Two of America's best known investors are moving in opposite directions in the stock market, with Laszlo Birinyi predicting more gains as David Einhorn takes a more cautious approach.
Holdings that profit if stocks gain at Einhorn's Greenlight Capital Re Ltd.'s exceeded short bets by 35 percentage points as of Sept. 30, compared with about 42 percentage points three months earlier, he said today on a conference call.Birinyi, president of Birinyi Associates Inc., said the Standard & Poor's 500 Index will reach 1,820 by February and bought calls that profit from a rally in equity benchmark.
The divide is widening between Birinyi, whose bullish forecasts have proved prescient during a 4 1/2-year bull market, and Einhorn, who gained fame betting against Lehman Brothers Holdings Inc. Stocks in the U.S are in the midst of their broadest advance on record, a rally that has burned short sellers and pushed valuations to the highest levels since 2010 as the S&P 500 (SPX) reaches all-time highs.
"As the market continued its relentless climb, we've become more conservatively positioned," said Einhorn, a hedge-fund manager and chairman of Greenlight Re, a Cayman Islands-based reinsurer.
Stocks climbed this year as earnings exceeded analyst forecasts, unemployment declined and the Federal Reserve continued its economic stimulus program. The S&P 500 has gained 4.9 percent in October, bringing the advance for the year to 24 percent, the most since 2003. The advance has pushed the price-earnings ratio up almost 20 percent to 16.7, according to data compiled by Bloomberg.
Call OptionsBirinyi predicts a 3.2 percent advance to 1,820 in the next three months, according to a report today. His firm purchased calls on the SPDR S&P 500 ETF Trust (SPY) with a strike price at $182 that expire in January 2014. The exchange-traded fund closed at $176.29 yesterday. The S&P 500 was little changed at 1,764.73 at 1:47 p.m. in New York.
Einhorn said most of the portfolio gain in the third quarter was from long holdings in companies including Apple Inc. (AAPL) He said he was sticking with his short positions, or wagers that a stock will decline, including one on Green Mountain Coffee Roasters Inc.
"The losses in the short book were broad-based, and we continue to be short most of the companies that contributed to the loss," he said. "These include a variety of companies which tend to have conventional valuations, rather than speculative story stocks that have caused excessive pain for other short sellers."
Investment ReturnsGreenlight Re's investment portfolio returned 4 percent in the third quarter and 12 percent in the first nine months of the year, the company said yesterday in a filing. That compares with 5.2 percent and 20 percent for the S&P 500, including dividends. The reinsurer's portfolio was valued at $1.15 billion as of Sept. 30.
Einhorn, 44, has sounded alarms about the climb in asset prices for months. Last year he compared excessive stimulus by central bankers with eating too many jelly donuts, a habit that can be a threat to long-term health, according to an article that quoted him in Grant's Interest Rate Observer.
Birinyi's 1,820 forecast comes after he said in August the S&P 500 would reach 1,740 by the end of the year. He projected in January that the index had more than a 50 percent chance of reaching 1,600 in 2013. The gauge surpassed 1,600 in May and 1,740 this month.
Unexpected Obstacles"We took it on a step-by-step basis expecting some detours and unexpected obstacles, which did occur," Birinyi wrote.
The S&P 500 has a 51 percent chance of reaching the new forecast by Jan. 31 and a 75 percent chance of doing so by March 31, according to today's note.
Birinyi has stuck to his bullish projections since the rally began. He said the bull market was intact in August 2011 when S&P's downgrade of the U.S.'s AAA credit rating helped send the index down almost 20 percent.
He cautioned investors not to "get shaken out" in May 2012, as stocks lost 9.9 percent. This year represents the fourth and final phase of the rally, during which gains accelerate as investors pile in, Birinyi said.
The index will drop to 1,718 by year's end, according to the average of 19 Wall Street strategist projections compiled by Bloomberg, whose estimates range from 1,440 to 1,800.
