Biggs Market Redux Places Procter & Gamble in Basket

By Rita Nazareth and Elizabeth Stanton

Jan. 4 (Bloomberg) -- Barton Biggs, who piled into stocks at the bottom of the global bear market in March, is loading up on the biggest U.S. companies and speculating commodities will drop in 2010.

The 77-year-old manager of Traxis Partners LP is buying household-product manufacturers, drugmakers and computer companies on speculation they will prove bargains as earnings surge. The hedge fund, which gained three times the industry average in 2009, is shorting raw materials and says banks will trail the Standard & Poor’s 500 Index for five years.

“Big capitalization, high-quality U.S. stocks are very, very cheap compared to everything else,” said Biggs, who cited Procter & Gamble Co. and Johnson & Johnson in a Dec. 29 interview. He called commodities “an investment vehicle for maniacs” that will probably fall in 2010. “I don’t know what’s going to happen in the second half of next year. I’m just saying that in the next three to six months, the economy is going to keep recovering and stocks are going to go up again.”

Buying shares before the benchmark gauge for U.S. equities plunged to a 12-year low in March gave Traxis Fund a 38 percent gain in 2009, helping recoup a 40 percent drop that began when Biggs failed to foresee the credit crisis in 2007. He’s staying bullish even after the largest rally since the 1930s pushed the S&P 500 to its highest price relative to profits in seven years, data compiled by Bloomberg show.

Cheap Valuations

The index rose 1.5 percent to 1,131.35 as of 11:06 a.m. New York time. While the S&P 500’s gain since March pushed its price last week to 24.6 times the combined earnings of its companies, the highest since 2002, the index remains cheap compared with forecast profits, Biggs said. The price-earnings ratio falls to 14.2 when measured against the average forecast for S&P 500 income in 2010, according to equity analysts surveyed by Bloomberg.

For the 100 biggest companies, the ratio drops to 13.7 compared with 2010 estimates, lower than any time between 1997 and the 2008 credit crisis, based on earnings during the previous year.

“I can find a lot of things that I want to buy in the U.S.,” he said. “I’m still playing the same tune. I’m pretty well loaded up as far as stocks are concerned.”

Biggs, who oversees about $1.4 billion, declined to comment on specific holdings. P&G, the world’s biggest maker of consumer products, is trading for 16.8 times earnings in the last year and 15 times profit forecast for the year ending in June 2011, according to data compiled by Bloomberg.

Beating Projections

That compares with an average of about 21.6 times income last decade, the data show. Cincinnati-based P&G lost 1.9 percent in 2009 even after beating analysts’ profit projections for three straight quarters.

J&J, the world’s largest health-products company, is priced at 14.2 times annual earnings, 42 percent below the average valuation in the S&P 500. The New Brunswick, New Jersey-based company climbed 7.7 percent in 2009 after dropping 10 percent a year earlier. J&J has beaten analysts’ average profit estimate for 14 straight quarters.

Biggs is buying the largest U.S. computer and software makers on speculation that executives who put off investments will start spending this year. About 22 percent of corporations plan to increase technology purchases in the first quarter, the most in two years, according to a survey of 1,753 companies from Nov. 9 to 20 by ChangeWave, a Rockville, Maryland, research firm.

Spending Boom

“It’s a bet on a capital spending boom and it’s also a bet that big corporations around the world have under-spent on technology since 2000,” Biggs said. “Big-cap tech stocks are still very attractive.”

Computer makers led the S&P 500’s advance in 2009, climbing 60 percent for the biggest increase since 1999. The S&P 500 Information Technology Index trades for 23 times profits in the past 12 months, a 5 percent discount to the overall market and 26 percent below its average valuation in the last decade, according to data compiled by Bloomberg.

Stock market bulls are counting on the fastest U.S. earnings growth in at least a decade to reduce valuations in 2010. Companies in the S&P 500 are forecast to report their first quarter of profit growth in two years this month after more than $1.7 trillion of bank losses and writedowns spurred the first global recession since World War II.

Fastest Growth

Analysts surveyed by Bloomberg estimate income will rise 27 percent in 2010 and 21 percent in 2011, the fastest two-year gain since 1994. A year ago, Wall Street firms predicted 2009 profits would rise 4.5 percent. They are poised to fall 12 percent, according to data compiled by Bloomberg.

Equities may prove expensive should the profit increase fail to materialize. The S&P 500’s price-earnings ratio based on earnings in the past year has jumped to the highest since May 2002, when the index began a 28 percent tumble, data compiled by Bloomberg show.

Biggs, the former global equity strategist for Morgan Stanley, said Traxis is “generally short” raw materials after the Reuters/Jefferies CRB Index of 19 commodities gained 23 percent in 2009, the steepest advance since 1979, data compiled by Bloomberg show. Investors profit from short sales by borrowing an asset and selling it in the hopes of buying it back later after the price falls.

Oil climbed 78 percent in 2009 and copper rallied 137 percent after the U.S. government lent, spent or guaranteed $11 trillion to end the credit crisis. So-called macro hedge funds such as Traxis that speculate on stocks, bonds, currencies and commodities gained an average 12 percent in 2009 data compiled by Bloomberg show.

Trail the Market

Financial companies are likely to trail the market for another five years, mimicking computer and software stocks following the collapse of the Internet bubble in 2002, Biggs said. Technology makers lost 57 percent from their all-time high in March 2000 through October 2007. The S&P 500 climbed 2.5 percent to a record over that period, according to data compiled by Bloomberg.

Hedge funds, mostly private pools of capital whose managers participate substantially in the profits from speculating on whether the price of assets will rise or fall, boosted bullish investments in stocks to the highest level since October 2007 in the third quarter, according to data compiled by Goldman Sachs Group Inc.

