Investor's Business Daily
Miller Doubts Tech's Leadership Power
Monday June 30, 10:26 am ET
By Ken Hoover
Bill Miller, manager of the top-performing $20 million Legg Mason Value Trust, said Thursday he doesn't think technology stocks will do well in what he thinks is a new bull market.
A year ago, he reduced his fund's share of tech to 2% of assets from 38% in January 2000.
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Miller is worth listening to because he is a member of a select group of managers who have consistently beaten the S&P 500. He's beaten it for 12 straight years.
He spoke at the Morningstar Investment Conference in Chicago, where 1,200 financial planners have gathered to listen to the best minds in the investing world.
Miller rests his case against tech on historical precedent. He noted that the leading stocks in one bull market often start the next bull market with strength, only to wither once the bull continues.
He said this was the case with energy stocks, which led in the '70s, and consumer stocks in the '80s. He thinks the same will happen with tech, which led in the late '90s.
"Everybody wants to own what they wish they'd owned in the last cycle," he said. "We can't find any companies planning to spend anything on technology in the next 12 months."
And, he added, he talks with a lot of company executives.
He proved his contrarian nature by pointing to Japan, which he thinks will be helped as the U.S. leads the world away from the danger of deflation. His favorite company there is Sony.
Miller noted that most actively managed mutual funds fail to beat the S&P 500. Over a one-year period, only about 40% can do so. Over 15 years, only 22.8% do.
So why does the benchmark, which is actively managed by Standard & Poor's, do so well?
He said it's because the index's managers don't worry whether the company has short-term problems or try to anticipate what sectors will do well in a particular part of the business cycle, among other things.
"They let the Darwinian aspects play themselves out," he said.
Most managers, he said, worry too much about the economy, trade too much, hold too many stocks and react rather than anticipate.
"I tell my analysts that if it's already in the newspapers, it's in the price," Miller said.
Top stock and bond market strategists worried Thursday about whether deflation could bring about a recession and kill what looks like the beginning of a new bull market.
"The inflation rate is too low to instill animal-spirit capitalism," said Paul McCulley, manager of Pimco Short-Term Bond Fund. But he said the Federal Reserve, having won a two-decade war against inflation, has gotten the message.
"The Fed will not say so in plain English you could put on a bumper sticker, but it wants a higher rate of inflation," McCulley said.
He said he doesn't expect the Fed to hike short-term interest rates for a long time. The Fed's new war against deflation creates a perverse situation for the Treasury bond market.
For the Fed to succeed, the bond market must think it will fail, driving long-term rates lower and creating a bond market bubble. And that bubble, McCulley argued, will result in the Fed succeeding and a reflating of the economy.
His point was that if long-term rates are driven lower because bond investors fear deflation, it could stimulate spending and raise prices throughout the economy.
Dan Fuss, who runs Loomis Sayles Bond Fund, gave one of the gloomiest outlooks of the conference, noting that growth in the 1980s and '90s was accompanied by peace. The war on terrorism has changed that.
"I'd like to say it's a temporary thing, but I don't think it is," he said. "Government is going to be a bigger part of our lives."
Fuss thinks the stock market is in an extended trading range, with the bottom of the range around the bear-market low of October 2002 and the high a few hundred points higher than the 9000 on the Dow Jones industrial average we now have.
One of the more optimistic outlooks came from Byron Wien, Morgan Stanley's senior investment strategist.
He thinks real GDP growth will be 3% to 4% in the third and fourth quarters of this year, which would possibly set the stage for stocks to return 10%. "That still beats bonds," he said.
He thinks stocks are still slightly undervalued and there's plenty of liquidity in the economic system. And although investors are more optimistic than they were in March, sentiment is not excessive.
He sees a couple of negative forces weighing on the market: Investors have lost trust in basic institutions, whether it's Wall Street analysts, government, the press, even church.
And, he said, we've been lucky we haven't had another terrorist attack. |
