Legendary investor Bill Miller, manager of the Legg Mason Value Trust which beat the S&P 500 for 15 straight years before underperforming in 2006 and again in 2007, appears to have called the bottom in his most recent quarterly letter to shareholders, released yesterday (Wednesday April 23):
The credit crisis that I wrote about last quarter culminated this quarter in the collapse and rescue of Bear Stearns, an event that I believe (though no one knows) ended the panic phase of the credit cycle. The economic consequences of curtailed credit, increased risk aversion, deleveraging, lost jobs, falling house prices, and negative equity returns remain, and are likely to take some time to play out. All of those issues have been front-page news for some time, and I believe they are well discounted by the market, which is why stocks have risen since Bear’s collapse.
I think we will do better from here on, and that by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs. Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which valuation- based strategies usually begin to work again, and momentum begins to fade (there is no evidence of the latter yet, as the old leaders continue to lead). Most housing stocks are up double digits this year despite dismal headlines, a sign the market had already priced in the current malaise. I think likewise we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then.
With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.
Well, well, well. Whatdyaknow. Another bull making the standard argument: the collapse of Bear Stearns on Monday March 17th marks the bottom.
The S&P got as low as 1260 that Monday morning, about 20% below the closing high of 1565 on October 9, 2007. It’s all very nice and tidy isn’t it? The collapse of a major institution, a 20% down move which is the formal definition of a bear market, and what appears to be a V bottom.
We shall see my friends. Me, I don’t think so. I think we’re going lower.