The selloff in U.S. stocks may be close to ending with valuations so low they could withstand a 15 percent decline in profits, said Barton Biggs, the hedge fund manager who said this month he was selling shares.
“It’s very possible, in the grand scheme of things, that what we’re seeing is the classic retest of the lows of 10 days ago,” Biggs said on Bloomberg Television today. “We may be in the process of making an important bottom.”
Equities around the world plunged today, with the Standard & Poor’s 500 Index falling 4.5 percent to 1,140.65 as of 4 p.m. in New York. The level is within 1.9 percent of the one-year low of 1,119.46 reached Aug. 8 and down 16 percent from the 2011 high of 1,363.61 on April 29.
The tumble in stocks shows that investors expect a slowing economy to spur analysts to lower earnings estimates, he said. Earnings at S&P 500 companies are forecast to climb 17 percent to $99.08 a share in 2011 and 14 percent to $112.90 in 2012, estimates compiled by Bloomberg show. The index is trading at 12.4 times profits in the last 12 months, 24 percent below its five-decade average.
“If analysts and investors really believed the S&P earnings estimates, the market wouldn’t be selling where it is,” said Biggs, whose equity purchases prior to the March 2009 market bottom sent his Traxis Partners LP hedge fund to a 39 percent gain that year. “The market is already priced for a 10 or 15 percent decline in earnings.”
Biggs runs the Traxis Global Equity Macro Fund, which produced a 2.2 percent profit, net of fees, for investors in 2011 through the end of July, according to Adam Jaffe, the company’s chief operating officer. That compared with the 3.3 percent gain for the MSCI All-Country World Index of shares in 45 nations, including reinvested dividends.
Equity prices will prove too high should the economy fall into a recession, he said, a possibility the U.S. Federal Reserve should act to prevent with something similar to the purchase of Treasury bonds it began in 2010.
“We do need something more out of the Fed at this point, but are we going to get it? I don’t know,” he said. “I’d like to see the Fed do something drastic, maybe buy a different asset than Treasuries.”
Biggs, who called stocks a “strong buy” on Aug. 3, said five days later he had cut risk in Traxis. Biggs, the former chief global strategist at Morgan Stanley, said he wanted to “get out of the way” of the slide that had wiped out almost $2 trillion from U.S. equities over two weeks.
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