Jeremy Grantham: Stocks Still Aren't Cheap

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Includes: FXB, FXE, FXF, FXY, USO
by: SA Eli Hoffmann

Barron's interviews highly-respected money manager Jeremy Grantham. He was a tad early in warning about the absurd appetite for risk-taking and where it would lead in 2006, for which he received no small share of grief. Grantham now says that despite predicting the bubble's burst, he's surprised by how bad things have turned and how quickly they've done so. He's also shocked by the incompetency of U.S. financial stewardship:

This is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [top-tier firms] have turned out to be much less than I had expected; that's very disappointing. And, therefore, how could one's confidence that the senior people would get us through the storm be very high?

Yet despite all the pain, Grantham doesn't think U.S. equities are cheap. True, fair value on the S&P 500 is about 1,025 - vs. last week's close of about 900 - but bubbles tend to overcorrect by more than that (20%).

One bet that he continues to like is to go long high-quality, blue-chip stocks - and short risky companies. He will at some point look to move slowly back into the cheapest pockets of emerging-market equities and small-cap international value - which are down 50% and 40% respectively since late last year. Still, he's worried about jumping the gun:

The great trap is to buy too soon and, in the big move, to sell too soon. I've been saying since '98-'99 that my next major-league error will be buying too soon -- but we will not buy quite yet. But when we do, I suspect it will be too soon again.

Grantham likes commodities - long term - but thinks the next couple of years they're a good short due to the global economic slowdown (he's short oil (ETF: USO) and his firm's short copper). Looking at currencies, he's long the yen (NYSEARCA:FXY), Swiss franc (NYSEARCA:FXF), and short the euro (NYSEARCA:FXE) and sterling (NYSEARCA:FXB).