James Montier sees “deep value” in markets – he is bullish

James Montier, a market guru usually known as a permabear has turned bullish of late.  In keeping with my bullish sentiments, I have posted his thoughts below according to Bloomberg News.

That said, I should always qualify my ‘bullishness.’  I still believe we are in a bear market and that equities will go lower on an inflation-adjusted basis.  Investing only in index funds is a bull market strategy to be avoided like the plague. However, there are many stocks trading for 3 and 4 times earnings like Valero Energy or Chevron that deserve a look – Montier obviously agrees.  This is shaping up to be a value investor’s dream.

Notice the huge number of deep value stocks in the energy sector at the bottom of this post.

Societe Generale SA strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices for stocks, corporate bonds and inflation-protected government debt.

The Standard & Poor’s 500 Index is “distinctly cheap” because it trades for 15.4 times the 10-year moving average of its companies’ profits, compared with an average of 18 for the U.S. market since 1881, London-based Montier wrote in a research note today. Fifteen stocks in the U.S. index, from Chevron Corp. to Gap Inc., pass his test for “deep value,” while a tenth of shares in Europe and a fifth in Asia qualify.

“This is a value investor’s version of heaven,” wrote Montier, SocGen’s global equity strategist. “From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.”

Corporate bonds are pricing in the highest default rate since the Great Depression and some senior secured debt is trading for as little as 50 percent what investors would recover in a bankruptcy, Montier wrote. The drop in bonds may amount to “the investment opportunity of a lifetime,” he said.

Market Plunges

Equities tumbled this year, sending benchmark indexes in the U.S., Europe and Asia down more than 40 percent, as financial-company losses stemming from the U.S. housing-market collapse approached $1 trillion. Merrill Lynch & Co.’s U.S. Corporate Master Total Return Index of investment-grade corporate bonds declined 13 percent this year.

The Federal Reserve has reduced its benchmark interest rate to 1 percent from 5.25 percent in September 2007 and pledged to lend more than $7 trillion to revive the economy. Investors can get cheap insurance against the risk Fed lending spurs inflation by purchasing government bonds that pay interest on a principal amount that rises with the consumer price index, Montier wrote.

“Such instruments have seen their yields rise dramatically of late,” he said. “Mr. Market is offering you the opportunity to protect yourself from the ravages of inflation in an exceptionally cheap way.” Bond yields move inversely to prices.

Montier was a member of the top-ranked investment strategy team in Thomson Extel’s surveys the past three years.

“With all of these opportunities available I have never been more bullish!” he wrote. “Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”

S&P 500 stocks that Montier characterizes as “deep value
opportunities” based on profit and dividend yields, debt levels
and price relative to earnings:

Allegheny Technologies Inc.
Carnival Corp.
Chevron Corp.
Cummins Inc.
Dow Chemical Co.
Gap Inc.
Illinois Tool Works Inc.
Ingersoll-Rand Co.
KLA-Tencor Corp.
Marathon Oil Corp.
Molex Inc.
Nucor Corp.
Tesoro Corp.
Valero Energy Corp.

Montier Has ‘Never Been More Bullish’ on Stocks – Bloomberg

  1. Stevie b. says

    Ed – was listening in on a conference call last night to Bruce Berkowitz (used to work with him a couple of decades ago) of Fairholme who has also been seeing terrific value at these levels. He is rightly prepared to look beyond the initial losses of buying too early on the way down (& what’s the point of buying too late?) because -yep- clearly there’s no gain without pain.

    I too love being a contrarian (one-way streets make me nervous…) but I just worry – in a way I never worried before – that ( gulp) this time it really is different. All the old historic yardsticks about debt/dividends/cash/flow/p.e.’s/divergences etc etc assume stetched versions of normality. We seem now not even to be in abnormal times – we are truly in uncharted territory. We are seeing new ad hoc solutions when the previous ad hoc ones didn’t work. With each new non-solution we slide inexorably deeper into the mire, but one thing seems inescapable – whatever the cost, there will be no deflation.

    I’d really like to know if you agree with this ” no deflation” view. I’d also really like to know what you think of Prof. James hamilton’s view ( https://www.econbrowser.com/archives/2008/11/time_for_a_chan.html ) that basically the Fed should be buying-up all the TIPS it can get it’s hands on at these levels.

  2. Edward Harrison says

    Stevie b, so nice to hear from you. I got out of a lot of stocks earlier this year and shifted into TIPS. But, after the Lehman bankruptcy I sold TIPS. Basically, I thought up until September that we had equally likelihood of high inflation as we had of deflation — at least over the medium term (1-2 years).

    The Lehman Brothers incident and the subsequent fallout showed me that asset deflation was going to lead to commodity and eventually consumer price deflation. So, I can’t agree with Hamilton because I fear deflation and moved away from TIPS for that reason.

    Nevertheless, I wouldn’t discount his scenario because the Fed is doing its darndest to reflate. They fear deflation because it will increase the real burden of debts in an indebted United States. And if they are successful, then my original trades of TIPS and precious metals would look good.

    Right now, the balance is leaning away from that trade. As for what the Fed should buy, I reckon they will start buying lots of asset-backed securities. The question is at what price. This market is collapsing and writedowns are imminent because of FAS 157 so the Fed needs to provide liquidity there very soon if it wants to go the reflation route.

    As much as I fear deflation, I fear the extremes to which the Fed is willing to go in order to reflate. These are not ordinary times.

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