Bill Miller: 'The Worst Has Passed'

From Bill Miller's Second Quarter 2009 letter (.pdf) to investors in Legg Mason Value Trust (LMVTX):

... the preponderance of the evidence supports the view that the worst has passed in the market and the economy...

Financials have been leaders off the bottom, just as they were off the bottom of the last banking crisis in the late 1980s and early 1990s. Banks still face mounting credit losses for the next year or so, but that should not impede their performance in
the market, as it did not in 1991 when the same thing occurred. Pre-tax, pre-provision earnings at banks continue to rise, setting a new record last quarter, which means that banks are likewise set to report record results as the economy improves. They are a candidate for being among the leadership groups as they are under-owned, widely disliked, very inexpensive on price-to-book6 value or to normalized earnings, and the system has seen massive capacity withdrawn due to the disappearance of Bear Stearns, Lehman, Washington Mutual, and Wachovia. The powerful results of Goldman Sachs this quarter may be a preview of things to come in that sector in the next few years as the economy recovers....

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.

Bloomberg adds:

Miller’s top holding as of March 31 was Arlington, Virginia-based power producer AES Corp., whose shares have surged 46 percent this year for the best gain among 35 companies in the S&P 500 Utilities Index.

Returns at Miller’s Legg Mason Value Trust also got a boost from online auctioneer eBay Inc., whose shares jumped 39 percent this year, and Yahoo! Inc., which advanced 42 percent.

Comments

[Ferdinand E...:]

A lot of people in this forum don't want to hear what you have to say, Bill, but it certainly sounds sweet to me. I just hope that you know what you are talking about.

Jul 24 09:31 AM

[HunterGVL:]

Financials? Really? The banks are going to take off just like they did in '91? I don't seem to recall Banks carrying $600 Trillion dollars in derivative exposure that were virtually worthless back then. Maybe the banks will take off short term, but the risk profile is more of the Vegas type, than sound investing. Goldman just reported in excess of $3 Billion in Profits. Of course you have to turn a blind eye to their $40 Trillion in derivative exposure. If they can keep making $12 Billion a year in profits, it will only take them until the sun burns out to break even. Good sector pick, Bill, NOT. I understand your need to be a different, more risky investor to make up for your trouncing in 2008, but it looks like your investment direction has more to do with vegas craps, than Graham principles. Every gambler understands that when you are down a lot, then you have to take much higher risks to recoup your losses. Don't go down that road, Bill, and more importantly don't tell us to go down that road with you, my friend.

Jul 24 10:06 AM

[Swashbuckler:]

Trying to make a case for financials today is like trying to make a case for AIDS or lung cancer.

Jul 24 10:36 AM

[31October:]

My father worked in a mortuary once. He said the bodies would occasionally sit up, as if they were alive.

And they did that without trillions of dollars of other-people's-non-exi... money shoved up...

Sure, numbers will go up for a while. But buying power, employment, productivity, and standard of living are not bullish.

Jul 24 11:30 AM

[Maxe Paul:]

Nice one Bill, all of 2 sentences and a paragraph in your argument......IM SOLD!

BTW where do you buy your rose tinted glasses from, i obviously need a new pair?

Jul 24 12:40 PM

[Gtarras:]

I agree Ferdinand. Most people who leave comments on SA are bearish. I am curious if it has anything to do with the media. I know CNBC are bullish, but still the I would say the overall sentiment out there is very negative. Seems to me that pretty much everybody wants to sound negative. Republicans, so they can blame Obama, democrats, so they can seize the moment and socialize as much as they can, bankers, so they can acquire competition, funds, so they can win on there shorts etc etc. I think it would serve small investors well to do just the opposite, i.e., think positive.

On Jul 24 09:31 AM Ferdinand E. Banks wrote:

> A lot of people in this forum don't want to hear what you have to
> say, Bill, but it certainly sounds sweet to me. I just hope that
> you know what you are talking about.

Jul 24 02:00 PM

[roflmfao:]

i find it funny when people model today's recovery off a previous recovery from the disinflationary 90's whereas today we have outright deflation.

next time try to compare apples to apples bill.

Jul 24 03:07 PM

[TraderMark:]

I am amazed this guy still gets the press after what he did to his shareholders not just in 2008 alone but he past 3 years.

I was saying Freddie would go to zero and he was buying it concurrently. No cred -sorry.

Jul 24 04:22 PM

[WhoisJohnGalt:]

Your final conclusion on bull market emergences is pretty simple to counter. As in all investment report disclaimers (maybe not yours):

"Past performance does not necessarily indicate future return."

The markets may have fallen in line with your prediction the last few trading days, but a tiny prick of uncertainty is all this ballooned market needs to pop. Tech performances yesterday/today have set a wary tone for the remaining earnings to come.

