Edwards: A “Hybrid” Market Stance (Bearishly Bullish)

A news report earlier this month (January) summarizing the current “market view” of an internationally known investment strategist reminded me of the old saying: “with friends like this, who needs enemies?”

The report emerged from London, England, during SocieteGenerale’s(SoGen) annual investment strategy conference. At that conference, the SoGen’s chief global strategist, Albert Edwards, dramatically declared that European equities are “unambiguously cheap” and proceeded to attack United Kingdom pension fund managers, who in recent years have significantly under-weighted stocks and over-weighted bonds (producing an average asset allocation of stocks versus bonds at about 50/50): “…I have to say that this is ridiculous. It allows the rest of us to pick up stocks at cheaper and cheaper prices.”

Let me ask you then: if the above was all that you knew about a well-known and respected market strategist, what would your next step be regarding your own asset allocation? Obviously, if you were inclined to adjust your allocation at all, you’d likely sell some bonds and buy European equities!

Unfortunately, that’s hardly the “full story”. Mr. Edwards has a well-established reputation as a stock market “bear”. In fact, at that January conference, he described himself as a “trenchant equity bear” (the popular media sometimes refers to him as a “perma-bear”. The natural next question to ask him would be: “What new insight or revelation has led you to (seemingly) reverse your stance?”

Mr. Edwards denied that he has experienced any such “moment of revelation”. In fact, Edwards’ clear expectation is that stocks will fall from here. For example, he suggested that the U.S. S&P 500 Index (over the 1485 level on January 18) could possibly move under the 700 level – a level last seen in 2009!  Addressing the European market, he described equities there as “locked in a secular valuation bear market”. He suspects that Europe will need to endure more than two recessions before a new, full-blown bull market can unfold, adding: “We haven’t reached a culmination of despair.” Therefore, Euro equity holders will bear the risk of a steep decline during the next twelve to eighteen months. http://www.moneynews.com/InvestingAnalysis/Edwards-bullish-European-stocks/2013/01/16/id/471697

Perhaps you are, by now, reeling in confusion. Is Edwards “bullish” or “bearish”?  I doubt that the following will help you much, but Edwards opined: “In the sense that we are so far through the equity bear market, I’m relatively more bullish. I expect the S&P to go below 666. I expect there to be total carnage. But I am more bullish than I was!”

Wow! With a “bull” like Edwards, who needs any “bears”?  To his credit, he did qualify the bullish sentiments he expressed with the caveat that his recommendation to buy Euro stocks was only intended for investors who are willing to hold them for ten years!

For the record, I note that Edwards has demonstrated a significant, redeeming quality of humility in the past (not a common trait among “market stars”). Just a few months ago (September) he wrote: “Regular readers will know that in the main, my market timing is unerringly inaccurate, normally months, if not years, too early!”

So, regarding Edwards’ actual “market stance”, all we know for sure is that, whether the market goes up or down in the next few years, Edwards can say: “I told you so.” He called equities “unambiguously cheap”, but he also warned “I expect there to be total carnage.”

We are clearly left (at best) with a “muddled” picture regarding what to do with our own portfolios. Edwards sounds like a delightfully complex thinker, someone with whom I’d thoroughly enjoy a two hour lunch at a fine London pub. However, I am fairly certain that I’d prefer someone else for the task of managing any portfolio funds within which I hold a stake!

Submitted by Thomas Petty

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