Morgan Stanley

Traxis Fund is the flagship of the firm Biggs founded with Madhav Dhar and Cyril Moulle-Berteaux from Morgan Stanley, which owns 20 percent of the company and recently invested $150 million. It has climbed about 7 percent a year since being formed, twice the S&P 500’s return but less than the average for so-called global macro funds.

Biggs stayed bullish during the first half of 2008 after underestimating losses spurred by defaults on subprime mortgages, he said.

“I certainly wish I had understood more in late 2007, early 2008 how serious the credit problem was,” Biggs said. “The bubble wasn’t in spaces that we knew.”

Traxis still fared better than the S&P 500 in 2008, losing 29 percent after fees as the S&P 500 tumbled 38 percent. While Biggs was early in predicting a rebound, his fund profited by adding stocks in emerging markets between October and March.

“Over the longer run, emerging markets are going to be the place to be, particularly the Asian emerging markets,” he said. “In the short-run, I’m bullish about the U.S. as well.”

Templeton's Mobius likes commodities

Mon Jan 4, 2010 10:43am GMT
By Kevin Lim

SINGAPORE (Reuters) - Mark Mobius' Templeton Asian Growth Fund is banking on commodity stocks to boost returns in 2010 following its best-ever yearly performance in 2009, when it benefited from big bets on companies such as Indian iron ore exporter Sesa Goa.

The $7.7 billion (4.7 billion pound) fund gained 103 percent last year, according to data from Lipper, handily beating the 72.5 percent rise in the MSCI Asia ex-Japan index. It was the 10th best performer among more than 600 Asia Ex-Japan focused equity funds tracked by Lipper.

The fund is weighted heavily in energy and materials, and Mobius said he expects demand for metals to exceed supply in the next few years, boosted by infrastructure development in large emerging markets such as China and India. Economic growth in emerging market has also boosted growth for soft commodities.

"As China grows richer, the (dietary) trend is changing to include more meats such as pork and beef. This means that more and more land is being allocated to raising cattle, thereby reducing the production of crops such as grains and oilseeds," he said in an emailed response to queries from Reuters.

"Even though commodity prices will fluctuate from time to time, the overall trend globally is upwards."

The strong returns of Mobius' flagship Asia fund come after a torrid 2008, when it lost 60 percent compared with a 52 percent fall in the benchmark.

For a graphic on the fund's performance, click:

here And since inception in 1991, the fund has cumulatively returned 194 percent, trailing the 335 percent return of the MSCI index, as per Lipper data. Lipper is a unit of Thomson Reuters.

RISKY BETS

Mobius' willingness to defy conventional wisdom and take big risks can be seen in the Asian Growth Fund's portfolio. Sesa Goa was its top holding as of end-November despite news a month earlier that the company was being investigated by India's Serious Fraud Investigation Office.

"The Sesa Goa situation was something that occurred during previous managements... The relationship between the company and a buyer of ore, a trader getting commission and an investor is obviously complicated but as far as we can see, no harm was done to the operations of the company," he said.

Sesa Goa shares rose five-fold last year despite the probe into offences allegedly committed prior to 2007 when London-listed Vedanta Resources (VED.L: Quote, Profile, Research) took a majority stake.

Sesa Goa accounted for 6.2 percent of the Asian Growth Fund's portfolio at end-November, up from 5 percent at the end of October, according to the fund's latest fact sheet.

Templeton's other big bet was on Thailand, which accounts for 22.9 percent of the fund's portfolio despite concerns about the political situation there. The fund's top Thai holdings include oil firm PTT PTT.BK, Siam Commercial Bank (SMCBF.PK: Quote, Profile, Research) and Siam Cement SCC.BK.

The Thai stock market rose 63 percent last year, bettering the performance of bigger Asian markets such as Hong Kong and Korea.

Click on for a table on Asian stock market performance in 2009.

The Templeton fund also has a 4.8 percent weighting in Pakistan .KSE, higher than its holding of companies listed in Hong Kong, Taiwan or Singapore.

"Yes, there is a risk but the potential reward could be significant. China is now making more investments and giving more aid to Pakistan," Mobius said. "This is significant."

(Additional reporting by Nishant Kumar in MUMBAI; Editing by Muralikumar Anantharaman)

Chichester Fund Favors Platinum, Iron Ore; Avoids Nickel, Gas

Jan. 4 (Bloomberg) -- Platinum, iron ore and coal will probably extend gains this year on strengthening demand, according to commodities hedge-fund firm Chichester Capital Management LP.

Nickel and natural gas may fall on rising supplies, said Uday Narang, who co-manages the Chichester fund with New York- based Julian Barrowcliffe. The fund returned about 53 percent in 2009. London-based Narang spoke in a phone interview.

For 2010, Narang’s top picks are platinum, iron ore, coal and copper, based on expectations that a U.S. economic recovery will reinforce demand from China and other emerging economies.

“The Asian emerging markets will take us higher. The U.S. is also coming out of recession. The worst in the U.S. is over, as we can see from industrial and economic data.”

Platinum may gain as much as 30 percent as demand expands from both the auto industry and jewelry buyers, Narang said. Iron ore and coal will probably rise by 20 percent to 25 percent, boosted by higher steel demand, he said. Copper, which more than doubled last year, can extend the rally by another 15 percent, he said.

“For copper, the Chinese are still buying. We’ve also got production issues at mines.”

Nickel and U.S. natural gas should be avoided in 2010, Narang said. Stockpiles of nickel tracked by the London Metal Exchange are at the highest since at least 1979.

“Nickel is doing well right now but there’s too much stock around. Nickel can fall 10 percent to 15 percent” this year.

“I’m not friendly to U.S. natural gas because of ample supply. As prices go higher, more LNG will hit the U.S. market.” Prices could decline 10 percent, he said.

To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net