Paul Krugman isn’t the only Nobel Prize-winning economist saying austerity measures are threatening to derail the economic recovery — not help it. Columbia University’s Joseph Stiglitz tells CNBC that there is a misconception that government cutbacks inspire confidence in the private sector. He says there is a “very high risk” of a double-dip recession, and says the U.S. needs to continue a program of monetary and fiscal stimulus, while changing its pattern of spending and taxation. It should focus on high-return investments like education and infrastructure, he says, and use more tax incentives to promote business investment.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today. Several big names are among the movers, including Microsoft, Amazon.com, and AstraZeneca.
Barry Ritholtz, who turned bullish right around the March 2009 low and bearish shortly before the “flash crash” in May, is now sitting largely in cash — but says his best guess is that we’re in a “normal” correction, not something more severe. Ritholtz tells Yahoo! TechTicker that he’s 25% in stocks and 75% in cash. Right now, he says there’s a lack of clarity, consensus, and conviction in the markets, and he’s prepared to let the dust settle before making any big moves.
David Winters, whose Wintergreen fund has a solid market-beating track record, says that he’s seeing a lot of “fat, slow pitches” in the market right now, and that he’s particularly high on Asian stocks.
“We’ve been more or less a net buyer recently,” Winters tells Barron’s. “What is just so striking is that you can buy great companies at the most reasonable prices I have ever seen. And most sentiment, especially in the West, is just not terribly upbeat. So you really don’t have a lot of people who want to buy stocks today, which creates a lot of fat, slow pitches.”
Winters says his cash position is only about 10% right now, significantly lower than it was during the market meltdown of 2008. He says investors need to be selective, and “pay attention to things like whether a business has multicurrency diversification in terms of its earnings, and does it have the ability to do well in almost any environment?”
Wells Capital Management’s Jim Paulsen says lower Treasury rates will have a positive impact on the economy in the second half of the year. Paulsen tells Bloomberg that with the market down 15% or so, Treasury rates falling, and corporate earnings continuing to climb, a bit of resilience from the economy should bring greed back to the market.
Nobel-Prize-winning economist Paul Krugman has said in recent months that if more stimulus is not injected into the economy, the economic recovery very well may be derailed. Now, he sees more than a “derailing”.
“We are now, I fear, in the early stages of a third depression,” Krugman writes in his latest New York Times column, adding that the depression will likely be more like Long Depression that began in the 1870s than the Great Depression. “But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense,” he warns.
Krugman says the depression will be the result of bad policy. “Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending,” he says.
Bruce Berkowitz, whose Fairholme fund has returned close to 13% per year over the past decade while the S&P 500 has been in the red, says he’s still finding a good deal of value in one of the market’s unloved areas — financial stocks.
“Investors have lost much of their wealth from financial institutions over the past couple of years and are not prepared to risk more,” Berkowitz tells Investment News. “Meanwhile, the Great Recession has forced our surviving institutions to fortify their balance sheets and practices in preparation for continued stress. Thus, they are priced for more stress and prepared for more stress. We try to protect against the downside and let the upside take care of itself. Such is the case with our holdings in large banks and brokers.”
Berkowitz also offered advice for financial advisors, which would seem to apply to individual investors as well. “Invest with managers that have superior long-term track records during tough times and invest most of their money alongside their clients’ money — under the same terms and conditions as their clients,” he says. In addition, they should invest with those who have an “understandable strategy, one that will keep clients sane during the inevitable difficult times”.
Berkowitz says he doesn’t try to predict the future of a particular company or industry, let alone the economy as a whole. He says he instead tries to price securities and their underlying businesses “for difficult times so that we can survive those one-in-100-year catastrophes that appear to happen every decade, and prosper during more-normal times.”
Fund manager John Hussman is amping up his recession warnings, saying that, “based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn.”
Hussman recently noted that of the four pieces of his recession indicator, the only one not yet signaling a recession was the ISM Purchasing Managers Index, which needs to fall to 54 or lower. The most recent reading, from May, was well above that, at 59.7. But now, Hussman notes in his latest market commentary that the ECRI Weekly Leading Index — which has been a leading indicator for the ISM index, has declined to -6.9% — a bad sign.
Hussman also says that investors shouldn’t base their assumptions on what will happen in the economy and market on historical trends of the past 30 or 40 years, because the credit strains and deleveraging risks the U.S. faces make such comparisons “out of sample”. He says that if you broaden your outlook, however, there are other periods that offer good comparisons, and he says Kenneth Rogoff and Carmen Reinhart’s This Time Is Different highlights many of them. “The book presents lessons from a massive analysis of world economic history, including recent data from industrialized nations, as well as evidence dating to twelfth-century China and medieval Europe,” Hussman says. “Reinhart and Rogoff observe that the outcomes of systemic credit crises have shown an astonishing similarity both across different countries and across different centuries.”
While the tenets of good investing remain much the same as they were decades ago, the tools that average investors can use to implement those concepts have undergone something of a renaissance in recent years. In his new book Tradestream Your Way to Profits, Zack Miller examines some of the changes that have occurred, and some of the ways that individual investors can profit from them.
In an e-book companion to his book, Miller explains that investing at one time was a “very lonely process”, which involved lengthy, intensive research of company reports, journals, and other publications. And, he says, it was a process that had a tilted playing field, with big investors getting the inside track on news about particular companies as part of an “old boys’ network”.
“Kiss all that goodbye,” Miller writes. “With the advent of social media and regulations ensuring fair disclosure of financial information, the playing field is leveled and what’s more: the playing field is truly a collaborative environment. Investors are sharing ideas on Twitter and using new technologies to mimic the moves of the world’s top guru investors. … Investing has evolved from a very isolated, solitary process for the few to one where ideas — and profits — are being shared among the many.”
Miller’s book examines how blogging and social media sites, online trading sites and forums like kaChing and Covestor, and guru-inspired research sites like Validea.com have impacted investing. You can download a free PDF of the book’s e-book companion here.