Tuesday, January 25, 2011

Grantham's 2011 Outlook

I am reading a book right now titled "More Money Than God: Hedge Funds and the Making of a New Elite."  It is an excellent read in  story form (I am actually listening to it) about the history of hedge funds and some of the great names in the industry over the past 80 years.

It documents the big names that made the correct (and incorrect) moves at the pivotal moments in market history (the crash of 87, the Internet stock market bubble, and the financial crisis of 2008).  Many investors spotted the Internet stock bubble in the late 1990's but were run over by the market as they tried repeatedly to short overvalued stocks.

Many of them gave up and just joined the herd.   One who did not, who refused to back down from his value investing and macro economic views, was Jeremy Grantham.  He ended up making a tremendous amount of money for his clients (and was managing over $107 billion at 2009 year end) when the Internet bubble finally gave way.

Below I have included his outlook for 2011.  Here are some of the highlights:

- Bullish on the stock market short term and feels it has the potential to run to 1500 (back to classic bubble) before a massive reversal.  Sees the fair market value of stocks at 990 today and therefore recommends caution to those owning stocks moving forward.
- Very bullish long term on commodities and and natural resources although he is cautious short term due to their strong performance in the 4th quarter
-Does not see enough major dislocations in the currency markets to make an investment

Grantham discusses the 3rd year of an election cycle as being tremendously bullish for the stock market.  Below is a chart of the S&P's performance in the 3rd year of an election cycle from 1955-2003:


And Grantham's letter in full:

Grantham Q4

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