Avoid the sucker punch


Messages at this site have often outlined jewels of investment wisdom by Jeremy Grantham. Grantham is a value oriented Boston-based money manager to which institutions and individuals have entrusted $48 billion, Grantham is one of the most respected U.S. fund managers and is best known for his acumen in relative values represented by different asset classes and markets worldwide.

He was recently interviewed for an article entitled “Sucker Punch Coming” in Barron’s and I would like to share with you some of the key pints from that article that should serve us all as a sobering warning.

Grantham says:

“The simple story is that the market is overvalued and will go to a trend line P/E which we now believe is 16 times. Currently the market is around 24. This is not just a bear market but the greatest sucker rally in history.”

He states that there is nothing comparable in American history and that there are numerous signs that this is not a true bull market. For example in real bull markets it is normal for the majority of investments to shift back to best performing sectors of the last bull. This has not been true in the rallies of 2001-2002 and 2003. The run up was in “particularly flaky little companies.” Grantham says, “The scope of the speculation and the leadership of tech and the surviving internet stocks is just not typical of a serious new bull market.”

He also states, “New bull markets typically start when the great bubbles have broken badly and stocks become very cheap” eight times depressed earnings and way under replacement cost. After this bubble burst, the market hit 19 times earnings, barely below the prior peak of the two previous great bull markets. Then it staged a big rally with all of the indicators of a bear market rally except one. Bear market rallies typically don’t have legs and in the U.S. have never lasted a year.”

He also claims that the Presidential cycle is important because presidents have learned that it is good to stimulate the economy in the third year, so that in year four unemployment is dropping. He added:, "What is unique to this cycle is debt has not declined. It has in fact risen dramatically at the government level, quite dramatically at the corporate level, dramatically at the foreign level and very substantially and steadily at the consumer level. It is not a good picture. Normally it rises in good times and falls in recoveries. This time it has not. This is a long way from today but 2005 and 2006 will be a much clearer call than most years. They will be painful years. A black hole.”

Grantham thinking fits very nicely with ours and with the view that a hundred years of share history gives us. See http://www.garyascott.com/archives/2002/11/21/696/index.html for more on this view.

Next message, we’ll see Grantham’s recommendations.

Until then, good investing.

Gary


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