Bulls Redeemed as Birinyi Sees Rally, Shaoul Beats 98% of Funds
The Standard & Poor’s 500 Index was tumbling to a 10-month low on July 2 as U.S. hiring declined and factory orders plunged. At Marketfield Asset Management in New York, Michael Shaoul told clients to hang on.
“The skill in this business is knowing when to trust your views,” said Shaoul, whose mutual fund beat 98 percent of its competitors in the past year, according to data compiled by Bloomberg. “You can’t never change your mind, of course. It’s a cyclical world. But you need to have enough conviction in what you believe to not just be pushed around.”
Shaoul, Laszlo Birinyi of Birinyi Associates Inc. and Federated Investors Inc.’s Philip Orlando stayed bullish as the S&P 500 lost 13 percent in May and June, convinced the fastest annual earnings growth since 1988 would keep U.S. stocks out of a bear market. They’ve been rewarded as the index rallied 6.9 percent in July, its biggest monthly gain in a year, on signs the American economy will avoid falling into a recession.
Now, they see more gains ahead after $908 billion was restored to U.S. equity markets. Companies from Intel Corp. in Santa Clara, California, to Peoria, Illinois-based Caterpillar Inc. and Harley-Davidson Inc. in Milwaukee reported earnings that topped analyst forecasts. Of 316 S&P 500 companies that have posted results since July 12, 77 percent exceeded forecasts, while government reports on building permits and industrial production showed unanticipated growth, according to data compiled by Bloomberg.
“It’s a lot easier for me to make my point today than it was three weeks ago, when you would have been saying, ‘Really? Do you still think that?’” said Shaoul, whose fund assets have doubled to about $800 million this year. “We feel fairly strongly that there is significant value in the U.S. equity market going forward.”
The S&P 500 fell 0.1 percent to 1,101.60 last week after Commerce Department data showed the U.S. economy slowed in the second quarter. Gross domestic product grew at a 2.4 percent annual pace during the period, compared with the 3.7 percent rate in the first three months of the year. While consumer spending rose 1.6 percent, corporate purchases of equipment and software jumped at a 22 percent pace, the most since 1997.
The benchmark gauge surged 2.2 percent to 1,125.86 at 4 p.m. New York time today following better-than-estimated earnings at companies from Humana Inc. to Allergan Inc. and manufacturing data that topped economist predictions.
U.S. equities will probably lead shares in the developing world over the next 10 years, returning about 8 percent a year, Robert Doll, the vice chairman of BlackRock Inc., said in a statement today.
Profits that beat analyst forecasts at Memphis, Tennessee- based FedEx Corp. and Motorola Inc. in Schaumberg, Illinois, and a decline in applications for unemployment benefits gave the S&P 500 its first monthly gain since April.
Stocks rose on July 26 after Barton Biggs, whose New York- based Traxis Partners LLC hedge fund returned 39 percent in 2009, three times the industry average, said he was buying stocks less than a month after cutting holdings in half. Stronger-than-expected economic reports convinced Biggs “it’s a new day,” he said in a radio interview with Tom Keene on “Bloomberg Surveillance.”
Biggs was a seller before July 2, when a Labor Department report showed private employers hired fewer people than economists estimated in June and factory orders fell three times as much as forecast. The S&P 500 is up 10 percent since then.
‘Tsunami of Negativity’
“Was I concerned during the past three months? Absolutely,” said Orlando, who helps oversee $350 billion at Federated in New York. “The things that caused the correction over the period of April, May, June were a tsunami of negativity. You had literally a perfect storm where a dozen or more items came together.”
The MSCI World Index of 24 developed country stocks fell as much as 17 percent between April 15 and July 5 and the Dow Jones Industrial Average posted its worst May decline since 1940, losing 7.9 percent, data compiled by Bloomberg show.
Fitch Ratings stripped Spain of its AAA credit ranking on May 28, spurring concern Europe’s credit crisis would spread and global growth would slow. The S&P 500 lost 3.1 percent on June 29 after the Conference Board’s gauge of consumer confidence slumped to 52.9, trailing all projections in a Bloomberg survey.
