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Gary shilling: I think stocks are in a bubble

October 23, 2009
(GuruFocus, October 23, 2009) This week, Steve Forbes interviewed Gary Shilling, President of A. Gary Shilling & Co., Inc., and editor of A. Gary Shilling's Insight.

They talked about quite a few topics, from the state of the economy, to the American’s newly found frugality and its economy to economy. Gary Shilling holds the view that a second stimulus package is required to sustain the current economic recovery next year.

On the stock market, Gary Shilling is rather bearish. He thinks the market is far ahead of its fundamentals. In his opinion, S&P 500 at 600 is just about right. I include an excerpt here, but make sure you read the complete interview. He is a guy called many economic and market downturn right. Ignore him at your own peril:

Do you see any bubbles right now?

I think stocks are in a bubble. I think stocks are running--it's not a gigantic bubble, it's not like the dot-com nonsense of the late '90s--but it is a bubble in the sense that I think they've outrun what are likely to be the profit results for the economy. I just don't see the kind of growth that will support the big surge that we've had in stocks since March.

So why are equities a bubble now?

Because it's pushed stocks to prices that I don't think are going to be supported by earnings. I think we're going to see operating earnings on the S&P at $40 a share this year. Now, even with a generous 15 multiple on that, with, say, a 600 on the S&P--and as we speak it's 1,058. I mean, that's a big difference.

When do you think this might burst, or will it even burst?

I think it will over the next couple of months, simply because people are starting to worry about the fourth quarter which, as I indicated earlier, could very easily see a relapse and say that the recession isn't over and confound those who thought that it was over and see a rip-roaring recovery and as people realize that consumers are going to be cautious and keep the economy is a slow-growth mode at best, and probably a couple of more negative quarters until the recession is technically over, I think that's going to be very disappointing for those who are rip-roaring into stocks.

Are there any sectors in the market that are immune to this?

We did a study on that and looked at sectors and how they did in bear markets accompanied by bull recessions and it is true that utilities, consumer staples and health care tend to hold up better than most. But they don't consistently show increases in prices in these bear markets.

Sometimes there have been recessions where the stock bear market ignored these three areas--health care, utilities and consumer staples--but about half the time, they did see declines. And indeed, if you look back to last year, they all got clobbered. If you look at an index of utilities and an index of the S&P 500, they look almost identical for last year. It's pretty hard to find areas that are going to be spared. These areas are probably going to do better than stocks in general, if they're declining, but losing less money than the average is kind of cool comfort. You're still losing money.

If that's the case, should investors look at other asset classes now?

I like long Treasuries, which have actually been rallying since mid-June. And I buy them not for yield but for appreciation. I think the yields on these are going down. We are in deflation, which I think will be chronic, and there is the safe haven aspect of Treasuries. And it's interesting that retail customers have not been buying stocks. If you look at the mutual fund inflows, it's been tiny in stocks and it's been very heavy into bonds in general and Treasuries.

Read the entire Gary Shilling interview transcript here.

Rating: 3.4/5 (12 votes)


Joreal2479 - 9 years ago    Report SPAM
"I just don't see the kind of growth that will support the big surge that we've had in stocks since March."

You wrote...Gary is right. There is no growth. Its all reducing spending and inventory that is showing the earnings. Great article and great review. This is where we are headed. I wish I could add to this, but it is a perfect little article.

John Mylant

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