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Jeremy Grantham: Stocks Still Aren't Cheap

by: SA Editor Eli Hoffmann October 12, 2008 | about stocks: FXB / FXE / FXF / FXY / USO    
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Barron's interviews highly-respected money manager Jeremy Grantham. He was a tad early in warning about the absurd appetite for risk-taking and where it would lead in 2006, for which he received no small share of grief. Grantham now says that despite predicting the bubble's burst, he's surprised by how bad things have turned and how quickly they've done so. He's also shocked by the incompetency of U.S. financial stewardship:

This is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [top-tier firms] have turned out to be much less than I had expected; that's very disappointing. And, therefore, how could one's confidence that the senior people would get us through the storm be very high?

Yet despite all the pain, Grantham doesn't think U.S. equities are cheap. True, fair value on the S&P 500 is about 1,025 - vs. last week's close of about 900 - but bubbles tend to overcorrect by more than that (20%).

One bet that he continues to like is to go long high-quality, blue-chip stocks - and short risky companies. He will at some point look to move slowly back into the cheapest pockets of emerging-market equities and small-cap international value - which are down 50% and 40% respectively since late last year. Still, he's worried about jumping the gun:

The great trap is to buy too soon and, in the big move, to sell too soon. I've been saying since '98-'99 that my next major-league error will be buying too soon -- but we will not buy quite yet. But when we do, I suspect it will be too soon again.

Grantham likes commodities - long term - but thinks the next couple of years they're a good short due to the global economic slowdown (he's short oil (ETF: USO) and his firm's short copper). Looking at currencies, he's long the yen (FXY), Swiss franc (FXF), and short the euro (FXE) and sterling (FXB).

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This article has 16 comments:

  •  
    Oct 12 07:32 AM
    There is a rather compelling analysis that stocks are at about the right level now but could get a lot worse before they get better:
    www.investingminds.com...
    Reply
  •  
    Oct 12 11:54 AM
    since almost all have a selfserving agenda nobody can be believed. you have to think for yourself.wether its a financial magazine or tv station or website or radio nobody really cares about you.i have been saying for over 3 years that wall st is just vegas.you lose slower & nobody brings you a drink.the word stockholder is unmentionable..there is no accountability or transparency.i dont know if investing in a sane way will ever come back.its all a game with a big edge to the insiders.
    Reply
  •  
    Oct 12 12:18 PM
    notsosmart, I think you have nailed it. You speak the real truth. The real reason stocks are falling so dramatically has nothing to do with deleveraging or economic distress. The real reason is that no one trusts the insiders who have been milking companies dry with huge salaries and massive corrupt stock option plans. At the same time they play games with earnings and balance sheet. Witness Lehman's huge award of 100 million dollar bonus just before declaring bankruptcy. The atmosphere between shareholders and management is downright hostile. For years, my refusal to buy any share in which there has been insider selling, especially the repeated cashing in of huge stock options, has saved me from experiencing the pain that other investors have experienced. And even though stocks appear "cheap" or "fairly valued", this doesn't changed my opinion or my actions. I refuse to play games with these people. I am 100% invested in companies with real products whose management is doing the job right for a fair salary. I'm at about break even for the year. Furthermore, people who blindly buy index funds like the SPY are grossly contributing to the problem.
    Reply
  •  
    Oct 12 12:29 PM
    Much truth here.. stocks have not yet exhausted in their downward spiral. What you deem as cheap today will be considered expensive by tomorrrow's standard. They are going to fall more.. do not know how fast but to not anticipate it has the potential to be your own demise. Take the Scout's mantra and run with it. "be prepared"
    Reply
  •  
    Oct 12 12:31 PM
    Until and unless the large institutional investors consistently and regularly vote against excessive executive compensation packages, they will continue because small shareholders simply don't matter. California's state employees pension fund, PERS, has been exceptional in demanding greater accountability from management. Stock options get favorable tax treatment, but enforcement by the feds for anything except the most egregious offenses has been missing...
    Reply
  •  
    Oct 12 04:24 PM
    "All the competencies of the senior people at the Fed, Treasury and [top-tier firms] have turned out to be much less than I had expected;"

    Tell me again, why are these folks pulling in the big bucks?


