Tuesday, January 10, 2012

Birinyi Sees Bull Market Continuing in 2012

Laszlo Birinyi, whose prediction the bull market would weather a five-month retreat came true in October when the Standard & Poor’s 500 Index rallied 11 percent, says stocks will keep climbing in 2012.

Equities will gain at least 8 percent as improving corporate profits force bears to capitulate, according to Birinyi, who manages $400 million in Westport, Connecticut. Forecasts for declines from economists Gary Shilling and Nouriel Roubini were repudiated in 2011 as the benchmark gauge for American equities erased a 13 percent drop.

Birinyi, who advised holding stocks in August as the U.S. government was stripped of its AAA credit rating and strategists cut forecasts faster than any time since the credit crisis, said shares will climb for years to come if history is any guide. Shilling, president of A. Gary Shilling & Co., predicts equity investors will lose money in 2012 as consumer spending drops.

“Many concerns are opinions, but not necessarily facts,” Birinyi, president of Birinyi Associates Inc., said in a telephone interview on Jan. 4. “Later in the year, things will get a little bit better and sentiment will change, and we end up at the last leg where we’ve got the last-guy-in-the-pool scenario.”

Annual 28% Returns
The S&P 500 has risen 89 percent since March 2009, returning 28 percent a year to investors including dividends as U.S. gross domestic product expanded at an average rate of 2.4 percent over nine quarters. After ending 2011 virtually unchanged, the index gained 1.6 percent to 1,277.81 last week, the biggest rally to start a year since 2006. Futures on the S&P 500 advanced 0.8 percent at 10:07 a.m. in London today.

While U.S. stocks avoided a bear market in 2011, they posted their biggest decline since 2008, falling 19.4 percent between April and October. Investors outside the U.S. suffered bigger losses, with the Stoxx Europe 600 plunging 26 percent and China’s Shanghai Stock Exchange Composite Index tumbling about 30 percent. About $6 trillion was erased from global equity values last year, the second annual decline since 2002.

The Chicago Board Options Exchange Volatility Index, a gauge of investor concern derived from equity derivatives, averaged 24.2 in 2011, the third-highest level in the last nine years behind 2008 and 2009, data compiled by Bloomberg show. It reached a 29-month high of 48 on Aug. 8. The Dow Jones Industrial Average swung 400 points for four straight days for the first time ever in August.

Strategists Cut
The average S&P 500 estimate from 13 Wall Street strategists tracked by Bloomberg fell more than 9 percent from May through November, the most since 2009. Their forecast for a 6.4 percent increase in 2012 at the start of this year was the most conservative since 2005, Bloomberg data show.

“Even though we were basically flat, this was a really volatile year,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, who helps oversee $14.5 billion, said in a Jan. 5 phone interview. “Negative sentiment is what trapped the U.S. market and then we got range bound because the fear that if Europe slips into a major recession, it takes us with them.”

Birinyi, an equity trader at Salomon Brothers Inc. in the 1980s, was one of the first investors to recommend buying when stocks bottomed in 2009. He stayed bullish through the S&P 500’s decline of 16 percent in 2010 and last year’s tumble to 1,099.23 on Oct. 3 from 1,363.61 on April 29.

‘We Were Uncomfortable’
“Quite frankly, when the market got down 19 percent, we were uncomfortable,” he said in a Jan. 4 phone interview. “But we were uncomfortable in 2010 when the market went down 15 percent, and it ended up recovering.”

U.S. equities (SPX) are in the third of four bull market stages, in which investors accept the rally that gathered momentum in the first two, according to Birinyi’s analysis. He said this phase, which started around July, should end in 2012 with a gain of at least 8 percent. The bull market’s final phase of “exuberance” has lifted the S&P 500 an average of 39 percent in the five advances since 1962, he said.

S&P 500 earnings have beaten estimates for the past 11 quarters and are forecast to climb above $100 a share in 2012, according to analyst projections compiled by Bloomberg. A ratio of debt to assets for S&P 500 companies reached its lowest point since at least 2002 in the third quarter, Bloomberg data show.

Bulls Under Pressure
Bulls such as Birinyi came under pressure in the second half of 2011 as the S&P 500 tumbled 5.7 percent in August and 7.2 percent in September. It lost 4.5 percent on Aug. 18 when the Federal Reserve said factory production in the Philadelphia region reached a 29-month low. The index lost more than 5 percent over two days twice before bottoming on Oct. 3, the first time after the Fed cited risks to the economy on Sept. 21, the second after consumer spending slowed on Sept. 30.

Stock swings increased as economists cut their forecast for 2012 GDP growth from 3.3 percent in February to 2 percent in October. Roubini, the co-founder and chairman of Roubini Global Economics LLC in New York, put chances of a contraction in developed economies at 60 percent and said investment gains would prove temporary. The S&P 500 is up 4.5 percent since he spoke Oct. 18 at an Asset Allocation Summit in London. Roubini declined to comment on his outlook.

Shilling said in September that equities were likely to drop and that earnings would fall short of estimates. He predicted in August that the U.S. would enter a recession this year. While he missed the 17 percent rally that began Oct. 3, he’s betting on a retreat as consumers save, the economy shrinks and profits fall.

“It’s probably tough-going for the equity markets this year because the expectations are that economy is going to be strong and corporate profits are going up,” Shilling, who contributes to Bloomberg View, said in a Jan. 4 phone interview. “I don’t think that’s realistic. I think we’ll probably have a decline in earnings, which feeds off the forecast of a moderate recession.”

Michael Shaoul told clients of Marketfield Asset Management on Sept. 14 and Sept. 23 to hold stocks because the decline wouldn’t last. While investors were right to be wary of Europe’s debt crisis, calls for a U.S. recession were unwarranted, according to Shaoul, who helps oversee $1 billion in New York.

‘Violent Market’
“This was a particularly violent market,” Shaoul said in a Jan. 5 phone interview. “At some point in time those negative things are going to matter a great deal, but not at this point in the cycle. It still looks to me that the U.S. equity market should be able to surpass that 2011 high.”

The S&P 500 has risen about 7.1 percent during the third year of a bull market and the price-earnings ratio increases 6.3 percent, according to Bloomberg data dating back to 1960. The index is trading at 13.5 times reported earnings, compared with 15.8 in February and about 18 percent below the 16.4 average since 1954, data compiled by Bloomberg show.

Alcoa Inc. was the first Dow company to report earnings for the last three months of 2011 yesterday when the largest U.S. aluminum producer posted its first quarterly loss in more than two years. Fastenal Co. and eBay Inc. are among the companies scheduled to report in the next 10 days that analysts forecast will see an increase in earnings, according to estimates compiled by Bloomberg.

“What we can see is that companies are still in business, balance sheets are good, earnings are still there and the negative case continues to be somewhat sketchy,” Birinyi said. “The potential for surprise does exist.”

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