Tuesday, September 14, 2010

Why some gloomy investors are bullish on stocks - Yahoo! Finance

I found this link to an article on Yahoo! Finance from Eddy Elfenbein, a fellow blogger.

Eddy posted a short note on Twitter yesterday noting the following:

Today was day 82nd day in a row that the S&P 500 closed between 1020 and 1130, but we're getting close to the upper bound.

Put another way, stocks have essentially gone nowhere for the last three months.

In addition to being mired in a trading range, stock movements over the last few months have all tended to move in lockstep. Correlations are above 0.80 for most sectors with the S&P, meaning that fundamental and sector analysis has not added much value.

Little wonder, then, that frustration has lead to apathy, with overall stock market volumes declining and many investors staying on the sidelines.

And yet, it could very well be that boredom is creating opportunity, as the article from Yahoo! indicates. Here's an excerpt:

If you believe a few respected money managers, there's opportunity aplenty in stocks now. If you find that surprising, wait until you hear where they think the bargains lurk: big blue chips that almost always fetch premium prices.

Legendary bear Jeremy Grantham of GMO LLC in Boston says the U.S. faces "seven lean years" of meager growth, but he has been pounding the table about blue chip bargains with big dividends. Steven Romick of FPA Crescent predicts rising taxes and an economic malaise but is singing the praises about "bigger is better" stocks now, too.

"If you're worried about a feeble economy you want to own companies with strong balance sheets," says T2 Partner's Whitney Tilson, who is loading up on big, multinational companies though he doubts the market will rise much for a while. "The beauty today is those companies are on sale."

The bull case for stocks, in my opinion, remains the lack of interesting investment alternatives. Money market rates remain low, and bond yields are also meager, especially for maturities under 5 years. For investors with a longer term time horizon, it seems reasonable that dividend-paying blue chip stocks should be at least part of your portfolio.

Why some gloomy investors are bullish on stocks - Yahoo! Finance