    Just read where Lehman tried to pay out $100M (why does this now sound tiny) to top execs 3 days before collapse. Talk about raping the stckholders.
    Reply
  •  
    Oct 12 04:32 PM
    SmartStops: Trouble is, there is no foolproof system for knowing when to get out or back in. Trailing stops get you whipsawed in this kind of volatile market. Staying out altogether means you're constantly losing buying power to inflation. Buy and hold aint working real well lately either. notsosmart is right - it's like Las Vegas without the free drinks - and just when you could really use a drink too.
    Reply
  •  
    Oct 12 06:18 PM
    A question that should be asked would have to entail qualifications as we now have top tier advisors who plainly did not even understand the derivitives they were playing with,for pete's sake, never mind the rip off bonuses they get(got). I was thinking of getting into advising as a career but if the regulators are so flapdoodle as they appear to be then why bother?
    Reply
  •  
    Oct 12 07:46 PM
    As I have said before,you must discount stocks to house values,at least for now.Of course,there are many exceptions,but the bulk of inflation is a result of home value spikes and the resulting liquidity..
    Reply
  •  
    Oct 12 08:10 PM
    Why is it whenever I see someone introduce an "expert" with adjectives such as 'highly-respected', I always roll my eyes. Perhaps, like this one, he throws mud at those in power, but doesn't have any constructive plan for how things could be fixed.

    How 'bout it? What type of fix does he suggest, or is he just a clueless as those he derides?
    Reply
  •  
    Oct 12 09:01 PM
    I agree with the comments of the market being more like Vegas. This is an excerpt from something I sent to a friend this weekend, who was looking for investment advice:

    I just have serious reservations about publicly trade equities as an investment class - because it really isn't an investment, but speculation between two parties independent of the company - the amount of publicly traded equities you own should equal how much you would be willing to put in slot machines in Vegas. The people running publicly traded companies have no "skin in the game" so they very often make decisions counter to the interest of the person holding the equity in such businesses.
    Reply
  •  
    Oct 13 01:01 AM
    For what it's worth, life itself is a gamble and therefore it's no surprise that the stock market, which reflects life, if a gamble also.

    I know that is a cliche but it is true nevertheless. (That rock is always falling from the sky and someone gets hit squarely on the head every day.)

    But to get to a point that has been consistently ignored in this discussion:

    Recessions/Depressions feed on themselves and stock prices reflect earnings which don't exactly rise with a falling tide.

    When stocks go down, total buying power goes down which fuels the recession which causes stocks to go down, which fuels the recession ....

    I know this is all obvious but I think in times like this it pays to look at the obvious too.
    Reply
  •  
    Oct 13 01:16 AM
    Stocks are cheap by any historical measure especially the earnings yield which is much more accurate then a random PE. PE doesn't compare other asset classes. Doesn't mean that they won't get cheaper just means anybody buying at these levels gets a long term value.
    Reply
  •  
    Oct 13 06:20 AM
    There's a serious flaw in the school of investing. Asset allocation. Asset allocation based on past performance and correlations are bound to prove irrelevant, "black swan" events will make any predictory investment theory laughable. We simply don't have enough data or sample size to intelligently decide which asset class to invest in and how they will perform.

    I believe there should be only 2 assets in a portfolio: cash and risky investments. Risky investments include equity, HY, options, commodities, currencies, etc. When we decide how to invest, we should always be mindful that the risk for all these risk assets are equal(if it hasn't proved equally risky yet, it will) and we should be ready to write all of them off.

    So are stocks cheap now? Who knows! If you can risk the portion of your asset allocation, take a punt! If not, keep them either in overnight deposit or short dated T-bills.
    Reply
  •  
    Oct 14 03:34 AM
    Stocks WERE cheap last friday, not anymore...
    Reply
  •  
    Oct 14 11:14 AM
    Morningstar is featuring an article this morning, by By Russel Kinnel (date stamped: 10/14/08 at 6:00 a.m.), bearing the headline:

    "Grantham: Stocks Haven't Been This Cheap since 1987. Market seer Jeremy Grantham predicted financial debacle, and now he's buying."

    It goes on to say:

    "Nonetheless he's now more constructive about equities because he believes they are trading at severely depressed prices. He said that at the end of Friday, global equities were trading as cheaply as they had been since the 1980s. In fact, the U.S. had traded below GMO's fair value estimate--though as we spoke Monday morning a rally had brought it back to around fair value. Specifically, he prefers blue chips to small caps or highly leveraged companies."

    Grantham further states:

    "We're buying carefully and slowly," Grantham notes. Why slowly? "When bubbles correct, they usually overcorrect so that the market is selling well below fair value."

    Draw your own conclusions based on the contradictions in information provided by Barrons vs. Morningstar.
    Reply
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