Two of America’s best known investors are moving in opposite directions in the stock market, with Laszlo Birinyi predicting more gains as David Einhorn takes a more cautious approach.
Holdings that profit if stocks gain at Einhorn’s Greenlight Capital Re Ltd.’s exceeded short bets by 35 percentage points as of Sept. 30, compared with about 42 percentage points three months earlier, he said today on a conference call. Birinyi, president of Birinyi Associates Inc., said the Standard & Poor’s 500 Index will reach 1,820 by February and bought calls that profit from a rally in equity benchmark.
The divide is widening between Birinyi, whose bullish forecasts have proved prescient during a 4 1/2-year bull market, and Einhorn, who gained fame betting against Lehman Brothers Holdings Inc. Stocks in the U.S are in the midst of their broadest advance on record, a rally that has burned short sellers and pushed valuations to the highest levels since 2010 as the S&P 500 reaches all-time highs.
“As the market continued its relentless climb, we’ve become more conservatively positioned,” said Einhorn, a hedge-fund manager and chairman of Greenlight Re, a Cayman Islands-based reinsurer.
Stocks climbed this year as earnings exceeded analyst forecasts, unemployment declined and the Federal Reserve continued its economic stimulus program. The S&P 500 has gained 4.9 percent in October, bringing the advance for the year to 24 percent, the most since 2003. The advance has pushed the price-earnings ratio up almost 20 percent to 16.7, according to data compiled by Bloomberg.
Birinyi predicts a 3.2 percent advance to 1,820 in the next three months, according to a report today. His firm purchased calls on the SPDR S&P 500 ETF Trust with a strike price at $182 that expire in January 2014. The exchange-traded fund closed at $176.29 yesterday. The S&P 500 was little changed at 1,764.73 at 1:47 p.m. in New York.
Einhorn said most of the portfolio gain in the third quarter was from long holdings in companies including Apple Inc. He said he was sticking with his short positions, or wagers that a stock will decline, including one on Green Mountain Coffee Roasters Inc.
“The losses in the short book were broad-based, and we continue to be short most of the companies that contributed to the loss,” he said. “These include a variety of companies which tend to have conventional valuations, rather than speculative story stocks that have caused excessive pain for other short sellers.”
Greenlight Re’s investment portfolio returned 4 percent in the third quarter and 12 percent in the first nine months of the year, the company said yesterday in a filing. That compares with 5.2 percent and 20 percent for the S&P 500, including dividends. The reinsurer’s portfolio was valued at $1.15 billion as of Sept. 30.
Einhorn, 44, has sounded alarms about the climb in asset prices for months. Last year he compared excessive stimulus by central bankers with eating too many jelly donuts, a habit that can be a threat to long-term health, according to an article that quoted him in Grant’s Interest Rate Observer.
Birinyi’s 1,820 forecast comes after he said in August the S&P 500 would reach 1,740 by the end of the year. He projected in January that the index had more than a 50 percent chance of reaching 1,600 in 2013. The gauge surpassed 1,600 in May and 1,740 this month.
“We took it on a step-by-step basis expecting some detours and unexpected obstacles, which did occur,” Birinyi wrote.
The S&P 500 has a 51 percent chance of reaching the new forecast by Jan. 31 and a 75 percent chance of doing so by March 31, according to today’s note.
Birinyi has stuck to his bullish projections since the rally began. He said the bull market was intact in August 2011 when S&P’s downgrade of the U.S.’s AAA credit rating helped send the index down almost 20 percent.
He cautioned investors not to “get shaken out” in May 2012, as stocks lost 9.9 percent. This year represents the fourth and final phase of the rally, during which gains accelerate as investors pile in, Birinyi said.
The index will drop to 1,718 by year’s end, according to the average of 19 Wall Street strategist projections compiled by Bloomberg, whose estimates range from 1,440 to 1,800.