Richard Bernstein has done a huge reversal in the last few months from touting low-risk stocks to high-beta ones. He has gone from a preference for consumer staples to one for consumer cyclicals (XLY). And he has gone from lugubrious doubter of a sustainable recovery to an almost V-shaped optimism.
What is remarkable about the transformation is the dichotomy between his views and his former Merrill Lynch colleague David Rosenberg’s. The two were tied at the hip at Merrill, producing research that was out of step with the bullish consensus yet painstakingly substantiated.
Just five months ago, back in May, I caught Bernstein on Bloomberg and he was questioning whether we would get any recovery at all. I wrote then:
“Richard Bernstein asks a very good question in a wide-ranging interview with Bloomberg. Now that the so-called green shoots are dominating the news coverage and the S&P 500 is up a massive 34% from its March lows, one might think we are due for a pretty Robust V-shaped recovery. Is that what the future holds?
“Bernstein doesn’t think so. He thinks the recovery will be more muted than most people think. For this recovery to have any legs Bernstein believes we need to move away from the ‘credit-induced’ dynamic of the previous 5 to 15 years. This necessarily means that financials will not be leaders in a sustainable bull market because we will have a lot less leverage in the system. This also means that the core earnings power in the sector is a lot less than people think. Bernstein thinks the financial sector has gotten way ahead of itself - a view I am beginning to share after today’s junk rally.”
Bernstein went on to say that there was still huge overcapacity in financial services and that we needed to shed this capacity if we wanted to see a good return on investments in the sector. At the time, I was more bullish on the financial sector (although I also worried expectations were getting ahead of themselves; I am now bearish). I saw upside because the overcapacity coupled with low interest rates was an invitation to seek risk, a view that has been borne out in recent months.
“As to the bailouts and the government plan, Bernstein believes that the government is attempting to keep the excess capacity in the financial sector alive. His basic point is that bubbles create overcapacity (think tech stocks). This is the case in finance. The sector must shrink. In my own, there are only two ways a sector in over-capacity can perform. They can have poor earnings (Bernstein’s first point) or they can seek heavy risk taking and reach for yield.”
Just as I am switching the other way, so too is Bernstein. Witness the latest Bernstein appearance on CNBC last week.
“It seems even the most bearish market mavens can’t fight the bullish momentum in this stock market. Wait until you find out who’s now a buyer of stocks.
“Richard Bernstein, the former Merrill Lynch chief investment strategist, and one of the biggest bears we know is changing his tune.
“People like me have underestimated the rebound, Bernstein says. What’s made him a believer?
“You might remember the last time Bernstein was on Fast Money he told the traders - at the foundation of the stock market and the recovery is jobs. The market can’t sustain itself unless people are brining home the bacon.
“And although the unemployment rate continues to rise Bernstein is more focused on initial jobless claims which he and many others consider a leading indicator. And that number has started to decline.
“In fact, when they were reported last week new jobless claims dropped to the lowest level since January. And that trend combined with low inflation likely means Americans will regain their appetite for spending.
“Another way of saying that is - the economy is slowly getting better. ‘if you believe in the recovery this is the prime time to be a value investor.’”
Bernstein added that one wants to load up on risk now if one believes in the recovery. Junky names are the best as they have more leverage to a rebound. This is certainly the play right now (but I think it has more to do with interest rates than recovery). I had seen Bernstein saying exactly this last month, but he was not yet confident that the jobs picture had turned. Apparently, he is now and recommends going all-in, a recommendation I would view with skepticism.
Source: Edward Harrison, Credit Writedowns, October 25, 2009.