems that the Japanese economy has had and perhaps
more importantly, the unwillingness on the part of the Liberal
Democratic Party (the party in power) to come to grips with those
problems. What they should have been doing all along was to allow
bankrupt companies (I love the term they now give them, the
“zombie” companies), to go into bankruptcy and simply go out
of existence.

Instead,
the LDP has forced Japan’s banks to continuously lend money to weak
companies that have no merit. In essence, Japan has kept its bad trade
going — it’s kept its losers and curtailed its winners. Very bad
policy. Look at those numbers and fundamentals. Those clearly tell you
one should be a seller of yen. And then look at the technicals.
Basically, on balance, every low for the yen is lower, every high for
the yen is lower. I’m not sure but that tells me I should probably
sell it.

Connors:
So, you’re first starting with the fundamental picture. You’re
basically looking at what you think is the way something should work.
And then you are waiting for the technicals to confirm?

Gartman:
Oh yes, I think that’s the
best way to do it.

Connors:
What you said
about looking at lower highs is a
very
simple form of technical analysis. Is that the extent of where you go
— is it just simply letting price just show you that? Or do you use
anything more elaborate?

Gartman:
I rarely use anything more
elaborate than that. I understand the guys who watch Fibonacci and
Elliott waves… I find most of that becomes so arcane. There are so
many ways of looking back and saying, “Well, that wasn’t the
third wave, that was an ABC corrective wave.” I just find that
the simpler you keep it, the better off you are. And to me the
simplest methodology is: A bear market means lower lows and lower
highs. A bull market is higher highs and higher lows. That works! I’ll
draw trendlines, but I tend not to put a great deal of credence in
then because most people want to become so specific about the
trendline that even the smallest break of it — they give it too much
importance. It’s amusing to me how often markets correct somewhere
between 50% and 60% of each move.

So I
tend to draw what I call a box on the charts after an extended move on
the upside where, you know, what would be 50% to 60% back, and then
say, “Gee, the market could probably retrace back to those
levels.” If it’s a bull market, that’s where you should be a
buyer. If it’s a bear market, you could probably jump upward to the
50% to 60% correction. If it’s a bear market, you should probably look
to be a seller in those areas. But other than that, I think that if
you get any more sophisticated (or complex is probably a better
term than that), you’re making it more difficult for yourself.

Connors:
Sure. Your first point about entries…where
would be a typical entry for you after you’ve put these pieces
together? How do you rank them?

Gartman:
Well, one of the good ways to
look at any new trade, and I try to stick by this, I think it’s
important: If I’m going to be a buyer of something, to start with, if
I think that I’ve seen something making a bottom of some consequence,
I’m going to want to buy strength the next time, a break above a
trendline, a break above the previous highs, any number of rather
simple technical triggers. But I think you want to buy strength first.
The next time you want to buy that market to stay with the winning
trade, you want to buy strength the second time. The market’s got to
prove to you that it has merit.

After
that, I think you want to try to buy retracements and you want to buy less
each time. I like to think in terms of buying units of something and I
don’t know what a unit is. I don’t know how to tell somebody… they
should buy “X” amount of something and an institution that’s
much smaller to buy the same amount. So I tell them, “Look, I
think you need to trade a unit.” Whatever your unit is, is
what you’re comfortable with. You start with some amount and the next
time you buy it, you buy a half again as much, and the next time you
buy it, you buy a half again as much, and the next time you buy it,
you buy a half again as much as what you have on totally — you’re
trying your best to keep away from being stopped out after a 60%
correction. That seems to work. Keep it simple. The simpler you keep
it, the easier you make it.

Connors:
What about stops?

Gartman:
I think stops are
absolutely paramount. It’s the first level — getting your high
school diploma in trading is getting the ability to use stops as much
as possible. You don’t always have to use them, because
sometimes they can be a problem — where you place them — but I’d say
85% of the time, you’d better put a stop in when you put a trade on.
And where do you put it? Again, keep it relatively simple. If you’re
bullish, and each high is higher and each low is higher, well then
some reasonable amount — and the only word one can use is
“reasonable” because what’s reasonable to me might not be
reasonable to somebody else — a reasonable amount below the previous
low is probably a good place to put stops.

I know
that your readers are going to look for something particular and
terribly finite and I think probably more sophisticated than
what I’m telling them, but again, I think that’s the proper way to go.
Keep it simple: Something that should be making new highs shouldn’t
make a new low, and if it does, that ought to be taken as a very
substantive warning. I think that trendlines have some merit and
putting stops below well-defined trendlines has a great deal of merit.

