Three (Relatively) Bullish Views on the U.S. Stock Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

After experiencing its first technical correction of 10% since 2011, the U.S. stock market has bounced back from the lows it reached on Aug. 24. Since then, volatility has eased and the S&P 500 has recovered almost 7%.

I already have given my own “30,000 foot” view of the financial markets in a recent issue of The Global Guru entitled “Why This May Be the Best Week of the Year to Pile into Stocks” — published the day after the U.S. market bottomed.

Still, the market remains choppy and investors are still unsettled by Mr. Market’s moodswings.

That’s why it’s worth reviewing the perspectives of some of the major investment gurus, who, as a group, remain surprisingly relaxed about the recent market turmoil.

  1. Warren Buffett

The greatest investor of all time has not been immune from the effects of the recent pullback in the markets.

Warren Buffett’s Berkshire Hathaway (BRK-B) is down 7.08% over the past three months, and it is trading where it was back in August of 2014.

Still, Buffett has a generally optimistic view of the American economy and remains unconcerned about the global economic picture and the meltdown of the stock market in China. More important than his short-term outlook is that Buffett is genuinely indifferent to the market gyrations that keep many investors up at night. As Buffett recently noted, he has never based an investment decision on whether the Fed was going to raise or drop interest rates.

In fact, Buffett says he is very pleased that prices on some of Berkshire’s core holdings have dropped. After all, it offers him the opportunity to add to his holdings — which he is doing at the rate of about $500 million per week — even more cheaply, thereby augmenting Berkshire’s long-term returns. Specifically, Buffett has said that he expects to put $32 billion to work — a big chunk of his current cash pile — over the next few months.

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Some of that cash pile may be used to buy back Berkshire’s own stock. It is worth recalling that Berkshire has committed to repurchase its own stock if it ever drops to 120% book value. It has done so in the recent past. In late 2012, Buffett spent $1.3 billion to buy back Berkshire shares when they were trading at less than that benchmark level.

With Berkshire’s book value at $100.33 per share for the quarter that ended June 30, 2015, this would put the floor of Berkshire’s price at just about $121 per share. This is within striking distance of Berkshire’s current price of around $130.

I do find it interesting that Buffett never recommends investors buy Berkshire stock itself, instead suggesting that average investors should just buy and hold a cheap S&P 500 index fund.

That doesn’t seem like a bad idea. After all, a quick look at Berkshire’s performance shows that it is up 9.53% annually over the past five years, while the S&P 500 ETF (SPY) is up 13.80% over the same period.

  1. Nouriel Roubini

Nouriel Roubini made his reputation as one of the many market gurus who predicted the global financial crisis on 2008. In September 2006, Roubini famously told an International Monetary Fund meeting that the United States was in for a “once-in-a lifetime housing bust and a deep recession.” He predicted that mortgage-backed securities would crash worldwide, bringing the global financial system to a shuddering halt. The accuracy of that prediction earned him the nickname “Dr. Doom.”

Yet, Roubini seems surprisingly unconcerned about the recent pullback in global markets, calling the recent collapse of the Chinese stock market “excessive, unreasonable and irrational.” Roubini points out that the stock market in China has little impact on the “real” economy. And the Chinese government standing behind the state-owned banks will help avert any serious financial collapse in the Middle Kingdom. This may cost the government trillions. But if push comes to shove, the banks will be bailed out, just as they were back in the late 1990s.

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Roubini believes that China’s slowdown is not “hard” or “soft” — just “bumpy.” Ignoring the widespread criticism of the validity of Chinese economic statistics, Roubini believes Chinese growth won’t slow to below 6.5% this year and 6% in 2016. Nor does Roubini believe China’s devaluation of the yuan will mark the beginning of a currency war that could spread deflation across the world.

Roubini’s biggest concern is the slowing global economy and the prospect of liquidity in certain assets drying up when asset prices start to fall.

I’ve always found it fascinating that Roubini has said that he never invests on the back of his own insights. Instead, he puts his money in cheap index funds, just as Warren Buffett recommends.

The irony is that in doing so, Roubini has probably outperformed most of his clients who instead actually acted on his advice since 2008.

  1. Jim Rogers

As he is best known as the ultimate commodity and China bull, you’d think that Jim Rogers would be humbled by the collapse of the commodities and Chinese stock markets and the bull market in the much-reviled U.S. stock market over the past six years.

But you would be wrong.

Rogers remains as bullish on commodities and China as ever, even as the rest of the world nurses its wounds from the sharp sell-off in these two Rogers favorites. Chinese domestic shares are off by more than one-third over the past three months. U.S. stocks also fell by more than 10%. Both European and Japanese stocks have been hit similarly hard.

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For all the panic surrounding China, Rogers points out the Chinese stock market has been the strongest stock market in the world over the past 12 months. Sure enough, the Deutsche X-trackers Harvest CSI300 CHN A (ASHR) is up 30.33% over the past year. By way of contrast, the S&P 500 has been essentially flat, as has an unhedged bet on Japan through the iShares MSCI Japan (EWJ).

Rogers’ long-term bet on commodities has been even rougher on Rogers. The ELEMENTS Rogers Intl Cmdty TR ETN (RJI), which tracks the Rogers International Commodity Index, is down almost 13% in the past three months and over 60% from its 2008 all-time highs. And in what seems a bit too conspiratorial a notion, Rogers sees this year’s fall in oil prices as “engineered by U.S. State Department people in Washington putting pressure on the Iranians and Russians.”

The biggest irony is that Rogers says his biggest current holding is in the much-reviled U.S. dollar — and by extension, U.S. assets. Although Rogers has been a shrill and relentless critic of the Federal Reserve, even Rogers acknowledges the Greenback’s safe-haven status during times of turmoil.

So, apparently, when it comes to his own money, the United States still comes out on top.

The bottom line?

The markets may be choppy, uncertain and frustrating. Still, none of these investment gurus are heading for the hills just quite yet.

In case you missed it, I encourage you to read the e-letter column from last week about the largest global stock market entities. I also invite you to comment in the space provided below my commentary.

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