John Paulson Still Bullish on Stocks

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Oct 03, 2011
John Paulson has had a rough year in 2011. The most celebrated winner of the subprime crisis has stumbled in 2011 with losses of over 30% in all of his hedge funds.


Paulson made untimely bets on U.S. financial stocks such as BAC, JPM and WFC. Paulson has also been hit with a collapse in the share price of Hewlett Packard (HPQ, Financial), not to mention his holdings of Sino-Forest were obliterated due to fraud.


Many investors have been concerned that hedge fund redemptions at Paulson's funds would create a huge drag on the gold market in particular.


Despite the poor performance Paulson is bullish on stocks. He is primarily focused on the discrepancy between equity earnings yields and Treasury yields. Right now the discrepancy is at a record which gives Mr. Paulson comfort that stocks are fairly valued. He also notes that “the dividend yield of the S&P 500 equals that of 10-year Treasuries, even though equity dividend yields grow over time while Treasury yields are fixed.”


Paulson's rather simplistic analysis has been countered by analysts like David Rosenberg who see the S&P earnings at $75 a share.


"If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $75 in 2011 as opposed to the current consensus view of over $110. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 10x was actually buying the market with a 15x multiple," Rosenberg said in his daily commentary.


Thus, the bears simply do not believe that earnings yields or dividend yields are sustainable.


Paulson seems to be unfazed by the recent volatility in the stock market.


"This summer and similar periods in the past have been used as buying opportunities for savvy investors,” Mr. Paulson says. “Unfortunately, many investors make the mistake of buying high and selling low while the exact opposite is the right strategy to outperform over the long term.”