One of
my favorite lines that I’ve heard in years of trading is by a very
well-known hedge fund manager who once that the best trader he’d ever
seen was his 4-year-old nephew Bobby. My friend would hold a chart in
front of him and say, “Bobby, what’s the direction of this?”
The 4 year-old will always tell you, “Uncle, it looks like it’s
going down. Uncle, that looks like it’s going up.” Sometimes
that’s the easiest, the best way to trade. I’ll reiterate that time
and time again: Keep it simple.

Connors:
Let’s look at current markets. Today is
March 24 and we’re going to post this on Saturday, March 29. It’s the
war. I was looking at some of your newsletters from the past week. For
example, on Tuesday March 18, you had up in the upper left hand
corner: “US 10-YR NOTES: We exited on the very high of the
move… luckily!”

Gartman: Well,
a number of reasons: One, I noticed that people who didn’t wish to buy
the debt market a month and a half earlier couldn’t help themselves
but to buy the debt market at that point.

Gartman: Yes,
I thought it seemed like a bit of panic buying and it also bothered me
as I noticed what I thought was psychological panic buying, the market
wasn’t making new highs with any kind of fervor. That scared me a
great deal. The fact that we were up 10 out of the previous 11 days
bothered me a great deal. That’s reasonably extended. There were a
number of things that were of concern and I certainly thought that
those were the days — about a week prior to the advent of the war —
I thought that the amount of buying incumbent on flight to quality was
probably overdone.

So
there were a number of things, but I think your point being that this
is not a science, this really is an art and sometimes you just draw
upon past history and past activity and say, “Gee, I’ve seen this
before. And this acts a little unusually to me.” And so I just
said, “I think it’s time. I wish to stand aside.” I wish I
had been prescient enough to have sold the market short, but I would
never have done that. It was still a bull market. Every high in the
debt market was higher, every low was higher. The best I could do —
the most bearish I could get — would be go to the sidelines, and I
did. Again, I’ll reiterate to anyone, I was very fortunate.

Connors:
Last
week we had the biggest rally in 20 years in the markets and I know
you’ve been extremely bullish. Today, as we’re speaking at least,
there’s a fairly healthy correction because of some events that
happened over the weekend. Your outlook at this point — does what
happened the past couple of days change anything for you, or is this
just a natural correction?

Gartman:
No, it’s just a natural correction. I mean after all, my word, you
had the Dow up 1,000 points. I mean isn’t that bizarre? In what…
seven trading sessions? I don’t want to be held to it but I don’t
think we’ve had a rally of greater violence in history. If we did, we
certainly didn’t have more than one or two of those. By Friday
afternoon, the market had priced in utter, complete euphoria, as if
the war was going to be over by, the latest, Sunday morning. It wasn’t
going to happen. Anybody who thought so was naive at best. The bear
market in equities in the US ended the first week of October last
year. I’ll stand by that. And we have tried to go in and test those
lows and those lows have held. And I think that that’s terribly
important. So I think the bull market began in October of last
year. Henceforth, I think I want to buy weakness. After the Dow
rallies 1000 or 1100 points, do I want to buy that rally? No.
Give me four or five days of weakness, take the Dow back 300, 400
points from its highs, take the S&P 25, 30 points from its highs,
take the Nasdaq 40, 50 points from its highs of last week. Then will I
start looking to be an owner? You betcha I will.

Gartman:
I’m not sure if I want to sell
bonds short. That I have some concerns about. I’m not sure that I
would wish to sell gold short. I think that what I wish to do is be a
buyer of equities. That I can feel reasonably comfortable with.

Gartman: If
I do, they’re going to have to give me one whale of a rally in bonds
for me to sell into it and it’s going to have to fail well below the
highs made two weeks ago. And you may tempt me at that point, but the
violence with which the bond market has collapsed makes it hard for me
to want to sell any modest rally. You’re going to have to rally quite
a good distance and then it’s going to have to job about — as my
British friends would say — after a sustained rally and fail below
the previous highs. Then you’ll pique my interest. Will I act then? I
don’t know. But you’ll at least have my interest. I know that we all
have our own inherent biases and I know at this point I’ll be far more
amenable to buying stock on weakness than I will be to selling debt on
strength.

Gartman:
I understand the use of SPDRs
and QQQs and whatnot else, but quite honestly I find myself being
drawn to the notion — and this one makes some sense to me — I
probably prefer using individual stocks rather than indices and I’m
probably going to be drawn to the notion that I want to buy things
that if I drop them on my foot, they’ll hurt. I want to buy, probably,
steel. And I want to buy the manufacturers of ball bearings.

