Bull Herd Expands
Legg Mason's Bill Miller, in a new note, says conditions are right for the start of a new bull market. He expects financials and tech stocks to lead the gains.
"Bull markets typically begin when the following four conditions are present: the economy is bottoming:, profits are bottoming, the Fed is stimulating, and valuations are low. That's where we are now," he wrote in a note, dated July 19.
Miller is well-known for a 15-year winning streak when his value fund, Legg Mason Value Trust consistently outperformed the S&P 500. Since then, his fund trailed for three years and lost 55 percent in 2008. But now the fund is up more than 19 percent year-to-date, while Miller's new Legg Mason Opportunity fund was at the top of U.S. equity funds for the second quarter, with a return of 48 percent.
Miller, chairman and CIO at Legg Mason Capital management, said in May his S&P 500 target is 1100 or 1200 for year end, and that financials will provide the greatest return over the next two years.
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In his July note, Miller points out that cash in money market funds exceeds that in general equity funds for the first time in 15 years, as opposed to October, 2007 when assets in equity funds were three times greater than money market funds.
"Those looking for economic numbers to validate the market's move higher or for corporate executives to express optimism about the outlook are likely to continue to be disappointed. Economic numbers report the past and corporations observe the present, while the market lives in the future," he wrote. He also noted corporate executives are always the most optimistic at the top and most pessimistic at the bottom.
As of June 30, the Value Trust's top 10 holdings, in order, were AES Corp, Aetna, Sears, eBay, United Health, State Street, Yahoo, Hewlett-Packard, Cisco and Aflac.
Other companies reporting before the open are Ford, Bristol Myers, Philip Morris, Wyeth, Hershey, Kimberly-Clark, EMC, Diamond Offshore, CME Group, Union Pacific and UPS. Troubled CIT is also scheduled to report. After the bell, Microsoft and American Express release earnings.
Oil slid $0.34 to $65.25 Wednesday, while natural gas rose 2.4 percent to $3.793 a million BTUs in a technical move ahead of Thursday's inventory data. Metals were higher, but some of the ag commodities sold off Wednesday. Gold rose 0.2 percent to $953 per troy ounce. Copper gained 3 percent to $2.5180 per pound on China demand, but also power disruption at Chile's Anglo American mine.
Jerry Gidel, grain analyst at North America Risk Management Services, said comments about new regulation from CFTC chairman Gary Gensler Tuesday spurred a nearly 2.5 percent decline in wheat, which in turn weighed on corn.
Gensler told Congress Tuesday that the CFTC needs to be aggressive about making changes in the wheat futures system and will consider such options as revising position limits and improving transparency. The activity of index funds is being blamed for volatility in the wheat market, and Gensler said commercial hedgers are being hurt, potentially resulting in higher food prices for consumers. The index funds were sellers Wednesday, and other sellers followed them, Gidel said.
Gidel said a new report from Darrel Good, a widely-followed University of Illinois economist, also spurred selling. Good said he believes the U.S. corn crop has the potential to yield a record 161.9 bushels per acre, above the USDA forecast of 153.4 bushels per acre. That would also be above the record yield of 160.3 bushels in 2004.
Soy beans were higher on the day because of supply concerns. "The issue is how tight the supplies are going to be between now and the harvest," he said. "There's huge tightness because of drought in South America."
**And a happy birthday to Roy Neuberger, founder of Neuberger Berman, as he turns 106. Neuberger founded the firm in 1939.
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