We last looked at the Bullish Bears? back on October 21. Now, we have another Ursine to add to the bull camp: Steve Leuthold, Chairman, The Leuthold Group.
He is the subject of this week’s Barron’s interview:
Barron’s: What is your assessment of the market’s big selloff this fall?
Leuthold: There were two stages, the first being what we thought was a normal cyclical bear market. We thought the economy had peaked in last year’s fourth quarter. And then, about six weeks ago, after the market had come down about 25%, it looked to us as though the market had discounted a recession. By that time, the recession was eight or nine months old. So we thought that, as normally happens, the market tends to turn up in the middle of a recession.
Then came the liquidity freeze, which was the second stage, and that took us down over the past six weeks and really hurt us. We were doing pretty well up until that point because we were defensive, but we turned bullish too early.
In a recent research note, you wrote: “I remain bullish and wrong.” Is that still your sentiment?
Yes, it is. I was just looking at an interview I did with Barron’s in December 1980, and I was called a super bull. And then we got prematurely bearish in 1998, and people started calling me a perma-bear. Right now, though, I am not a super bull, but I am a very convinced and optimistic bull.
What underscores your case?
Certainly, the intrinsic value of stocks. In terms of our valuation model, it’s the most positive we have seen since 1984. We look at 28 different factors, including price-to-earnings and price-to-sales, and they are quite decidedly positive. Because we look at normalized earnings, we smooth them out over a business cycle. We have always done it that way, and we are at about 12 times earnings now.
Is that on forward earnings?
No. What we do is we take the last 4½ years of historical earnings, and then we project forward only six months. Then we divide the whole thing by 20, or the number of quarters. We have found over the years that it is almost imperative that you do that — that is, smoothing out the business cycle to get the underlying level of earnings.
How does that 12 times P/E ratio compare to other periods?
Looking back 55 years, we are in the 15th percentile, well into the bottom quartile, and this is where markets very often have bottomed out. So on a valuation basis, this is a really cheap market. At these levels, we are really down in bull-market territory. From here, on a one-year basis — and this goes back to 1926 — the market has been up about 18%, on average, in the next year.
There’s more at Barron’s, and their interviews often show up at Marketwatch of Yahoo finance.
INTERVIEW: A “Perma-Bear” Warms to Stocks Steve Leuthold, Chairman, The Leuthold Group
LAWRENCE C. STRAUSS
Barron’s, NOVEMBER 3, 2008