BlackRock’s Doll: S&P Earnings Estimates Too Low; Market Bottoming Process Ending

BlackRock Vice Chairman Bob Doll tells CNBC that, while the economy isn’t good, “some [analysts] have gone too far to the negative side,” and says that those analysts who have estimated $40 in per-share S&P 500 earnings for 2009 “are going to have to raise their numbers.”

“Two months ago, it looked like a black hole,” Doll said. “Now, we have a much more balanced picture.”

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Wharton Prof Duel: Siegel vs. Stambaugh

Several weeks back we highlighted a new study that found stocks are actually more risky in the long run than they are in the short run. Today in an interview posted on the University of Pennsylvania’s Knowledge@Wharton web site, two Wharton School professors — Robert Stambaugh, one of that study’s co-authors, and Jeremy Siegel — talk about many of the issues the study raises for stock investors, as well as the current market conditions.

Among the particularly interesting parts of the interview:

  • Siegel says that bonds and other asset classes might get more risky over the long run, and Stambaugh says that could be true — the study only examined stocks. “It’s quite possible that this same kind of [long-term] uncertainty in nominal bonds could well make them less attractive,” Stambaugh says, adding that he and the study’s other authors hope to due follow up research on that issue.

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Yardeni’s 12 Reasons for Optimism

Yes, the news this morning is filled with swine flu and a bigger-than-expected first-quarter GDP drop, but Ed Yardeni of Yardeni Research — who has a pretty good track record of economic forecasting, including his solid calls on the last recession recovery in 2003 — is offering several reasons for economic optimism. (A tip of the cap to The Wall Street Journal’s David Wessel for highlighting this.)

In an email to clients, Yardeni cited a dozen such reasons. A few of the highlights:

  • In the U.S., consumer confidence rebounded during April.
  • The 4/28 Financial Times reported that the high yield bond market may be starting to open up again. About $7 billion was raised in April, the highest volume since last July.
  • The stock market held up remarkably well on Monday and Tuesday despite nervousness over bank stress tests, swine flu, and the forced downsizing of the U.S. auto industry.
  • The first quarter earnings season is off to a good start as 64% of the 235 S&P 500 companies reporting so far have a positive surprise and all 10 sectors are beating their first-quarter forecast too.
  • Our Fundamental Stock Market Index rose during the week of August 18 as jobless claims edged lower and the Consumer Comfort Index moved higher.

The Great Depression “25-Year Recovery” Myth

If you’re worried about stocks taking a period of many, many years to recover following the recent market plunge, Mark Hulbert offers some insightful — and encouraging — news in The New York Times.

While many have cited the fact that the Dow Jones Industrial Average took 25 years to get back to its pre-Great-Depression highs as reason to worry that the coming market recovery could take a upwards of 10 or even 20 years, Hulbert says the 25-year Depression recovery figure is misleading for a number of reasons. In reality, he says, it took only four-and-a-half years after the Depression bottom for investors to recapture their losses.

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Guru Upgrades/Downgrades: Morgan Stanley Falling, Petrobras Rising

Each week, I take a look at which stocks my Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks that my strategies have upgraded or downgraded today (overall, upgrades slightly outnumber downgrades):

Guru Strategy Upgrades/Downgrades, April 29, 2009


Arnott: Value Stocks Priced at or below Depression Levels

Researcher and money manager Rob Arnott has made a lot of headlines lately with his focus on the bond market, but in yesterday’s Financial Times he keyed in on another asset class — and it’s one that he says is extremely cheap right now: deep value stocks.

“Most investors,” writes Arnott, “do not yet realise that today’s spread between growth and value, on most measures, is nearly as wide as it was at the peak of the tech bubble. But this time it is the value stocks that are the extreme outliers.”

In the tech bubble, he says, typical growth stocks were priced at more than three times the valuation multiples of average stocks — the highest growth stock valuations ever. Today, he says, it’s the opposite, with deep value stocks trading at “valuation multiples … near or below Great Depression levels”.

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Tilson, Heins, and Recency Bias

How did so many investors and analysts fail to recognize the looming economic and stock market crises in recent years? In their latest Forbes column, Whitney Tilson and John Heins say that “recency bias” is a big reason — and a major challenge facing all investors.

“One of the more insidious investor biases is a natural tendency to assume that the future will look like the recent past,” write Tilson and Heins in explaining recency bias (sorry no link — the article is available only in Forbes magazine and is not online). “The best investors don’t fall into this trap.”

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Barron’s Top Advisors

Barron’s has unveiled its annual “Top 100 Financial Advisors” feature, with the new #1 being Gregory Vaughan of Morgan Stanley in Menlo Park, California — and the theme of the article being how these advisors are rethinking their approaches given the recent market meltdown. The top advisors “are giving diversification a thorough rethinking,” Barron’s Suzanne McGee writes. “It’s not as simple as owning a bunch of different investments. For example, there’s ‘tactical diversification,’ or moving swiftly to take advantage of price moves in particular markets.”

This video offers a good summary of what Barron’s found was on the mind of these advisors, and this link provides more detailed commentary from five advisors in particular. As you read or listen to their comments, you might want to keep these two quotes below in mind:

  • “The four most dangerous words in investing are, ‘This time it’s different.’” — John Templeton
  • “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” — Benjamin Graham

Biggs vs. Mauldin: Will The Rally Hold?

The big question in the market these days is, of course, whether the current rally is really the start of a new bull run, or if it is another bear market head fake. And two interesting, differing takes on the topic come from top strategists Barton Biggs and John Mauldin.

In a recent CNBC interview, hedge fund star Biggs says the rally could well be for real. As of mid-April, he saw 40 signs that the environment was starting to improve. Global manufacturing is improving, consumer demand is strengthening, new orders are up, and inventories have fallen to new lows, according to Biggs. “The classic economic recovery begins with new orders and output rising, spending stabilizing, and inventories falling,” he says.

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Risk and Asset Allocation

In a piece written for Forbes’ Intelligent Investing section, David Serchuk today offers some interesting data on risk and portfolio management.

One point made by several of those Serchuk interviewed is that asset allocation is a crucial, and often overlooked, key to managing risk. “The macro-picture here is that asset allocation remains an easy way to get to the core of your portfolio’s risk exposure, even though it gets relatively little attention in the financial media compared with earnings or, to use a more contemporary example, government bailout money,” writes Serchuk.

Support for this idea comes from a study conducted in 1986 by Gary Brinson, Randolph Hood and Gilbert Beebower titled “Determinants of Portfolio Performance”. “They compared quarterly earnings from 91 large, actively managed pension funds from 1974 through 1983 against comparable funds that held similar asset allocations but were passively indexed,” Serchuk explains. “What they found was that asset allocation was responsible for 93.6% of the variation in quarterly returns in a portfolio’s quarterly returns. Not stock picking, not taxes, but asset allocation.”

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