Bear fund managers warn against short sales
Here’s an interesting article from Bloomberg. I don’t agree with it, but then again I didn’t make 74% returns last year, nor do I run a multi-billion dollar fund.
Steven Leuthold, whose Grizzly Short Fund makes money for investors by betting companies will fail, says he wouldn’t invest in his own fund now because the U.S. stock market is close to bottom.
Leuthold, who helps manage $3.2 billion as founder of Minneapolis-based Leuthold Weeden Capital Management, told investors to keep money out of the Grizzly fund last week; it rose 74 percent in 2008. He joins Bill Fleckenstein, who shut a 13-year-old bearish fund in December, and Marc Faber, who covered bets against U.S. stocks, in talking down short selling.
Leuthold says the Standard & Poor’s 500 index, which has lost 54 percent since October 2007, may rise 40 percent this year because the U.S. economy won’t fall into a depression and stocks are the cheapest they have been in 24 years.
“I personally would not have an investment in the Grizzly fund because I think we’re so close to a major market bottom,” said Leuthold in an interview. “Every investor ought to be considering putting money into equities.”
Short sellers can profit from falling stock prices by borrowing a stock and then quickly selling it. If the prices then fall, they only have to pay back the stock at the lower price, pocketing the difference.
SP 1,000?
The first simultaneous recessions in the U.S., Europe and Japan since World War II pushed the price of the SP 500 as low as 10.2 times earnings from the past year, the cheapest since 1985, according to data compiled by Bloomberg. About $1.2 trillion in bank losses tied to subprime mortgages sent financial companies in the SP 500 down 82 percent from the February 2007 high, making them the cheapest relative to book value, or assets minus liabilities, since Bloomberg began tracking the data.
Leuthold, 71, said investors have become too concerned about the economy. Comparisons between the current slump and the Great Depression are exaggerated, said Leuthold, who predicts the SP 500 will rally to at least 1,000 this year.
Fleckenstein, president of Seattle-based Fleckenstein Capital Inc., says that while stocks may advance in coming months, they’re likely to lose the gains as the recession worsens and unemployment climbs.
The 55-year-old investor, who plans to open a fund that bets on both stock declines and gains later this year, said if he were managing a fund today he would be “doing a whole lot of nothing” and would have few short sales.
So what am I invested in? I still think gold and oil stocks will outperform in the long run. I’m also shorting a few companies that I think will go bankrupt. One of them is a American College Communities (ACC), which provides luxury student housing. They bought an awful lot of real estate at the peak. Check out this great analysis at Stripnomics blog.
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March 9th, 2009 at 1:01 pm
Steve Leuthold is one of the top three market forecasters, as far as I am concerned. He, Bill Fleckenstein, and also Doug Kass, three big time market bears the past 3-4 years, have all reversed their positions and are either getting neutral (Fleckestein) or going long (Kass).
The talk about DOW 5000 or DOW 4000, is really off the charts. Nouriel Roubini is pushing his luck and will kill his hard won success. Sure, it is possible if the worst case scenario happens (the Fed and Treasury stop defending the banks). But it is not a good idea to bet on outliers (1 in 10,000 probabilities). The market is beginning to look frothy in the negative direction. People are now blindly chasing the market lower as they did the NASDAQ higher in 1999. I see all these rationalizations about SP earings of 25 or 30 and a PE multiple of 7 (for a SP500 index of 250), which are both worst case scenarios). But you can’t use trough earnings to figure valuation (use 5 or 10 year smoothed earnings) and can’t use a multiple established during a period of high inflation (1974).
Momentum cuts both ways and the results can be disastrous for anyone who gets caught up in it.
I agree with you on the oil / energy / commodoties call. That is where I am positioned. I am much less excited by the prospects for gold. It just gave us a double top (right at $1000) and the technical indicators are poor. Also, the fundamentals are poor. Deflation is a negative story for gold because its alternative, the dollar, strengthens with deflation. The financial panic is over, I believe. The market has adjusted to the negative news cycle as can be seen by VIX, which no longer approaches 90 even as the market slowly declines.
Gold may be a good long term call (5-10 years), because the only way out of this depression is through weakening the dollar and expanding money supply. At some point, the credit contraction will stop when all credit assets are written down as far as they can be and the market begins bidding those credits higher. Once the contraction stops, all the money and near-money infused into the economy will be the basis for a monetary expansion and the dollar will weaken.
But I think it can be 2-3 years before the contraction stops, it is so well entrenched. Until then, gold will move sideways, though no chance of going back to $250. It would take a long period of dollar strength to accomplish that, and I think the dollar will intentionally be weakened as soon as possible, to encourage risk and investment (as opposed to parking money in Treasuries and other riskless assets).
March 14th, 2009 at 3:00 am
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