Wednesday, August 10, 2011

Jeremy Grantham: "The S&P Is Worth No More Than 950" (POT; MOS; MOO; SOIL; CIWS)

We have another entrant!
A month ago we did a quick roundup of some dreary prognostications in "Coming into the Far Turn Russell Napier and Albert Edwards Lead the Gloomster Stakes But Felix Zulauf is Making a Move With an S&P at 500 Prediction":
Napier is at 400
Albert says 450
Bob Janjuah trails at 550.
See "Take That Albert Edwards: "The Bear Market Bottom Will Be S&P 400"--Russell Napier"

From Pragmatic Capitalism:
Here's the latest via ZeroHedge:
Back in May, when the market was once again trading purely on hopium and everyone's head was in the sand of denial, (or worse), Jeremy Grantham released his second quarter letter which was so bearish, it literally moved the market lower briefly (at which point visions of Ben Bernanke pushing CTRL-P repeatedly restored the levitation).

Anyone who took his advice then, about 15% higher, to get out, has saved substantial capital: "whether [the market] will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it."

Well, to anyone hoping that the latest letter from the GMO manager has anything more optimistic after an epic rout in the past week, we have bad news: "as for global equities, they range from unattractive (August 2) to very unattractive. The S&P 500, for example, is worth no more than 950 on our estimates. In general, risk avoidance looks like a good idea. Cash – despite its manipulated low rate, deliberately designed to make us reach for risk – should be seen as a safe haven replete with important optionality: dry powder to take advantage of possible opportunities." Grantham adds that it is recommended to "keep your head down" for the last two months of a President's third year, and to also "keep it down for the foreseeable future."He adds that GMO is modestly underweight equities in asset-allocation    accounts, partly due to "desperately unattractive" yields on fixed income.

As for those who pray to the altar of St. Ben, he says that "the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical."

In other words, and in keeping with his previous letter, the time to continue fighting the Fed is now more than ever.
His summary recommendations on what to do:
What to Buy?
  • For those with a long horizon, I am sure well-managed forestry and farmland will outperform the average of all global assets.
  • I think it is likely that resources in the ground, hydrocarbons, metals, and fertilizer will also win on a 10-year horizon. I am not certain, though, because of the remarkable gains in so many of these in the last fi ve years. I would put the odds at 2 to 1. As mentioned last quarter, many commodities have the potential for very sharp declines in the short term. If that occurs, then the odds would, of course, rise.