In his latest market commentary, GMO’s Jeremy Grantham says the Federal Reserve has caused extensive damage to the economy by its manipulation of interest rates and asset prices, and is continuing to do so.
Grantham’s lengthy letter (it runs 16 pages) covers a variety of topics. A few highlights:
- He says that, contrary to popular belief, high debt levels do nothing to stimulate higher GDP growth rates. “In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership … and the quality (not quantity) of existing regulations and the degree of enforcement,” he writes.
- Grantham says subsidized debt — debt at manipulated rates — “in contrast to normal debt at market clearing prices, has a large, profound, and dangerously distorting effect on market prices.”
- He’s still high on high-quality stocks, saying that investors should “emphasize U.S. quality companies, which are still cheap in an overpriced world.” He also says investors should “moderately overweight emerging market equities”, “heavily underweight” lower quality U.S. companies, and carry extra cash reserves for a “volatile market with insecure fundamentals”.
Barry Ritholtz of FusionIQ and The Big Picture blog has been moving back into stocks, and says a “Don’t Fight The Fed” viewpoint is a big factor in his moves.
“When the Fed comes out and says, ‘Gee, the economy is worse than we expected,’ that things are taking much longer to get back to normal, therefore we want to do another round of quantitative easing, it’s tough for an investor to stand in the way of that,” Ritholtz tells Barron’s. You can’t step in front of a locomotive with your hand out and say ‘halt.'”
Ritholtz says he’s high on telecom stocks or stocks related to the industry, citing attractive valuations and strong dividend yields. He also talks about the one bank stock he owns, and why he’s soured on gold.
Lackshman Achuthan, director of the Economic Cycle Research Institute, says the threat of a double-dip recession is over. Achuthan, whose group has an excellent track record of forecasting economic cycles, tells CNBC that ECRI’s leading indicators are now definitively showing that a double-dip is off the table. He says the economy is likely headed for a “soft landing”, and says the Federal Reserve is again behind the curve in recognizing that a double-dip is no longer a threat.
In his latest Forbes column, newsletter guru Jim Oberweis says small-cap stocks are primed for a strong run.
“Ironically the best time to buy small caps is when investors are shunning them — typically at the tail end of difficult recessions,” Oberweis writes. “Interest rates have no place to go but up, and I believe that nimble small-cap companies will benefit as a bond bear market drives investors back into equities.”
Oberweis says that because of human psychology, investors tend to vastly under or overestimate risk. “In extreme situations we tend to dramatically overweight recent experiences and end up with very biased risk assessments,” he says. That creates opportunities in the market. “This is especially true, in my experience, toward the end of recessions,” Oberweis says. “That’s when risk aversion remains high, valuations remain low, but business conditions are beginning to improve. That’s the scene investors live in currently.”
Oberweis details how small-cap stocks have excelled coming out of several past recessions, and he offers four small-cap picks he’s high on.
While many firms have been posting strong profit numbers recently, many investors have been worrying about top-line revenue growth. Cost-cutting can only go on so long, the logic goes — if companies can’t generate demand and grow sales, they eventually will run into a profit-growth wall.
But while top-line growth has been a big concern, Validea CEO John Reese says a number of companies are finding ways to post strong growth in revenues, despite the current economic climate. And in his latest Seeking Alpha article, he highlights a handful of firms that are doing just that — and passing one or more of his Guru Strategy computer models, each of which is based on the approach of a different investing great.
“Whether because of conditions within their specific industries, an ability to tap into areas of the world that do have strong demand, or a good ol’ fashioned ability to market and sell their products, a number of firms have been producing very good top-line growth in a challenging climate,” Reese writes. Among them: healthcare company Neogen Corporation, which upped sales by more than 30% in the most recent quarter, and gets approval from Reese’s Martin Zweig-inspired strategy.
To read the full article and see the other four Guru Strategy-approved stocks, click here.
While many continue to fret over GDP growth, employment levels, forclosure fraud, and a myriad of other concerns, Charles Schwab’s Liz Ann Sonders says it’s the fretting itself that may be the biggest impediment to market gains.
“I’m always most intrigued by the story that the least amount of people are telling, and the story people aren’t telling is really the optimistic story,” Sonders told CNBC at Schwab’s Impact 2010 investor conference. She sees reasons for concern, but overall thinks the economy is moving toward a “Goldilocks” state, one in which growth is moving along at just the right speed. “I frankly am happy that that we have a slow pace of growth right now, because it’s driven less by a profligate consumer,” she said. “What we want right now in my view is low single-digit growth with more of a business spending driver than a consumer driver.”
Overall, Sonders — whose calls of the start and end of the 2007-09 recession proved quite accurate — says she’s “quite optimistic,” according to AdvisorOne.com. “The economy is like a combustion engine — everything is there, we just need a spark,” she says, adding that the “underlying pillars of support you need are stacking up” in the housing market. Among those pillars: a drop in what she calls the “real” mortgage rate — the nominal rate minus the depreciation of homes.
While hopes of another round of quantitative easing from the Federal Reserve have boosted the stock market, PIMCO’s Bill Gross says such a tact is fraught with dangers.
In his latest market commentary, Gross says the Fed’s expected announcement of more easing next Wednesday “represents a critical inflection point in determining our future prosperity.” He says that huge check writing by the Fed and years and years of fiscal deficits has resulted in a giant Ponzi scheme, and an incredibly difficult situation. “We are, as even some Fed Governors now publically admit, in a ‘liquidity trap,’ where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there,” Gross says (his emphasis). “Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try — it is, to be honest, all he can do.”