When the managers of two well-known bear funds develop opposing views on the market's direction, it's time for investors to tune in. As such, let's take a look at recent comments made by Steve Leuthold, captain of the Grizzly Short Fund (GRZZX), and David Tice, maestro of the Federated Prudent Bear (BEARX) fund.
One sees teddy bear delights; the other forecasts market hibernation
During a March 2009 Bloomberg interview, Leuthold remarked:
These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid … We've been in much worse, much more panicked and more scary situations in the U.S.
Leuthold proceeded to predict that the S&P 500 will execute a rather fantastic climb to 1,000 in 2009 and counseled investors not to buy his short fund. Instead, Leuthold, who also runs a long-only fund, urged investors to go long and go global, giving particular attention to Asia.
Tice couldn't disagree more. He offered the following view in a recent Kiplinger's interview:
People think we're near a bottom because President Obama is throwing money at the problems, the market's down 50% from the peak, and we can't stomach much more pain; therefore, stocks have to go up. Well, it doesn't work that way. Markets hit bottom not based on how bad the earlier pain was, but based on where markets should be relative to fundamentals. Earnings for S&P 500 stocks were far down in 2008, and 2009 earnings aren't going to be any better. S&P earnings will probably be below $40 per share this year [versus $65 in 2008 and $83 in 2007]. So the market's price-earnings ratio, based on 2009 estimates, is 20. That's still high, so how can you think the market is near a bottom?
So, what does Tice see as a possible market bottom? Try Dow 3,500, which, as the growly soothsayer points out, would be book value on the Dow industrials.
Hmmm …
A couple of points about these competing views stand out to me. The first involves a bit of psychology. Leuthold's Grizzly fund posted a market-crushing 73.7% gain in 2008 -- after reaping that kind of a profit from stocks' downfall, one can imagine that the natural inclination would be to turn positive.
Meanwhile, Tice's fund racked up a much smaller 26.9% gain in 2008: That's a tasty snack, but with stocks like Broadcom (NASDAQ:BRCM) trading at a PEG of 5.18, and Goldman Sachs (NYSE:GS) having ascended more than 50% since March 9, it may be easy to see the bear feast as just beginning. I am not accusing either manager of being overly influenced by their respective recent performance, but I do wonder whether it is a sneaky contributing factor.
As to Tice's forecast of S&P 500 2009 earnings coming in under $40, well, the possibility that earnings could fall roughly 38% from 2008 to 2009 looks severe but not outlandish. However, the market behaves strangely, and to assume that potentially forward-looking investors would refuse to endorse a P/E of 20 is just as risky as Leuthold's upbeat call for S&P 500 at 1,000.
The question is, what do you think?
When two standout investors of 2008 do not even vaguely agree on the market's next move, choosing a course of action can feel awfully daunting for individual investors. But as long as you are not putting money that you need in the next several years into stocks, my advice is to keep doing what you probably have always done: Focus on companies more than stock prices, and don't chase the crowd.
That said, if you're placing aggressive bets on debt-laden companies such as Brookfield Properties (NYSE:BPO) and Rio Tinto (NYSE:RTP) -- names that may be able to remain intact through one more year of tough times but not two -- you might want to keep Tice's prediction in mind.
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