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Nam Y. Huh/AP WASHINGTON -- Americans' confidence in the economy fell this month to the lowest level since April, as many worried about the impact of a 16-day partial government shutdown. The decline could weigh on spending and economic growth. The Conference Board said Tuesday that its index of consumer confidence dropped to 71.2 in October, down from 80.2 the previous month. September's figure was revised slightly higher. Consumers became particularly pessimistic in their outlook on the economy six months from now, while their assessment of current economic conditions declined by much less. They also expect less hiring in the months ahead. Consumer confidence is closely watched because their spending accounts for 70 percent of economic activity. Americans became more confident in the spring as job gains were healthy and economic growth improved. The Conference Board's measure reached 82.1 in June, the highest in 5½ years. That's still below the reading of 90 that is consistent with a healthy economy. Confidence has dropped in three of the four months since June. The shutdown already caused a drop this month in the University of Michigan's measure of consumer sentiment. Americans made more negative references to the federal government's impact on the economy in October than at any time in the 50-year history of the survey, the university said. Falling confidence can cause Americans to spend less, which would slow the economic growth. But sometimes consumers spend more, even when they say they are less confident. Weaker job growth is also weighing on consumers' outlook. Employers added an average of just 143,000 jobs a month from July through September. That's down from 182,000 a month in April through June and 207,000 in the first three months of the year. Sluggish spending is likely to weigh on economic growth. Most economists predict growth slowed in the July-September quarter to an annual rate of about 1.5 percent to 2 percent, down from a 2.5 percent rate in the April-June quarter. And the shutdown is likely to keep growth at a tepid pace for the final three months of the year.
Getty Images Following almost four days of closures, Bay Area Rapid Transit trains started operating again Tuesday morning, after representatives for striking BART union workers reached a tentative deal with BART management on Monday night. And although both sides still must formally approve the agreement, workers appear to have won a 15.38 percent raise over their four-year contract, in exchange for concessions that include an increase in their monthly medical insurance premiums of about $50, and agreeing to start contributing a portion of their pension costs. The BART strike is just the latest example of clashes between state and local government employees and the cash-strapped cities, counties, and states that employ them. Newly energized by what many will see as a win, government workers around the country might well follow suit in efforts to defend themselves against a rising tide of municipal bankruptcies and other financial threats to their security. Cities Under Siege Just 90 minutes east of San Francisco, the city of Stockton, Calif., is just one of many local governments dealing with huge financial problems. Last year, Stockton became the largest city in the U.S. to file for bankruptcy, holding that dubious honor until July 2013, when Detroit took the crown. In Stockton, current and retired city workers have found themselves at the forefront of controversy over the rights of government employees. The city has trimmed its workforce by about 30 percent, with dramatic reductions even to essential services such as its police department. However, Stockton's proposed bankruptcy plan last month included full payments to the California Public Employees' Retirement System, thus pitting pension recipients against municipal bond investors and insurance companies, as well as other creditors of the city. Not so say those retirees will get off unscathed: Health benefits promised to former city employees will be affected by the bankruptcy. But some say that even with that concession, the plan unfairly favors former workers at the expense of both current workers and other interested parties. Showdown in Motown Meanwhile, in Detroit, officials have laid even more of the blame for the city's financial troubles at the feet of former government employees. A report last month from The New York Times showed that retired city workers actually received billions of dollars in extra pension payments. Even some current employees received supplemental income, and families of deceased workers sometimes received cash payments according to the report. Outside analysis by actuarial experts found that these excess payments to workers, retirees, and their families cost Detroit almost $2 billion between 1985 and 2008. More broadly, state and local governments clearly benefited from the strong economies of the 1990s and mid-2000s, with investment gains bolstering pension plans and rising property values bringing in more tax revenue. Yet home prices and the stock market both plunged in the late 2000s, and that eliminated any financial cushion that state and local governments enjoyed prior to the Great Recession. More Struggles to Come As governments and government workers draw battle lines in their respective states, cities, and towns, many are waiting for the next shoe to drop. Harrisburg, Pa., tried to file for bankruptcy protection, but its request was denied. Pennsylvania's insolvent capital city continues to work on its finances through a receivership proceeding; the latest proposal to lift it out of the hole involves leasing out its parking system and selling a power plant that converts waste to energy. In California, Fresno has faced credit-rating downgrades that cite its weak finances after expansion plans that didn't pan out as well as local officials had hoped. The Philadelphia School District had to borrow $50 million just to open its schools on time this year, and with a deficit of more than $300 million in its $2.35 billion budget, the district hopes to get workers to agree to cuts in pay and benefits under their labor contracts in order to close the gap. Still, the pressure on governments to find ways to keep essential services running is immense. As a result, it's easier for government officials to make decisions that are geared more toward short-term patches rather than long-term solutions. In the wake of the BART strike, more state and local government employees might recognize the leverage they have, only increasing the difficulty that government entities face in balancing the needs of their constituents against the limited financial resources of their taxpayers. Your city might well be the next to see government employees take action to defend themselves against the next swing of the budget ax.
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