Long Term Bear Turns Positive

In my morning look through Morningstar’s daily 20-30 emails to advisors I came across one item that absolutely blew me away. Jeremy Grantham (his firm GMO is a major institutional investor), a long time bear, has turned positive on stocks. Mr. Grantham has had a low opinion of equities for virtually my entire lifetime. For him to be buying equities gives me a very warm feeling indeed. I have provided an excerpt of Morningstar’s article below.

Have a great day!

Greg Staub, CFA

A couple weeks ago I had a scary thought: Things are worse than Jeremy Grantham predicted. It's kind of frightening when one of the most bearish market seers has understated the risks and intriguing at the same time because he was really on the money. So, I checked in with him on Monday, Oct. 13 to see what he makes of the current situation. The markets were up about 5% when we spoke, and Grantham thought it had come close to returning to fair value.
Today Grantham says we're in for slowing global economic growth. In particular, he believes China will slow down more than expected as most economists have taken in their forecasts for Chinese growth only a touch. He argues that China is very dependent upon exports and that the countries on the other end of the trade are too weak.
Grantham expects that slowing growth will also keep commodity prices falling. "I would keep out of commodities for the near term," he said.
In addition, he sees the deleveraging--an unpleasant unwinding of debt-- leading to a reverse wealth effect for companies and consumers alike. Both had been living beyond their means and now will have to adjust to below-average earnings and income, and that means they'll be tight with spending.
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.
By Russel Kinnel 10-14-08 Morningstar, Inc.