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Big Investors Slowly Ramping Up U.S. Stock Buys

Thursday, 16 Oct 2008 04:11 PM

NEW YORK -- The allure of heavily-battered stocks has grown so strong that some of Wall Street's most prominent investors are dipping their toes into the market, suggesting the brutal declines may be over the worst.

Jeremy Grantham, Bill Ackman, Chris Orndorff and Bob Doll are some of the savviest U.S. money managers who are betting that equities have fallen to levels far below their intrinsic value.

"Things have just gotten a bit silly," said Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles. "We are very, very close to a bottom in equities."

Grantham, chairman of GMO, an institutional money manager with $120 billion in assets under management, puts it another way to Reuters: "The early purchases will be painful. But if you could slice in and do some buying before and after the low, seven years from now you will not regret it."

What's given money managers confidence that equities are a buying opportunity is that the risk-reward never looked so good.

It could be weeks or months before money flows freely again in debt markets -- a necessary function for a full-fledge stock-market recovery -- but with fear overriding fundamentals, investors are of the view that they will make out better if they are in the market too early rather than too late.

Last week's moves marked an important period for investors.

The Dow Jones industrial average .DJI tumbled 678.91 points on Thursday alone to end below 9,000 — or down about 40 percent from its record closing high at 14,164.53 a year ago on October 9, 2007 — and plunged again on Friday, breaking below 8,000.

The sheer hysteria — and you can call it that, after investors have pulled over $50 billion from stock funds so far in October — has left depressed prices in equities.

"In a couple of years we will look back at October of 2008 wishing we had bought more stocks," said Bob Doll, global chief investment officer of equities at BlackRock Inc, one of the world's largest asset managers.

Grantham said the broad-stock index Standard & Poor's 500 .SPX is trading below his firm's fair value estimate, adding "we have not been below the trend line for, really, 20 years."

Fair value for the S&P, which has moved back toward 900, is around 975 for GMO, Grantham said.

DON'T TRY THIS AT HOME

Truth be told, the stock-market declines has been exaggerated by volatility. The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's main barometer of investor fear, surged to new highs on Thursday, in a sign investors remain cautious and anticipate more market turmoil.

The widely-watched VIX vaulted to an unprecedented high of 81.17 before retracing to 78.62, up 13.68 percent.

"Things are improving, but will do so irregularly — meaning markets will remain volatile in both directions," BlackRock's Doll said.

That said, he said he believes markets are in a "bottoming process" that will take time.

Brian Gendreau, an investment strategist in New York for ING Investment Management Americas, shares that sentiment. He said his firm within the last week has gone 5 percent overweight in U.S. large-cap stocks from neutral equities since July 1.

"You usually form bottoms particularly when you have all this despondency, capitulation and utter despair," Gendreau said. Even Ackman, the hedge-fund manager who runs Pershing Square Capital Management, said stocks were "getting extremely cheap" at the Value Investing Congress conference on October 6 — before the panic-driven sell-off last week.

Ackman said he has been an aggressive buyer of shares in "less complicated, great franchises." His fund recently bought 180 million shares in Wachovia Corp.

It's not just stocks that investors are sifting through.

Gendreau said he favors investment-grade rate companies which have issued bonds and are trading at historically wide spreads. Spreads also hit an all-time high of 581 basis points on Friday, according to Merrill Lynch data dating to December 31, 1996.

"They are sitting on $640 billion of cash. What are the chances they are going to default on their bonds? These are good buys."

After all, equities can't rally strongly without credit spreads coming in, Gendreau added.

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NEW YORK -- The allure of heavily-battered stocks has grown so strong that some of Wall Street's most prominent investors are dipping their toes into the market, suggesting the brutal declines may be over the worst.Jeremy Grantham, Bill Ackman, Chris Orndorff and Bob Doll...
investors
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2008-11-16
Thursday, 16 Oct 2008 04:11 PM
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