I’m not
sure I want to buy Ford, but I think I’m going to be interested in
looking at General Motors. I’m going to want to buy railroads and coal
mining companies. I’m going to want to buy the stuff of manufacture. I
have no interest at all in technology. I don’t understand high tech.
I’ll leave that to far wiser people than I. I am probably going to
want to buy what I refer to as “prosaic America.”

Gartman: I
think there is an awful lot of excess capacity, black glass, black
wires, still left in the ground after the tech bubble but I look at
inventories of stuff on the shelves of industrial America and those
inventories are not all that substantive. I think when the economy
turns around it will manifest itself most clearly in old-style prosaic
America. Now I could be wrong and I’m willing to admit when I’m wrong
quickly enough but I understand ball bearings and steel more
than I understand technology.

Gartman: Absolutely.
Look at other companies. Look at railroads. Norfolk Southern, for
example. Their lows are holding and they’re making new highs. A good
one is — I love the notion of owning tankers, the transporters of
crude oil. There’s really only two that control of some 85% of
double-hull tankers: Frontline
(
FRO |
Quote |
Chart |
News |
PowerRating)
and TK Shipping
(
TK |
Quote |
Chart |
News |
PowerRating). Gee, I
understand that there can be problems with their earnings, but you’re
talking about two companies with price/earnings in multiples of two,
or three, or four. I’d rather own those and they are making new
highs and each of their new lows is higher. I’ll own that
sort of thing. I understand that. I don’t understand high tech. I
never shall. I don’t understand genomics, I don’t understand
pharmaceuticals. I understand steel and ball bearings.

Gartman: I
hope so. I’m only in my early 50s so I still have time to learn more
— but the past several years have been very good for me in my own
account and I see no reason to change my philosophy or my methodology.

Gartman:
I think people misunderstand
what’s going to happen with the Baby Boomer. Perhaps I spend too much
time talking to too many Baby Boomers but I notice one amazing change
that’s taking place. I am the quintessential Baby Boomer, I was born
in August of 1950, the highest month of births in United States’
history. I am the Baby Boom.

And
everyone I know that it’s in my — and I love this term —
“cohort” (let’s call us the 47 to 55-year old group): We’re
all effectively in the same circumstances. Our kids have either
graduated university or they can see it in the not-too-distant future.
As long as Mom and Dad are working — hold their jobs, and there’s
always the possibility that they won’t — but as long as they do,
they’re looking at the fact that while their 401Ks have been
decimated, their cash flow is about to go absolutely through the roof.
Kids are gone, college is paid, house is probably paid or close… if
not now, in another three or four years.

Retirement
has had to have been put off because of the decimation of their 401Ks.
These people are about to become the most egregious savers the world
has ever seen. I mean phenomenal amounts of cash flow about to be
thrown off and put some place. Don’t underestimate the impact of what
the bear market has done, the propensity — and I think all economics
is a study of people’s propensity to do things. Don’t underestimate
the propensity of the Baby Boomer to save phenomenal sums of money.

Connors:
Where is it going to go?

Gartman:
That’s the big question. This
will put Mark Twain’s cat theory of investment to the test. Mark Twain
— and I love this comment — once said
that a cat that sits upon a hot stove will never sit upon a hot stove
again, nor upon a cold one either, because they all look hot. Because
they sat on the stove of equities and I think the Baby Boomer’s
propensity to move to the equities market directly is very slim. I
think his propensity to save money and leave it in the small banks of
the United States… I can’t tell you the number of people who tell me
they don’t care what they make on their money any more, they just want
to get their money.

Gartman:
I have no idea where it’s
going to go. I only know there is an amazing pool of savings about to
be built up. Probably, it will go everywhere. Probably it will go
everywhere.

Gartman: I
think most everybody. It doesn’t argue for a strong consumer
demand-led economy in the United States. That’s not going to happen.
It does argue for a flow of capital into a large number of areas. It
does argue that any potential rise in interest rates that would
normally develop out of a strengthening economy will probably be less
violent than the past 20 years. To me, the most logical benefactor is
what I like to refer to as the People’s Bank & Trust of Rocky
Mount NC, phenomenon. There is no such thing. But the propensity on
the part of the Baby Boomer to keep his money close, liquid, and in
his local bank, is large.

And I
think that this is interesting: Look at any chart. Just pick 15 small
local banks — anywhere — and get a chart on them. As I like to say,
they go from the lower left to the upper right. Take a look at
Citibank, Bank of America, JP Morgan… they go from the upper left to
the lower right. And if you look at small banks, they don’t know
what’s going on. They think they’re smart. They think it’s because
they’re brilliant and their marketing’s better. The Baby Boomer
doesn’t give a tinker’s damn what he gets on his savings
account any more, or his checking account. He just wants to know that
at the People’s Bank & Trust of Rocky Mount, North Carolina, it’s
safe. They’re the beneficiaries.

