A Case of Contrasting Ideas

If you’re like me, you love reading all kinds of opinions about where things are headed. I recently read two articles that I thought really showed just how diverse the range of opinion is amongst the experts.

In the bullish camp was famed Wall Street giant, former Morgan Stanley global chief investment strategist and current hedge fund manager, Barton Biggs. In an interview with The Wall Street Journal, published in the May 31 edition, Biggs said that his "intuition" tells him that after the current consolidation is over, the next move for the market will be up, not down.

Here’s a great quote from Biggs explaining his view; "Psychology is involved here. I like the fact that the market is worried. I like that The Wall Street Journal runs articles about that. That’s all good. But the puke point has been reached, in March. Because of the problems we’re living under, the market should be in a trading range for the rest of the year, between 1250 and 1550 in the S&P 500."

Hey, you gotta love a sophisticated Yale graduate who uses the term "puke point."
Biggs goes on to say that if the Federal Reserve has made its last rate cut, then that is a bullish sign for the markets. He also thinks we are close to the bottom in terms of new-home sales and construction, which he says is a definite plus for the economy.

He also points out that we have a huge amount of liquidity on the sidelines that’s waiting to be invested. Biggs says that U.S. stocks are, "the cheapest major asset in the world." He did warn, however, that if oil prices continue rising in the short run, "this craziness would be inflationary and very recessionary. Oil rules the U.S. and world stock markets."

And which areas does Biggs see as the most — and least — promising going forward?

One area he likes is technology. Biggs says companies have been under-spending on technology for the last few years, but that is about to change. "Tech providers will see earnings grow, and so they will outperform the market." Biggs also likes emerging markets, particularly the Asian ones.

Like me, Biggs says that the financial stocks are a "busted sector." He expects to see a lot more write-offs in the sector, and he describes stocks in the space like this; "The magic age is over. It will be years until their earnings are back."

The other interesting article I read was from the May 30 online edition of U.S. News & World Report. The magazine did an interview with the ever-bearish Peter Schiff, president of Euro Pacific Capital. Schiff spent the past decade urging his clients to jump ship from the American economy ahead of what he views as inevitable pain caused by a lax monetary policy, wayward spending and tougher global competition.

Schiff sees nothing but downside ahead for U.S. markets, the dollar and the economy. When asked if he could say something good about the U.S. economy, he responded by saying, "There’s nothing good to say about our situation. The policies both the Fed and government are pursuing are making the situation worse. We’ve been getting a free ride on the global gravy train. Other countries are starting to reclaim their resources and goods, so as Americans are priced out of various markets, the rest of the world is going to enjoy the consumption of goods Americans had previously purchased."

Schiff says he’s buying natural resources and energy funds, along with gold, silver and industrial metals. His main theme is that the global economy will survive, even if the U.S. economy becomes a disaster. If you insist on investing in U.S. markets, Schiff recommends sticking with exporters and resource companies and avoiding retailers, home builders and financials.

When asked for his predictions about the market and the economy, the bear’s claws really came out; "I think the stock market is headed lower. Gold is going to be $1,200 to $1,500 by the end of the year. That puts the Dow at a less-than-10-to-1 price ratio to gold. Right now, it’s about 13 to 1. That’s another 30% drop in the real value of stocks by the end of the year if you price them in gold. The Dow was worth 43 ounces of gold in 2000. It’ll get to 10 by the end of the year and continue to fall from there."

And what of the future fate of the greenback? "At a minimum, the dollar will lose another 40 to 50% of its value. I’m confident that by next year we’ll see more aggressive movements to abandon the dollar by the [Persian] Gulf region and by the Asian bloc. That’s where the stuff really hits the fan."

Never shying away from apocalyptic rhetoric, Schiff offered up the following scary gem; "The other problem we’ll have during those years is civil [unrest]. There will be a big increase in crime. People are going to be hungry. People are going to be cold. There’s a sense of entitlement in this country, and when a lot of people used to having things suddenly don’t, everybody looks for someone to blame."

As you can see, while there is some agreement between Biggs and Schiff on financial stocks, one clearly thinks we are well on our way to recovery while the other is literally predicting blood in the streets.

Who’ll be right, and who’ll be wrong? We’ll find out in the months ahead.

In the meantime, I am going to let the market tell me whether it is safe to stay in the equity waters, or whether it’s time to head for shore.