Jul 24 05:03 PM

[Sober Realist:]

That is hilarious! But no amount of stimulus will get those dead bodies to walk.


On Jul 24 11:30 AM 31October wrote:

> My father worked in a mortuary once. He said the bodies would occasionally
> sit up, as if they were alive.
>
> And they did that without trillions of dollars of other-people's-non-exi...
> money shoved up...
>
> Sure, numbers will go up for a while. But buying power, employment,
> productivity, and standard of living are not bullish.

Jul 24 05:08 PM

[Mike Stathis:]

This post by SA, which apparently was not directly authorized by Miller, is yet another attempt of SA to become the CNBC of the Internet by promoting Wall Street hacks and clueless authors while censoring and deemphasizing articles by the very rare few who actually deliver TRULY valuable insight.

Miller did little more than ride the coat tails of the bull market of the 1990s, while exposing investors in his funds to style drift and excessive risk. For many years, his reckless approach worked; that is until reality hit.

This man has absolutely no idea what is going on, similar to 99.99% of fund managers. Article continues here.....
www.avaresearch.com/ar...

Jul 24 06:50 PM

[Hot Richard:]

Maybe he means the worst has passed for the statist corporations. They now know the SOP to bilk trillions (or however much they need) to cover their losses.

Jul 24 09:11 PM

[mtjon52:]

Seven more banks down, creative adjustments of earnings reports to meet analysts overly under- adjusted expectations, severely deficient revenues, increasing unemployment and exploding national debt...... sounds like recovery to me.

I couldn’t imagine what would have happened to some of these companies four years ago if they had tried to pass these earnings numbers on to actual investors instead of the broken and deflated gamblers that seem to be desperately inflating the markets today. I hope, like everyone, there is a recovery in the making but this recent market skyrocket is not it!

Jul 24 09:22 PM

[E Nuff Sed:]

Bear's please read the article before trashing someone. Sure Bill Miller's recent track record has been terrible but he is smart guy and can't be wrong for ever.

"Many worry that this rally is just a cyclical bounce in an ongoing bear market and they remain quite cautious in committing
capital to risk assets. Assets in money market funds recently exceeded those in general equity funds for the first time in over
15 years. In contrast, at the market peak in October 2007, assets in equity funds were more than 3x greater than the assets in
money market funds. The return on this mountain of cash rounds to zero, which is good when stocks and bonds are falling, but
far from optimal when they are rising. Although I expect credit spreads2 and risk aversion to remain well above the averages of
the past decade, there is plenty of room for them to narrow and for equities to move higher as this cash gradually moves out
the curve in search of better returns."

Jul 24 11:36 PM

[bynd2009:]

Readung comments on SA these days is like stumbling on to a radio station playing Limbaugh 7/24. Mr. Miller's opinions (partially posted by SA ) are just that, his opinions. I don't think he professed exceptional clairvoyance in saying financials look currently attractive. Sure, one has to taken into account all these ill-defined assets/ derivatives that are sitting on the books of a majority of financial institutions but the market will eventually figure out a way to value them. In the meantime, trade them! Most of these commentators would have looked like geniuses if they had bought GS at 73 and sold at 164 or BAC at 3 and sold it at 12 or if they prefer to play safer, buying PFF at 20 and selling at 32. Mr Miller had to eat crow for the past couple of years but he didn;t beat S&P a gazillion years in a row by being an IQ challenged average fund manager. As best as I could recall, the majority of fund managers fell on their collective faces during a good portion of last 18 months. Thus in stead of spitting venom at Mr. Miller, carefully examine if there is any good in his comments and implement them. If you can beat Mr. Miller, I am sure he will be the first one to complement you.

Jul 25 12:40 AM

[Sober Realist:]

July, 20th, 2009
• Current Recession Now Longest Since Great Depression
• June U-6 Unemployment Rate Topped 20% (25% SGS) in Michigan, Oregon, Nevada, California, South Carolina and Rhode Island
• Pressures Will Mount for New Stimulus and Bailouts
• Spreading Depression Creates Its Own Statistical Distortions
• Inflation Signs Begin to Surface
• U.S. Dollar Remains the Key to the Markets and Inflation
• The U.S. economic and systemic solvency crises show no signs of abating, despite the happy hype out of Washington and Wall Street. While the pending second-quarter GDP estimate likely will show a narrowing quarterly contraction, such will be against a deepening annual downturn and revisions that should show the recession to have been not only longer and deeper than previously reported, but also the most severe recession since the shutdown of war production after World War II. Irrespective of media excitement around the fluttering of often statistically-insignif... or seasonally-warped monthly numbers, annual growth rates in key series have been holding at or pushing to new historic or post-war lows.
---Shadowstats.com

Jul 25 01:15 AM

[Maxe Paul:]

"Hope is not an investment strategy."

