Saturday, October 3, 2009

The Bullish Bear?


Bloomberg reports that Leuthold Sees S&P 500 Rising to 1,350 on ‘Psychology’:
Steve Leuthold, whose Leuthold Core Investment Fund has beaten 95 percent of its rivals in the past five years, said the Standard & Poor’s 500 Index will jump to 1,350 next year as the economy recovers from the worst contraction since the Great Depression.

The 71-year-old investor, who turned bullish after his Grizzly Short Fund returned 74 percent because of the equity market rout in 2008, predicts that the stock index will end 2009 at 1,200. He joins Byron Wien, hired as a strategist by Blackstone Group LP in August, in predicting that the S&P 500 will complete a 77 percent surge from its March low on Dec. 31.

“There’s pretty good momentum, and the market psychology is right,” Leuthold, who manages $4 billion, said in a telephone interview from Minneapolis yesterday. “The markets turned up before the economy did. Now, the economy is improving. It might be a little better than most think. It ain’t wonderful, but it’s a lot better than it was.”

While the U.S. gross domestic product shrank for the fourth straight quarter during the April-to-June period, the Economic Cycle Research Institute’s gauge of growth surged 25 percent in the week ended Sept. 25, the fastest increase in data stretching back to 1968. It has risen every week since the second half of March, while the S&P 500 surged as much as 58 percent from a 12- year low seven months ago in the steepest rally since the 1930s.

Spending by U.S. consumers rose in August by the most since 2001, indicating the biggest part of the economy is starting to rebound from its worst slump in almost three decades.

Two-Week Slump

U.S. stocks fell today, capping the market’s first back-to- back weekly declines since July, following a bigger-than- estimated loss of jobs and a drop in factory orders.

The S&P 500 has lost 4.3 percent since Sept. 22, including the 2.6 percent decline yesterday that was the steepest since July 2 after a gauge of manufacturing unexpectedly declined and jobless claims grew more than forecast.

“I’m really not too concerned about a minor move like this,” said Leuthold, who has 72 percent of his fund in stocks. “It’s premature to take any defensive action.”

Leuthold said that 25 percent of his equity fund is in technology stocks, while 12 percent is in small- and mid-sized biotechnology companies.

“We think there’s going to be a lot more activity in terms of acquisitions,” he said. “The large tech companies are loaded with cash and willing to diversify in other areas.”

Recovery in Takeovers

U.S. stocks rose the most in five weeks on Sept. 28 as takeovers in the drug and technology industries added to evidence that mergers and acquisitions are rebounding from the slowest pace in six years.

Takeovers involving U.S. companies totaled $50.8 billion in September, compared with $26.6 billion in August and $36.8 billion in July, according to data compiled by Bloomberg. Through the third week of September, M&A dropped by about half in the U.S. to $492.5 billion this year, the slowest pace since 2003, the data show.

Leuthold isn’t convinced stocks will keep rallying in the second half of 2010.

“Valuations would be getting richer at that point,” he said. “We’re not going to make a new high above 1,550 or anything like that. There’s got to be more work done. And the U.S. is a lagging global economy now.”

He says it may take as long as five years before the S&P 500 exceeds its October 2007 record of 1,565.15, and 30 percent of his equity portfolio is allocated to non-U.S. companies on a bet that economic growth rates will be higher abroad.

$2 Trillion in Spending

The International Monetary Fund raised its forecast for global growth next year as more than $2 trillion in stimulus packages and demand in Asia prop up the global economy. The Washington-based IMF said the world economy will expand 3.1 percent in 2010, more than a July forecast of 2.5 percent. China’s economy will grow 9 percent and India’s 6.4 percent. That compares with growth of 1.7 percent in Japan, 1.5 percent in the U.S. and 0.3 percent in the euro region.

Leuthold has 8 percent of his portfolio in foreign banks, and he’s evaluating financial institutions in Europe and Asia.

“Not one of them is an American bank,” he said. “We don’t have American regional banks because our concern is that they seem to be maybe overexposed to commercial real estate, where you maybe have a second shoe to fall.”

U.S. bank shares are set to drop because loans made for commercial real estate will sour and lenders will need to raise more capital to cover credit losses, according to Mike Mayo, an analyst at CLSA Ltd. Regional banks will perform the worst among lenders because they have the most exposure to loans for commercial real estate, Mayo said on Sept. 22 at a conference hosted by his company in Hong Kong.

The Leuthold Group is an independent, top-down, quantitative and contrarian institutional research shop based in Minneapolis, MN. They produce excellent market research (I think it was the Blue Book that I use to read) and their funds are managed accounts which allow investors to get in and out easily.

Back in early March, Steve Leuthold told investors to "buy stocks now or you'll regret it". He was absolutely right then and I think he's right now. Forget retesting the March lows, the stock market is heading higher.

How do I know? I don't. Nobody does. That awful U.S. employment report shocked me, with huge downward revisions to previous reports. What did market participants do? They bought the dip hard. Don't underestimate the amount of liquidity and performance anxiety out there. And remember, in these markets, small and nimble is beautiful.

***UPDATE***

For an alternative, bearish view, read Tim Knight's Lying in Wait.

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