Biggs Cuts Stock Investments by Half as Risk of Recession Grows

Barton Biggs
Barton Biggs, managing partner at Traxis Partners LLC. Source: Morgan Stanley via Bloomberg News.

Concern governments around the world are curtailing stimulus measures too soon spurred Barton Biggs to sell about half of his stock investments this week.

Biggs, whose Traxis Partners LLC gained 38 percent in 2009 when he bought equities after the Standard & Poor’s 500 Index fell to a 12-year low, sold most of his U.S. technology holdings, he told Bloomberg Television yesterday.

Signs the U.S. economy is weakening convinced Traxis to reverse course as the S&P 500 posted a weekly slump of 5 percent, bringing its loss since April 23 to 16 percent. Biggs, 77, said yesterday he cut bullish bets by about half since June 29, when they made up 70 percent of his fund.

“I can change my mind very quickly,” Biggs, who manages $1.4 billion, said in a telephone interview following the Bloomberg Television appearance. “I’m not wildly bearish, but I don’t want to have a lot of risk at this point. I just want to have less exposure at a time like this.”

The withdrawal of government stimulus, including the U.S. Senate’s vote against extending unemployment benefits on June 30, may turn a “soft patch” into a recession, he said. The second recession in three years isn’t inevitable should “rational politicians” take action to avert it, he said.

Stocks in the U.S. have fallen nine times in 10 days, including yesterday when data on jobs and factory orders added to concern the economic rebound is slowing. On Bloomberg Television, Biggs said “policy mistakes” could curb the U.S. expansion in gross domestic product that’s forecast by economists to be 3.2 percent in 2010.

A Mistake

Biggs said it would be a mistake to rein in government spending at a time when global economic growth is weakening. The largest economies should aim to cut deficits in half by 2013, the Group of 20 said in June 27 after a meeting in Toronto.

“The economic numbers are very disappointing,” Biggs said. “Maybe the politicians respond. I’m worried that we could have not just a soft patch but a double dip which lasts two or three quarters and where nominal GDP is only up 2 or 3 percent, and that’ll have a big effect on profits. I’m afraid the market goes down another 10 or 15 percent if that happens.”

Biggs’s comments reflect the pressure on professional investors as the steepest rally since the Great Depression started to fizzle in April. Hedge funds lost an average of 2.6 percent in May, according to the HFRX Global Hedge Fund Index, as the European debt crisis triggered declines in stocks, the euro and commodities.

‘Raising Cash’

It was the biggest decline since November 2008, when hedge funds lost 3 percent following Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. About $3.5 billion was withdrawn from hedge funds in April, according to TrimTabs Investment Research and BarclayHedge estimates.

“I sold stocks pretty aggressively in the U.S., and we had a lot in tech,” Biggs said, referring to this week. “I’ve taken basically all of it out in the U.S., and we had a broader exposure to consumer stocks and just, in general, I’ve reduced my net long position by about 30 or 40 percentage points.

He added: “I’m not putting my money into anything. I’m raising cash.”

Biggs, who earlier this week predicted S&P 500 companies would earn a combined $85 to $90 a share in 2010, now says profits may be as low as $70 to $75 if the economy slows. The low end of that range implies a price-earnings multiple of 14.6 for the S&P 500, compared with its historical average since 1954 using reported results of 16.4.

Prior View

“I’m definitely not a seller,” Biggs told Bloomberg News on June 29. “All things considered, I’m going to stay where I am unless the market really comes down some more. Then I’d be inclined to be a buyer.”

Traxis was buying household-product suppliers, drugmakers and computer companies at the start of the year, speculating they would prove bargains as earnings surged, he said in a Dec. 29 interview with Bloomberg. In March, he said stocks remain cheap relative to forecasted earnings and predicted the global economic recovery would be “surprisingly strong.”

Biggs said yesterday stocks may still rise, comparing the current market to the end of the 1982 recession when the S&P 500 declined 13 percent. The advisory firm founded by Laszlo Birinyi published research on July 1 drawing the same comparison.

“This is what always happens at this stage of the cycle,” Biggs said on Bloomberg Television. “We are at exactly the same stage in the cycle as we were in 1982, using the exact kind of words: ‘The U.S. economy is collapsing, the world is collapsing, it’s the worst time since the Great Depression.’ Blah blah blah.”

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