Laszlo Birinyi will never forget the moment a year ago when the last ounce of confidence disappeared. Everyone from billionaire Warren Buffett to New York University professor Nouriel Roubini was convinced that the economy was in a free-fall, that exploding deficits would devastate the dollar and that home prices were heading down as much as 20 per cent.
"At turning points, the mood is always in one direction," says the 66-year-old Birinyi, who characterised the "total conviction" of pessimists as the start of an advance that would end up making Barack Obama's first year in office the best for shareholders in 76 years. What's more, the Standard & Poor's 500 Index, which gained 69 per cent in the past 12 months, is nowhere near its peak in a rally that may persist through the next presidential election, he says.
Taking advice from Birinyi, Barton Biggs of Traxis Partners and Leuthold Group's Steve Leuthold would have turned $US1000 invested in the S&P 500 into about $US1690 by the one-year anniversary of the bottom this week. All of them remain bulls, saying stocks will advance as the economy gains momentum and the fastest earnings growth since 1994 lures Americans from bonds.
Stimulus spending
More than $US8 trillion in US government stimulus stabilized the financial system and restored $US5.95 trillion to equities since March 9, 2009. Shares jumped as the Federal Reserve kept its target rate for overnight loans between banks near zero and worker productivity climbed at the fastest rate in seven years.
Inflation remains contained, with consumer prices excluding food and energy costs holding below 2 per cent for more than a year. Home prices increased seven straight months through December, according to S&P/Case-Shiller.
For Obama, gains in stocks and bonds may be the best evidence his policies are working after losses tied to subprime mortgages spurred a crisis that erased $US11 trillion from equity markets and sent unemployment above 10 per cent. While the world is focused on his efforts to pass health-care reform, overhaul the financial system and improve education, financial markets are showing growing confidence in US assets.
Bonds, US dollar
As stocks rallied, US investment-grade corporate bonds measured by Bank of America Merrill Lynch indexes have returned an average of 34 per cent since bottoming in October 2008, while the Treasury succeeded in selling $US2.92 trillion in securities to help finance a budget deficit estimated to reach a record $US1.6 trillion in the fiscal year ending September 30. Yields on 10- year Treasury notes remain below 4 per cent, compared with the average of 4.93 per cent since 1995. The dollar has climbed more than 8 per cent in the past 3 1/2 months.
While Buffett never stopped buying and profit at his Berkshire Hathaway rose 61 per cent to $US8.06 billion in 2009, New York University's Roubini and David Rosenberg of Gluskin Sheff & Associates were proved wrong as shares surged. Both said on March 9, 2009, that the S&P 500 was at risk of falling at least 10 per cent. Roubini, who forecast the credit crisis, declined to comment. Rosenberg, then working for Bank of America, said this will likely turn out to be a bear-market rally.
"The rules of the game changed when the government began to buy shares in the large insolvent banks," Rosenberg, referring to more than $US300 billion in capital injections under the Treasury's Troubled Asset Relief Program, said this week. "Shorts were squeezed and this was the tide that lifted all the boats. The question has to be asked as to what anybody's forecast on the market would have been a year ago knowing that there were going to be 3.3 million jobs lost in the ensuing 12 months."
Obama's recommendation
The advance that started a week after Obama called US stocks a "potentially good deal" for long-term investors is too young to end now, according to Birinyi. The average bull market since the 1960s has lasted more than 1000 trading days, compared with 253 for this one, data compiled by Bloomberg and Birinyi Associates show.
The costliest recessions give way to the strongest bull markets, his data show. Dividing rallies into quarters, Birinyi says the 69 per cent gain since March resembles the start of increases in 1974, after the Middle East oil embargo pushed inflation to almost 12 per cent, and 1982, when 30-year Treasury yields topped 14 per cent. The S&P 500 doubled from October 1974 through November 1980 and tripled from August 1982 to August 1987, according to data compiled by Bloomberg.
'Bull market'
"By any definition, it is a bull market, and there's no stronger force in the market than momentum," Birinyi said in a telephone interview. "If the market is continually picking black, picking red is not necessarily a good idea."
Biggs, whose flagship fund returned 37 per cent last year, three times the industry average, says stocks remain cheap relative to forecast earnings. The S&P 500 is valued at 14.7 times 2010 profit should earnings for companies in the index rise 27 per cent in 2010, the average estimate from analysts tracked by Bloomberg. Wall Street firms predict total operating income at S&P 500 companies will rise 50 per cent in the next two years, the biggest increase since 1994.
"I'm very struck by the level of bearishness everywhere I go," said Biggs, who predicts the next move in US stocks is a 10 per cent to 15 per cent gain. "I'm not obsessed with history. I'm bullish because I think the global economic recovery is on track and is going to be surprisingly strong. The world was falling apart in 2009. There's been a tremendous change."
Grantham turns bearish
Jeremy Grantham, who urged investors on March 4, 2009, to move cash into stocks, doesn't share the bullishness. The chief investment strategist for Grantham Mayo Van Otterloo in Boston says fair value for the S&P 500 is 875, 24 per cent below yesterday's close. The figure is based on his calculation of historic price-earnings ratios. He said chances the index will fall through the end of this year are higher than 50 per cent.
The 71-year-old manager said investors should have a smaller-than-normal percentage of their money invested in US equities, and if they do own them, to buy the biggest American companies. Grantham predicts that the bursting of the credit bubble will slow the US economy and stock market, and that Japanese shares are a better choice.
"My recommendation would be for this typical investor to think outside the US, and when he thinks about the US to be exclusively defensive blue chips," Grantham said in a telephone interview. "The chances of a softening again, not a big collapse, but a secondary softening in the economy are higher than the market believes."
Burning through cash
Stock increases may slow as equity managers run out of money to spend, history shows. Cash has dropped to 3.6 per cent of US mutual fund assets from 5.7 per cent in January 2009, leaving them with $US172 billion in the quickest decline since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 per cent drop.
Equity investors are too pessimistic, said Leuthold, who manages $US4.2 billion as founder of Leuthold Group and told clients to stop putting money into the firm's bearish fund on March 4, 2009. Data from ICI, the lobbying group for professional money managers, show investors have pumped $US369 billion into bond funds since March 2009 versus $US23.4 billion for equities.
Fund flows
"Individual investors as measured by mutual fund flows have absolutely no current enthusiasm for equity investing," he wrote in a March 5 report to clients. "As a contrarian I view this environment of disbelief and skepticism as quite bullish."
Birinyi says this bull market may last more than 1,023 trading days, the historical average, putting its end after April 2013. Customers of his firm have pushed up assets under management to about $US300 million from $200 million in 2007 after his prediction for gains came true.
"No one was calling me asking why I thought this way," he said. "We were trying to focus on facts and data and information. Both research and money management clients have shown appreciation in the best possible way."
