Two of America's best known investors are moving in opposite directions in the stock market. Who will win?
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 Mr. 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 on a conference call on Oct. 31. Mr. Birinyi, president of Birinyi Associates Inc., said the S&P 500 will reach 1,820 by February and bought calls that profit from a rally in equity benchmark.
The divide is widening between Mr. Birinyi, whose bullish forecasts have proved prescient during a 4½-year bull market, and Mr. 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 has reached all-time highs.
“As the market continued its relentless climb, we've become more conservatively positioned,” said Mr. Einhorn, a hedge fund manager and chairman of the reinsurer Greenlight Re.
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% in October, bringing the advance for the year to 24%, the most since 2003. The advance has pushed the price-earnings ratio up almost 20% to 16.7, according to data compiled by Bloomberg.
CALL OPTIONS
Mr. Birinyi predicts a 3.2% advance to 1,820 in the next three months, according to a report Monday. 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 on Oct. 31.
Mr. 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 RETURNS
Greenlight Re's investment portfolio returned 4% in the third quarter and 12% in the first nine months of the year, the company said in a filing. That compares with 5.2% and 20% for the S&P 500, including dividends. The reinsurer's portfolio was valued at $1.15 billion as of Sept. 30.
Mr. Einhorn 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.
Mr. 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% chance of reaching 1,600 in 2013. The gauge surpassed 1,600 in May and 1,740 in October.
UNEXPECTED OBSTACLES
“We took it on a step-by-step basis, expecting some detours and unexpected obstacles, which did occur,” Mr. Birinyi wrote in a note to shareholders.
The S&P 500 has a 51% chance of reaching the new forecast by Jan. 31 and a 75% chance of doing so by March 31, according to his note.
Mr. 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%.
He cautioned investors not to “get shaken out” in May 2012, as stocks lost 9.9%. This year represents the fourth and final phase of the rally, during which gains accelerate as investors pile in, Mr. 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.
(Bloomberg News)
