Portfolio Manager Perspectives

Jeff Benjamin

Current rally: Too far, too fast, too little real recovery

Tom Samuels of the Palantir Fund predicts a correction, banking on large, stable companies like Bristol-Myers, Wal-Mart

Dec 7, 2009 @ 4:14 pm

By Jeff Benjamin

The stock market rally has gone too far too fast, and on too little real economic recovery, claims Tom Samuels, manager of the Palantir Fund (PALIX), a global long/short fund from Palantir Capital Management Ltd.

“After almost 10 months, this rally seems like it might be due for a break, even if this were a healthy market,” he said.

For much of the past few months Mr. Samuels has had his fund positioned in what he described as a “neutral mode,” which is currently about 40% net long.

While he recognizes that stocks in general have been soaring based on “liquidity and confidence,” Mr. Samuels said the government intervention efforts have provided a false sense of economic recovery.

“The intervention of the Fed and the Treasury has stabilized the system, but in our view it is a crisis delayed because nothing has been fixed,” he said. “The broad data showing unemployment, bankruptcies, foreclosures and declining consumer spending do not add up to a recipe for a sustainable financial recovery.”

With that in mind, Mr. Samuels is banking on large, stable companies such as Bristol-Myers Squibb Co. (BMY) and Wal-Mart Stores Inc. (WMT) to hold up in the next market downturn.

On the short side, he is waiting for the market to start pulling back from its recent love affair with high-yield bonds. He has shorted two exchange traded funds as part of this theme: SPDR Barclays Capital High Yield Bond (JNK) and iShares iBoxx Corporate High Yield Bond (HYG)

“I'm bearish on the rally and I'm waiting to get paid on some of my low-quality shorts,” Mr. Samuels said.

Having been in neutral mode for the past few months, Mr. Samuels acknowledged he might be a bit early, but he believes the longer-term trend will support his case for being “bearish American [luxury] wants and bullish Asian needs.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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