The S&P 500 rebounded after its companies reported earnings growth of 56 percent in the second quarter, compared with the average analyst forecast for a 34 percent increase at the start of the period. Improving estimates from executives helped push analysts’ projection for annual profit growth in 2010 to 35.1 percent from 33.6 percent over three weeks.
Intel boosted its profit-margin forecast for the year to a record on July 13 when it reported second-quarter income that beat estimates by 20 percent after corporations resumed spending on computers. The results, which sent shares of the world’s biggest chipmaker up 1.7 percent the next trading session, signal the economy is improving, Orlando told investors in a July 16 note.
“We absolutely felt that second-quarter earnings were going to be very constructive, and frankly second-quarter earnings have come in better than we expected,” said Orlando, who recommends technology stocks. “The really big surprise was how bullish company guidance has been. There’s no reason to guide higher and miss. They could have given tepid guidance, but they came out and guided higher.”
Bears say it’s too early to celebrate. David Rosenberg, the chief economist at Gluskin Sheff & Associates Inc. in Toronto, said June 29 the convergence in the S&P 500’s 50- and 200-day moving averages, known as a “death cross,” signaled losses. The index fell 1.8 percent through July 2 before starting a six- day, 7.1 percent advance. He affirmed his bearish stance last week, saying the rebound “has run out of steam,” comparing it to the slowdown in declines at the end of June.
On July 4, two days after the benchmark fell to 1,022.58, New York University economist Nouriel Roubini warned of more declines.
“The next few weeks and months will be a time of volatility as the market surprises on the downside,” he said July 4 in an interview at a meeting of France’s Circle of Economists in Aix en Provence, France. Roubini, who recommended selling stock before the S&P 500 slid as much as 57 percent from its record in October 2007, forecasts the global economy will slow in the second half as Europe puts in place measures to reduce debt, slowing demand. Roubini, the chairman and founder of Roubini Global Economics, declined to comment.
While the rally from March 2009 to April 2010 was led by financial companies rebounding from losses after Lehman Brothers Holdings Inc. collapsed in September 2008, raw-material producers and industrial companies have advanced the most since July 2. To Birinyi, that means the economy is growing.
“I see a lot of economic-sensitive stocks, stocks that aren’t supposed to be doing well, a lot of stocks just not supporting the negative case,” said Birinyi, whose firm oversees about $300 million in Westport, Connecticut. He cited U.S. Steel Corp. in Pittsburgh and Phoenix-based Freeport- McMoRan Copper & Gold Inc. “The negative case was built on a lot of, let’s say, less-than-concrete data.”
U.S. Steel, the country’s largest producer, climbed 15 percent to $44.33 in July after three straight months of losses. Freeport-McMoRan, the world’s second-largest copper producer, surged 21 percent to mark the best month since May 2009.
Shaoul, who sends daily e-mails to about 800 securities professionals commenting on economic data and investment themes, told clients throughout May and June that dips in economic recoveries are normal and said a July 2 payrolls report that missed estimates shouldn’t surprise investors.
“It should not be ignored that the vast majority of data that people have taken issue with still allows for an improvement in activity at the corporate level,” he wrote in a note that day.
Shaoul said the decline was a correction in the bull cycle and wrote on June 29 that stocks might fall as low as 980. While the benchmark fell 1.8 percent over the next three days, it rebounded from an intraday low of 1,010.91 on July 1. May and June’s combined decline, the worst two months of the rally, sent Shaoul’s Marketfield Fund to the bottom 5th percentile of its peers for the past three months, though it beat 76 percent of peers in July.
Even after a 66 percent surge since March of last year, S&P 500 stocks are inexpensive relative to historic levels. The price-earnings ratio based on reported profits is 15.1, compared with a 20-year average of 20.5. Using estimates for the next 12 months, they trade at a multiple of 12.2.
“If you want to be bearish, you have to make a convincing argument that we’re going to have a recession, and now that’s very difficult to do,” said David Bianco, the New York-based head of U.S. equity strategy at Bank of America Corp. “We’ve got earnings results far stronger than anybody expected, the economy’s not double-dipping, we’re merely slowing down. We very much belong outside of correction territory and going higher.”