When you see posts like this from Bill you know a short term high is very near.

Mark my words ladies and Gentlemen, the suckers money is piling in now.

On Jul 24 09:31 AM Ferdinand E. Banks wrote:

> A lot of people in this forum don't want to hear what you have to
> say, Bill, but it certainly sounds sweet to me. I just hope that
> you know what you are talking about.

Jul 25 03:40 AM

[Mike Stathis:]

Maxe Paul is right. The ONLY problem is that investoer sentiment drives market direction. However, the illusion can only persist for so long before reality sets in. If you understand what's truly going on, you might want to play this rally. if you don't you should sit this one out, wait patiently and get back in after the market corrects back down.

FYI, I have still not altered my position on the financials from a year ago.... www.avaresearch.com/ar...

bynd2009: "Most of these commentators would have looked like geniuses if they had bought GS at 73 and sold at 164 or BAC at 3 and sold it at 12 or if they prefer to play safer, buying PFF at 20 and selling at 32. Mr Miller had to eat crow for the past couple of years but he didn;t beat S&P a gazillion years in a row by being an IQ challenged average fund manager. As best as I could recall, the majority of fund managers fell on their collective faces during a good portion of last 18 months. Thus in stead of spitting venom at Mr. Miller, carefully examine if there is any good in his comments and implement them. If you can beat Mr. Miller, I am sure he will be the first one to complement you. Jul 25 12:40 AM |Report abuse| Link | Reply +30"

I shorted GS at $155, and covered at $75 (documented in writing as an advance forecast). I didn't buy BAC at $3 or any other price (other to cover shorts) because I don't speculate. If I wanted to speculate, I'd play the futures market since the risk-reward is much better than with the financials.

What I did do however, was advise readers to short the mortgage companies, banks and homebuilders in my book (released in Q1 of '07) - Cashing in on the Real Estate Bubble. Clients who listened to me performed by 95% - 200% in 08'. More conservative clients went to cash in mid-2007.

Have a look ... www.avaresearch.com/fi...

Then ask yourself why the media has black-balled me. Figure it out. It's a game designed to screw you. That's why they interview fund managers who pump up their holdings and the SEC never bothers to investigate whether they dumped them after the interview (after the sheep climbed aboard).

Jul 25 08:33 AM

[Mike Stathis:]

BTW, I might have more faith in Miller if he wasn't in denial about his baldness. That combed-over hair look is really sad. Surely with all the BILLIONS of $$ extracted in fees over the years from his Value Trust fund (yes I said billions) you'd think he could afford a hair transplant.

Jul 25 08:40 AM

[a. palmer jr.:]

I thought O.J. was innocent, but your story is a little hard for me to believe.

Jul 25 09:36 AM

[Jasper M:]

Why is it that pretentious people tend to refer to themselves in the third person?

Or, at least, that is what Jasper has observed . . .

Jul 26 01:14 AM

[untrusting ...:]

What has bullish or bearish got to do with it? What retail investors want is facts, reality, and sound reasoning. For example, Miller mentions "valuations are low". This is simply not true by any objective comparison or by any traditonal or historical measure. If you want objective comparison of valuations, check out dshort.com who is not a paid shrill promoting himself or his book of business. The mere fact that Miller cites low valuations as a reason to buy is more than enough evidence to many to totally ignore anything the man says. Further to the fact that Mutual Funds in and of themselves are probably the worst way to invest for anyone that has any clue about the stock market at all. The most objective commentators are generally stating that this market is a traders market and probably will be for at least several years to come. This is probably a lot closer to the truth than the talking heads such as Miller who are attemtping to imply that this is the start of a new bull market. What is much more likely, based on objective criterion and past comparisons, is that significant downside corrections are still highly likely over the coming months.


On Jul 24 02:00 PM Gtarras wrote:

> I agree Ferdinand. Most people who leave comments on SA are bearish.
> I am curious if it has anything to do with the media. I know CNBC
> are bullish, but still the I would say the overall sentiment out
> there is very negative. Seems to me that pretty much everybody wants
> to sound negative. Republicans, so they can blame Obama, democrats,
> so they can seize the moment and socialize as much as they can, bankers,
> so they can acquire competition, funds, so they can win on there
> shorts etc etc. I think it would serve small investors well to do
> just the opposite, i.e., think positive.
>
> On Jul 24 09:31 AM Ferdinand E. Banks wrote:

Jul 26 02:45 AM

[Tack:]

What I note far too often, reading many SA comments to many posts, is the anger, cynicism and bitterness of people --who obviously lost money on the downside-- that keeps them paralyzed with negativity, crippling their objectivity and preventing them from making money on the upside.

Jul 26 05:08 AM