Portfolio Manager Perspectives

Jeff Benjamin

S&P 500's fair value in 2011? 1,000, says Innealta's Buetow

CIO trimming exposure to risky assets like equities and gold; ‘Fed doesn't have a clue'

Oct 14, 2010 @ 2:09 pm

By Jeff Benjamin

The equity markets are both confused and overvalued, according to Jeff Buetow, chief investment officer of Innealta Capital, which manages nearly $2 billion in assets.

Mr. Buetow, who is critical both of the current Federal Reserve policy and anyone who supports raising taxes right now, said the market is mispriced because “nobody knows how to quantify things like taxes, health care reform and financial reform.”

“The Fed doesn't have a clue what they're doing,” he said. “And the government intervention is almost comically inept.”

Mr. Buetow currently favors bonds over equities because he believes the market is overvaluing stocks.

Standard & Poor's estimates that the aggregate 2011 earnings for the S&P 500 will be $95. That level, he pointed out, is the same as the index generated in 2007. But in 2007, there were 7.8 million fewer unemployed people in the U.S. and the real estate market was still charging along.

“I think stocks are way too high, based on earnings estimates, to justify these levels,” Mr. Buetow said. “This is the kind of market where you wait for an opportunity to present itself.”

By Mr. Buetow's own reckoning, the S&P's aggregate 2011 earnings should be around $73, placing the index's fair value at around 1,000.

Whether it comes to stocks or the gold rally, he said the risks are too big right now.

Even though Mr. Buetow believes gold could climb to near $2,000 an ounce by the end of next year, he thinks the precious metal is due for a pullback.

“I'd rather take a little risk off the table,” he said. “Nobody can convince me that the risky assets like equities and gold are the place to be right now, and that's why I'd rather not try and get the last 10%.”

Mr. Buetow said he is currently trimming his exposure to health care and consumer discretionary stocks, as well as gold and real estate investment trusts — all of which have participated in respectable rallies.

At the same time, he is increasing his exposure to short-term U.S. Treasury bonds to 25% from 15% “in the near future.”

He also likes lower-grade corporate debt.

“The near-term outlook is one of confusion,” he said. “We like income, but the valuations have gotten out of control.”

The big question, he said, is how the Fed will manage to initiate some economic growth without triggering inflation.

“The Fed recognizes the economy has excess capacity and low demand,” he said. “The employment situation is disastrous in the developed world. In terms of real estate, the foreclosure moratorium is going to make things worse.”

If Congress lets the Bush-era tax cuts expire the situation will quickly go from bad to worse, Mr. Buetow predicted.

“The Fed is trying to trigger a spontaneous reaction by consumers to start spending, because the Fed's No. 1 concern is a Japanese-type scenario of deflation with credit contraction and a loss of wealth,” he said. “The folks who create jobs are looking at all these issues, and people will meaningfully change the way they spend money if taxes go up.”

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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