Blue Chip Bull, or Thoughtful Contrarian?

Good Evening: As they have so many times in recent weeks, U.S. stocks were able to overcome some early bumpiness to finish higher on the day. Some earnings disappointments were responsible for this morning’s profit taking, but stronger sales of new homes powered the home building and financial sectors enough to lift the averages into positive territory. It’s hard to give much weight to today’s action, since volume was so light, but the S&P 500 continues to trade as if it has a rendezvous with the 1000 level. The fundamental analysts, the technicians, and the cheerleaders on CNBC are all telling investors to get in now before the markets go even higher, so perhaps it makes sense to check back in with Jeremy Grantham to gain some perspective.

Stocks around the world were in the plus column heading into Monday morning’s trading in New York. Some lighter than expected earnings from the likes of Aetna and Corning, and, to a lesser extent, Verizon and Honeywell, worked to subvert the early upticks, however, and stocks opened on the shady side of unchanged. The averages went from red to green as soon as some surprisingly good new homes data were released 30 minutes into the day (see below). That rally faded when the incentives needed to achieve those sales were revealed, and stocks hit their lows for the day (down approximately 0.5%) some 45 minutes later.

But the housing news helped enough homebuilding and financial stocks to lift the tape back toward unchanged just before lunch, and the averages drifted slowly and unevenly higher from there. Trading was on the dull side throughout the session, though I will say breadth was firmly positive. By day’s end, the Dow Transports were up 1% to lead the way, while the NASDAQ lagged with only fractional gains. More than the housing data, it was in preparing for an onslaught of new supply that hurt Treasurys today. Yields were up between 4 and 9 basis points ahead of $115 billion worth of new paper this week. For its part, the dollar was weaker against all but the yen, but it wasn’t enough to ramp up the commodity pits. Helped by advances in both the grains and the metals, the CRB index squeezed out a gain of 0.2%.

Judging by the rest of the articles you see below, the bullish consensus is becoming more crowded by the day. On the fundamental side, equity analysts have been busily upping their earnings estimates for 2010, causing Bloomberg to posit that the S&P could rally another 26% from here. Since these are the same analysts who had to take erasers to their 2008/2009 estimates, let’s see if the technical analysts have anything to add to the outlook. Lo and behold, they’re bullish, too, saying the S&P 500 is now in “breakout” mode. This is the same crowd that missed the long term double top in the S&P back in October of 2007, and many of them also thought the October/November lows in 2008 were “THE bottom”. Still, with the fundamental and technical analysts both giving investors the “all clear” sign, seeing the last set of headlines on Bloomberg today made it seem as if even the bears had turned bullish.

Jeremy Grantham is commonly thought of as a pessimist, but it is a moniker that is better suited to headlines and Twitter than it is to the man himself. If Bloomberg is vying to become a sort of “Cliff’s Notes” for investors, then what they served up to readers about Mr. Grantham’s latest views does not pass muster. In reality, as well as in the piece you see attached, Mr. Grantham is not the Blue Chip bull the article suggests. He does have nice things to say about “U.S. Blue Chip stocks”, but his views are far more nuanced that a simple “up or down, bullish or bearish” connotation could ever hope to capture.

Mr. Grantham cares about value, first and foremost, and then relative value among sectors and asset classes. In such an uncertain world, Mr. Grantham maintains that the closest thing to certainty that can be found when investing is to take the other side of bubbles. In the late 1990’s, he shunned the zany prices for tech and telecom names, paying the price with some underperformance and some lost clients. A few years ago, he avoided exposure to real estate and finance, but GMO’s performance was helped by an overweight in emerging markets. When the averages were circling the drain back in March, Mr. Grantham gritted his teeth, bought stocks, and then wrote (virtually in real time) how hard it was to do so. Jeremy Grantham does not lack courage, even when he harbors doubts.

So what does this well regarded, long term value investor have to say about the choices arrayed before him in July of 2009? After a nearly 50% run in the indexes, Mr. Grantham bemoans the paucity of easy choices. He knows a broken bubbles in credit and real estate mean the economy is unlikely to roar back, but he is also mindful of the power of all the policy intervention by governments and central banks. He sees “the market” as being close to fairly priced, and he thinks a quick run to 1000 or higher in the S&P 500 is an even money proposition. If the S&P does pop another 5% to 10%, Mr. Grantham will once again batten down the hatches and await better opportunities. And while he likes “high quality” (low debt, P/E, and P/B ratios) blue chip stocks, he is not blindly wedded to the large cap Dow. He likes to emphasize quality and value, especially on a relative basis to lower quality names.

He also (still) favors emerging markets, though he is trying to reconcile his ardor for fast growing overseas economies with what he sees are growing imbalances in China. As an aside on market sentiment, Mr. Grantham notes that at a recent conference he attended, managers who were more concerned about underexposure in a rally outnumbered those worried about overexposure to a renewed decline by 10 to 1. All in all, he finds a “Boring Fair Price” type of market a tough environment in which to deliver outperformance to his clients. I agree. I also think that if silly labels must be affixed to money managers during the information age, maybe next time Bloomberg will be a little more precise when describing Jeremy Grantham to its readers. Rather than “blue chip bull”, they should call him a thoughtful contrarian.

— Jack McHugh

U.S. Stocks Rise as Gain in Home Sales Sends Banks, Builders Up
U.S. New-Home Sales Climb 11%, Most in Eight Years
Surging Profit Estimates Signal 26% Rally for S&P 500
S&P 500’s ‘Solid Breakout’ Points to Gains: Technical Analysis
Grantham Says U.S. ‘Blue Chips’ Are Cheapest Stocks
jeremy-granthams-quarterly-letter-july-2009

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