Bloomberg News

S&P 500 Tumble of 8% Is Fear Driving Money Manager Leuthold to Sell

July 10, 2014

Leuthold Group LLC said it’s trimming equities in some funds on concern the Standard & Poor’s 500 Index may slump as much as 8 percent in the coming months.

The Minneapolis-based firm is cutting stock holdings in tactical funds to 60 percent from about 65 percent, Chief Investment Officer Douglas Ramsey said in a phone interview with Bloomberg News. The drop will eventually turn into a buying opportunity as equities resume their advance later in the year, he said.

“We’re going to see a shallow 6 to 8 percent correction this summer,” Ramsey said today. Leuthold oversees $1.7 billion. “In the grand scheme of things, this will be a pretty small move.”

Equities slumped today and bonds of Europe’s most-indebted nations declined with speculation resurfacing that the euro region remains vulnerable to shocks as it emerges from the sovereign debt crisis. While Portugal’s central bank said Banco Espirito Santo SA, the nation’s second-largest lender, is protected after its parent missed debt payments, Moody’s Investors Service downgraded a company in the group, citing a lack of transparency and links to other companies.

The S&P 500 lost 0.4 percent to 1,964.31 at 12:22 p.m. in New York. The U.S. equity benchmark hasn’t posted a decline of 10 percent from a peak since 2011 and it has gone without a closing gain or loss of 1 percent for 58 days, the longest stretch since 1995, data compiled by Bloomberg show.

Vulnerable Equities

If stocks were at loftier valuations, Leuthold would consider trimming holdings in the tactical funds to about 30 percent, which it did in 2007 prior to the financial crisis, according to Ramsey. The firm can change the equity allocation between 30 and 70 percent, he said.

The S&P 500 is valued at 18 times reported earnings, the highest level since 2011. Analysts have lowered their forecasts for earnings since April and now predict profit growth of 5 percent in the second quarter, according to the average estimate from a Bloomberg survey.

Speculation that U.S. stocks have risen too far, too fast fueled losses earlier in the week as Raymond James & Associates Inc. said equities are vulnerable and Citigroup Inc.’s chief U.S. equity strategist cited concerns for a “severe” pullback. The S&P 500 closed at an all-time high on July 3 and the Dow Jones Industrial Average topped 17,000 for the first time.

Working Cash

Retreats this year have proved short-lived. The benchmark equity gauge dropped as much as 5.8 percent in the first two months only to reverse the slump by March. Craig Hodges of Hodges Capital and Greg Taylor of Aurion Capital Management say that’s likely to happen again.

“We almost look forward to days like today where we can put some of the cash we have on the sideline to work,” Hodges said in a phone interview from Dallas. “We have a list of 15 to 20 names that we’d like to buy at a cheaper price.”

He manages the $1.4 billion Hodges Small Cap Fund, which has beaten 99 percent of its peers over the last three years. The firm holds about 10 percent in cash. On its watch list are airlines, such as United Continental Holdings Inc., whose shares have fallen almost 8 percent since a peak in June.

Taylor of Aurion said he’s considering buying shares of energy producers and gold mining companies, such as Franco-Nevada Corp.

“We’re getting our buy tickets ready,” Taylor, a fund manager at Aurion Capital in Toronto, which manages about C$6.6 billion, said in a phone interview. “This feels like everyone’s looking for a reason to sell the market and they’re finding one in Portugal.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeremy Herron


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