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The Bears' Case

Two arguments against U.S. stocks.

John Rekenthaler, 12/23/2013

The Skeptics Speak
This column has given more voice to stock bulls than to bears. That has been for both general and specific reasons.

The general reason is that this column is aimed at slow-trading, strategic investors. For such investors, bears are an ongoing danger. Bears counsel trading a better-performing asset for a weaker-performing asset. Ostensibly they advise doing so only for a short while, but usually it tends to be years, if ever, before the trade is reversed. The opportunity cost can be great indeed.

The specific reason is that, until recently, bears held the microphone. With investors suffering the Great Investment Funk that followed the 2008 market crash, those who decried stocks had the loudest voices. The most visible mutual fund commentators were not stock-fund managers but rather Bill Gross and Mohamed El-Erian of PIMCO, which had most of its assets in bond funds. Also receiving attention were alternative investors who promised protection against stock market slides.

At such a time, the bulls needed their say.

Things are rapidly changing, however. As recently as late this summer, pessimism reigned in the business press, but happier days have arrived. The persistence of this year's stock rally, along with signs of economic improvement, appears to have finally altered sentiment. Stock-fund managers are once again in fashion.

In other words, it's time to listen to the bears. This column considers two sources: the "smart money" of hedge funds and GMO's asset-class forecasts. (Next week, I'll look at two additional arguments, one being a broad historical perspective offered by Bill Bernstein and the other being the near-term signal from cash flows into mutual funds.)

Playing It Smart?
Several readers have pointed out that the smart money looked to be getting cautious. George Soros reportedly has been shorting S&P 500 futures. Earlier this year, value investor Seth Klarman announced that he would return some of his investors' monies because he was having difficulty putting those assets to work--there just weren't that many attractive investment opportunities. He was followed this autumn by Daniel Loeb of Third Point, who, for the first time in his firm's 18-year history, will give investors back some of their monies. For its part, hedge fund giant D.E. Shaw has closed the doors to several of its funds.

That is worth knowing. At the same time, it's difficult to place the stories into context. While these four investors (or in D.E. Shaw's case, investment firms) are formidable, running several billions in assets and having terrific track records, they are scarcely the only hedge fund stars. There are several dozen others. What are those managers' thoughts? How are their funds positioned?

is vice president of research for Morningstar.

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