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Op-Ed: From Uber-Bear to Cautious Bull


A closer look at the Grantham turnaround.

Editor's Note: James Kostohryz was formerly the head of international investments for a major Brazilian investment bank.

I think Jeremy Grantham deserves congratulations for changing his position from super-bearish to cautiously bullish. Flexibility of mind is quite uncommon amongst the bear crowd. The bear crowd tends to be wedded to apocalyptic ideas for ideological reasons and rarely exhibit the capacity of seeing the bullish possibilities. Clearly, Grantham has distinguished himself from that crowd in his May letter to shareholders.

Having said that, I do not particularly share Professor Zucchi's enthusiasm for the overall content of Grantham's essay. However, two of Grantham's main points are ones that we coincide on:

1. Stimulus tends to work in terms of jump starting growth, so it is unwise to bet against it.

2. Investors are, in general, way over invested in cash and far under invested in equities. Thus, there is great potential for a buying panic to send the market to unimagined heights. Grantham seems to think that 1,100 could be such a level.

According to my own valuation work, 1,100 merely represents the midpoint of the "normal" valuation range for the S&P 500. Thus, 1,100 is merely within the range of my base case scenario for this rally. In a "buying panic" scenario such as Grantham hypothesizes, according to my analysis, the S&P could rise to 1350 or above.

One reservation I have about the Grantham essay is that he attempts to take credit for spotting the low in March citing an article entitled "Reinvesting When Terrified," that he posted in March. He then apologizes for not having published his current article a couple of months ago saying he was simply too busy. This is a bit disingenuous, in my view. First of all, in "Reinvesting When Terrified," Grantham never said he was buying nor did he suggest that people should buy.

In the article, he merely says that people need to have a game plan to eventually buy and that his firm had a contingency plan to buy if the market went lower. Second, in his most recent article (that he suggests he would have published a couple of months ago but was too busy), Grantham admits that his portfolio has been extremely underweight equities during the past two months and that it is still substantially underweight. So, if he really "called the bottom" as he suggests, then he sure didn't put his money where his mouth is. Suggesting you called the bottom and explaining to investors why you are still very underweight after a 30%+ rise in the market simply doesn't pass the giggle test.

So, kudos to Grantham for being flexible. That would have been more than enough to earn my respect. However, his retroactive "I called the bottom" claim is disappointing in that it is disingenuous.
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