Long time bears are increasingly abandoning their lair…

After stocks hit a 12-year low on March 8, several high profile bearish investors have since turned bullish. Indeed, the ranks of growing bulls include Steve Leuthold (Leuthold Group), William Flenckenstein (Fleckenstein Capital) and British-based Crispin Odey (Odey Funds).



Though the S&P 500 Index now looks overbought on a short-term basis (see above chart), there’s no doubt about the dramatic change in the primary economic trend since March. The news is still bad but not as downright awful as it was just 60 days ago. Investors are rejoicing as stocks have surged 26% since March 8 while emerging markets have skyrocketed 35%.

Another boost is the recent compression of investment grade corporate bond yields, which were reluctant to participate the first four weeks of March but have since rallied.

The Dow Jones Corporate Bond Index has seen its yield decline from 6.95% on March 1 to 6.63% this morning. Other non-Treasury fixed-income markets have also rallied over the last five weeks, including junk bonds and emerging market debt.

Bank stocks in the United States have more than doubled off their March lows following encouraging (though fabricated) earnings results last week from Wells Fargo and this week from Goldman Sachs. Two weeks ago, the FASB, under severe Congressional pressure, decided to loosen its accounting rules to allow banks more room or flexibility to value hard-to-value assets. Yet the market is digesting this change for the better as banks continue to rally.

Despite my obvious reservations about a new bull market, several very savvy investors are bullish and believe the market did hit a secular low on March 8.

Crispin Odey, a well respected British traditional and alternative money manager placed big bets against British banks in 2008 and earned a profit on his hedge funds. Odey, a big bear in 2008, recently sold his financial services shorts and is now long several bank shares, including Barclays plc. According to Odey, “As the story moves from the balance sheet to the earnings potential for the likes of Barclays, the bull market will also extend from its narrow base to encompass other industries where capacity has been sufficiently reduced as to allow pricing power to come through.”

Another high profile investor but now retired from asset management is London-based Anthony Bolton. Bolton, who ran a highly profitable long equity fund at Fidelity for many years, turned bullish six months ago, albeit just a few months too early.

Among famous onetime bears even Steve Leuthold, who’s Grizzly Short Fund gained more than 70% in 2008, has been bullish since last November. Leuthold claims we’re at the beginning stages of a new bull market.

Rising markets are a welcome change to be sure after months of protracted selling resulting in the second worst bear market since 1929. Yet I still have my reservations about this recovery for several reasons, namely soaring unemployment, declining domestic consumption and falling real estate prices. Also, with the American consumer now focused on balance sheet repair and savings, who will buy the world’s manufactured goods? America’s trade deficit has crashed since Q4 2008.

Finally, let’s not forget that despite TARP and TALF most banks are not expanding credit. Just how we’re supposed to enjoy a prolonged economic expansion without credit growth is beyond me.

Loan growth the first two months of the year was the weakest since September 2002, according to the Fed. Delinquencies on credit card debt continue to rise while revolving consumer credit, which includes credit cards, fell 9.7% in February compared to 12 months ago – the biggest decline since 1978. Does this sound like a market bottom? In the past, strong recoveries were associated with strong growth in credit and this presents a big challenge in the current cycle because credit is hard to obtain.

Stocks might be in a new bull market. Anything is possible. But I won’t participate in equity ownership, at least not directly. Instead I’m buying fixed income securities, including convertible bonds, TIPS, investment grade corporate bonds, mortgage agency bonds and senior Canadian bank debt.

I’d rather get paid to wait in this environment and reduce portfolio risk. I also continue to hold gold because any stock market recovery should also be accompanied by a lower dollar as investors increase risk and buy more foreign currencies and other non-dollar assets.

In my view, investors are underestimating the damage still spreading across the global economy – mainly in the West – as a result of ongoing credit destruction and for the most part the unavailability of credit.