Legg Mason's Bill Miller Is Optimistic

Legg Mason's Bill Miller released his first quarter investment commentary on Wednesday, and it was optimistic. Some highlights:

I think we will do better from here on, and that by far the worst is behind us. I think the credit panic ended with the collapse of Bear Stearns, (BSC) and credit spreads are already much improved since then. If spreads continue to come in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of write-downs.

Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which valuation-based strategies usually begin to work again, and momentum begins to fade (there is no evidence of the latter yet, as the old leaders continue to lead).

Most housing stocks are up double digits this year despite dismal headlines, a sign the market had already priced in the current malaise. I think likewise we have seen the bottom in financials and consumer stocks, but not necessarily the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the early 1990s, the market can move higher, as it did back then.

The wild card is commodities. If commodities break, or even just stop their relentless rise, equity markets should do well. If they continue to move steadily higher, they have the potential to destabilize the global economy. We are already seeing unrest in many countries due to the soaring prices of rice and other grains. Oil has rallied $30 per barrel in the past 8 weeks on no fundamental news, save only the same stories about fears of supply disruptions. The typical fundamental drivers at the margin, such as global economic growth, miles driven, and seasonality, would all suggest prices similar to those that prevailed in early February.

But none of that has mattered. I agree with George Soros that commodities are in a bubble, but it also appears he is right when he describes it as one that is still inflating, and we still have the summer driving and hurricane season with which to contend.

The weak dollar is another culprit in the commodity cycle. Oil began to rise in earnest when the dollar index broke down sharply in February. The Fed could help a lot by halting its interest rate cuts. Real short rates are now negative. It is not the price of credit that is the problem, it is its availability. If the Fed stopped cutting rates, that would help the dollar, which in turn ought to stall the commodity price rises, and thus also help the inflation picture. More technically, the Fed, in my opinion, needs to focus on the value of collateral and not on the price of credit. It appears they are beginning to do this, which is a very healthy sign.

Despite moving higher over the past month, the U.S. market and most others around the world are down for the year, and fear and risk aversion still predominate. Yet valuations in general are not demanding, interest rates are low, and corporate balance sheets, especially in the U.S., are in excellent shape.

That sets the stage for what should be an improving environment for investors in stocks and in spread credit products, if not in government bonds where risks are high and opportunities low, in my opinion. With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.

The Kelly Letter agrees, which is why we've made nine stock purchases so far this year.

Comments

[punk_ash]

bill miller has no choice but to be optimistic. He made all the wrong calls for the last 2-3 years and now he wants us to pay for his stupidity and buy the bank stocks so he can break even...

[fxtrader07]

that is the 3rd or 4th "optimistic call" by miller if i am not mistaken over the past 12 months or so.. Looks increasingly like issuing calls might soon be the only things he can do anymore. he has gotten it terribly wrong on the Homebuilders, the mortgage finance cos, the banks, the retailers, the banks and homebuilders again. Some day he will be right, of course. investors in his fund might not gain anything from that, though.
MILLER, if anything, HAS SO FAR PROVEN THAT HE HAD NO CLUE WHATSOEVER ABOUT THE ECONOMY; THE CRISIS AND HOW IT AFFECTED AND WILL AFFECT THE VARIOUS SECTORS OF THE ECONOMY. Wow, that's really someone i would like to have in my camp, duh?!
Looking at his investment history, Miller looks like someone who had a very lucky streak - until the streak suddenly ended. like Taleb's monkey on the typewriter - so this "monkey" typed half of Homer's "Ilias" and looked like a genius to everybody but now all he types is some senseless crap.
As warren Buffet said several times "only when the tide goes out you can see who was swimming naked". Seeems the tide has revealed another naked guy...

[icandoitdon]

more spot on comments.

cast miller along with the legions of "one-way" capitalists...those who believe the fed has the duty to save them from their mistakes.

miller also made a losing bet on yahoo and is...surprise!...makin... the absurd argument that microsoft's 60% premium for yahoo undervalues the company. let's see what he thinks if microsoft walks away...

[Matt Blackman]

Bill Miller, as are all money managers who would have us believe that we are at a "once in a generation opportunity to buy stocks," is doing nothing more than talking his book. Pretty hard for these guys to sell stocks to the public that holds the belief that prices will go lower hence the concerted campaign to 'talk up' the market...

[User 68127]

Bill Miller is to the housing bubble what Janus was to the tech stock bubble. "We do this intensive analysis. We have a proven winning formula..." then...OOPS! I guess it was just a black box. I guess we didn't really understand the fundamentals. I guess we assumed our formula would always work. We got so confident that we abandoned all prudent standards of diversification. OOPS! We now have a stunningly bad track record for the third year in a row...we're confident that the worst is behind us...

[enviro111]

miller is probably selling the stocks he is touting in his little bulbs.

He has wonderful track record, but still doesn't get it about "Peak Oil". Peak Oil is going to change everything in the world and it is happening fast!

Take Homebuilders: Most of the major builders like to build oversized mansions on the edge of nowhere (way, way out from the central city in former farm lands). Peak Oil will make these monsters expensive to heat, expensive to carry, and expensive to commute to and from. It is understandable that these stocks are down considerably over the past few years. Note that only the first leg in the homebuilder's has collapsed (cheap financing). Even this is surprizing given the fact that interest rates for good credits are only around 6% or so. Ten years ago, 8% was the norm. The other two legs (cheap heating and cheap gasoline for commuting) are changing, but are not yet devastating. Wait until these legs are kicked out.

Miller hasn't figured out any of this stuff yet. Someday he will get it.

[Ames Tiedeman]

Optimistic about what? This is a guy who said CFC was worth 20. Housing is done for years. Period.

[drmalaka]

Using Miller as a basis for optimism is like quoting Paul Krugman on economics.

[Chipstocktrader]

Judging from all the "Bash Bill" comments I read here, it's time to go long the banks, homes, and financials.