Bill Miller sees coming spike in stock prices

Legg Mason Inc.’s Bill Miller said U.S. stocks may rise 15 percent in the next 12 months as the Federal Reserve continues efforts to inflate asset prices and boost the economy.

“The Fed wants the stock market to go up, and they will do what’s necessary to get it to whatever level it takes for the wealth effect of higher stock prices to stimulate growth,” Miller wrote in a letter to shareholders released today.

Miller, famed for beating the S&P 500 for a record 15 straight years through 2005, trailed the U.S. benchmark for the next three years as he underestimated the severity of the financial crisis and bets on banks and real-estate companies backfired. He outperformed peers in 2009 as the stock market rebounded from a 12-year low.

Declines in top holdings such as power producer AES Corp. have hurt returns in 2010. Miller’s $4.1 billion Legg Mason Capital Management Value Trust fund was up 3.8 percent this year through Nov. 12, compared with a 9.4 percent return for the S&P 500, including reinvested dividends. In the past five years, the fund declined at an average annual rate of 7.7 percent.

The Federal Reserve on Nov. 3 announced plans to buy $600 billion in U.S. Treasuries in a round of unconventional monetary stimulus known as quantitative easing. The Fed left unchanged its pledge to keep interest rates low for an “extended period.”

The Fed’s plan has prompted criticism from leaders in China, Germany and Brazil, who have said it will depress the value of the dollar and has the potential to fuel speculative money flows. It has also spurred U.S. investors and economists, including hedge-fund manager Cliff Asness and Stanford University Professor John Taylor, to urge Fed Chairman Ben Bernanke to halt the stimulus, saying it risks an increase in inflation.

Miller said the most likely negative impact of the Fed’s purchases is higher commodity prices, which could slow economic growth and blunt the impact of the stimulus.

“This is not an endorsement of the policy, just a statement that I think the Fed has the tools to change the aggregate portfolio preferences toward riskier assets, and that it intends to use them.”

Miller, who has managed the Value Trust fund since its inception in 1982, remained a long-term optimist on the U.S. market even amid the slump that dragged stocks down 39 percent in 2008. He stuck to his bullish bets on an economic recovery last year, rejecting the idea of a “new normal” characterized by below-average U.S. economic growth and high unemployment as outlined by Pacific Investment Management Co.’s Chief Executive Officer Mohamed El-Erian.