Sunday, February 18, 2007

Steinhardt's gut flashes caution.

In July of last year former hedge fund manager Michael Steinhardt was interviewed on Bloomberg. His basic stance at the time was bullish on the US and the stock market at a time when a number of others were turning bearish. Mr. Steinhardt's call turned out to be the right one. Now, however, he's turning cautious.

Why do I refer to his gut, by the way? I read his autobiography a number of years ago, and though it was refreshingly candid on some less savory facts of his life (his father was a gambler and basically a bit of a crook; Mr. Steinhardt himself was a profoundly unpleasant boss) it explained little about his investment style. I came away with the idea (and perhaps I need to re-read it) that he made most of his major calls based mostly on solid gut instincts. Obviously, it's not quite that simple, as you also have to keep abreast of the news, major trends, have a streak of contrarian in you, and a good sense for timing.

Bloomberg: Steinhardt Is `Very Sensitive' to Signs Rally May End.


Michael Steinhardt, the investment pioneer whose hedge funds returned more than 20 percent a year for almost three decades, says the bull market in U.S. stocks may be coming to an end after more than four years.

``Very few people have the ability to pick a high, and I don't think that this is the exact moment,'' Steinhardt, 66, said in an interview yesterday in New York. ``One stays long, but one becomes very sensitive. You say to yourself that the next major, major move is going the other way.''

Steinhardt said some investors were using too much debt to boost returns, and the dollar may get support from a decline in the U.S. budget deficit. Fortress Investment Group LLC's initial share sale last week, the first by a U.S. manager of private- equity and hedge funds, showed its founders were ``clever in terms of their timing,'' he said.

The Dow Jones Industrial Average closed at a record high of 12,741.86 yesterday after Federal Reserve Chairman Ben S. Bernanke said inflation pressures were beginning to ease because of falling energy and commodity prices. The Standard & Poor's 500 Index, completing its best two-day advance since Sept. 26, has returned 16 percent in the past year. Bullishness on stocks is at a 10-month high, according to a Merrill Lynch & Co. survey of fund managers released yesterday.

`Loosened Rules'

Still, Steinhardt sees greater risks now than in the past from the potential for stocks to decline ``in a meaningful way,'' defined as by 10 percent or more.

``Coming back to the area where the excess might be, I think it's in leveraged investments,'' including commodities and real estate, he said. ``The rules related to borrowing money have loosened up extraordinarily. This is something we should remember.''


Blogger guy said...

I have been looking for comments on what he said yesterday as not too many people share his view. Thank you for publishing it.

He sounded scary and given all the leverage out there, the 'will not be pretty' actually looked really bad. Specially after the real estate boom/bust which has yet to affect consumers in a meaningful way...

From reading part of his book I got a different impression and that was that part of his successfull calls were due to being shrewd in obtaining information -quasi insider- which is a far cry to having intuitively perfect timing. However, this does not lessen the importance of his recent comment. In fact, the opposite is true!

7:38 AM  

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