Gartman: Yes,
I think what you want to do is own twice as many small banks and be
short — you want to have two units long in small local banks and
short one unit of the international stuff. You want to be outright
long the small banks. You want to be short on the large ones.

Gartman: Yes,
and it’s playing out. It’s working that way. The charts are telling
you that’s true and that’s a very good example of putting fundamentals
and technicals together. If the technicals are telling you it’s true,
then you go back and look at it and say, “Ah, Gartman may be
right.” I know that’s what I’m doing. You ask any 50
year-old how much money he’s got in his checking account compared to a
year ago and I’ll tell you one thing: It’s more than he had a year
ago.

Gartman: It’s
probably in the People’s Bank & Trust of Keokuk, Iowa, or the
First Federal Savings & Loan of Poughkeepsie.

Gartman: I
don’t think it will help. Unless they leave the name alone, they’ll
err badly.

Connors:
But ultimately the value will be there too. Let’s assume
they leave the name alone, they become wonderful takeover candidates.

Gartman:
Absolutely. They have to be.
As you can see, the older I get, I spend most of my time trying to use
sandpaper and smooth out the rough edges of economics and find out
what’s really important. What are the big things? What are the big
movements? I leave the minutiae to others. There are people who know
so much more about the energy market than I can dream of knowing, or
the debt market, but my clients are all basically institutions and
hedge funds. And energy traders and grain traders. My grain traders
don’t read my stuff for my grain information. They read it so that
they don’t get side-blasted by something happening in the energy
market or the debt market.

Allen:
How important is it for one trader who focuses, say, on equities, to
look at the broad picture. Something I’ve noticed a lot of successful
investors and traders do is look at the entire field, the entire
picture, to make their decisions.

Gartman: I
think they should. As I tell people, the first obligation you have is
to understand the political circumstance and you can keep that very
simple. You probably don’t want to buy the equities of a country
that’s about to have a revolution. You might want to buy the equities
of a country that’s in the midst of a revolution, but you don’t want
to buy the equities of a country that’s about to go into a revolution.
That’s my job… my job as I sit here in Suffolk,
Virginia, to kind of look above the fray and see as large a picture
as I can. I actually do think that a good proportion of my clients read my stuff
mostly for the political circumstances. My job is to protect people from the
next political blowup — which is probably going to be Nigeria. The tribal
problems that country is experiencing are just bubbling every week, more and
more, to the surface, and they’re struggling to keep their oil pipelines open.

Connors:
How would that impact financial markets?

Gartman:
Nigeria is the sixth-largest OPEC
county.

Connors:
So you see that as ultimately leading to potentially higher oil
prices?

Gartman:
It could. It could. Probably won’t lead
to lower prices, but given that Nigeria is one of our largest suppliers of crude oil, we need to pay attention.

Connors:
What about North Korea?

Gartman:
Doesn’t bother me in the
slightest. He (Kim Jong-il) is a madman but he’s a very bright madman
and he knows what he’s doing. Especially after last week now, he knows
that he doesn’t stand a chance to succeed militarily. The whole intent
on his part was to blackmail us for food. Here is a man who knows he
is in the end game of his regime — meaning maybe five, six, ten more
years at best. I think it will be much less than that. But his people
are starving and he knows that hungry people tend to pick up guns and
overthrow their leaders faster than fed people do. He knows he is the
one responsible for it.

The
only way to stop an internal rebellion is to make external mischief
and hope that we and the Australians and the Canadians feed him. I
mean his people are eating bark. He knows what he has done. His
only chance was to threaten the use of nuclear weaponry. That’s all he
has. He hasn’t spent any money on his people. He’s spent his money on
nuclear weaponry. He has, at best, two warheads, maybe. He’s working
on trying to get missile capability which is third-rate at best. But,
as all Communists do, they hold nice parades and make a lot of hubbub.
And he’s done this very successfully. Does he have any thoughts that
he can survive militarily? No. He’s a madman. But he’s a very bright
madman. He’s done this for blackmail.

Connors:
So it’s a non-event.

Gartman:
I’m as aware of the political
circumstances in North Korea as probably anybody. But the fact that
it’s made it to the front pages is really nothing more than amusing to
me. He needs to feed those folks and we probably need to find some way
to get them fed. My bet is we’ll probably do that. We are a decent
people. We don’t let people starve.

Connors:
That’s a great line and probably a good
place to end this. Dennis, we greatly appreciate your time. Thank you.

Gartman:
I appreciate your call and
your time.