Of Note:

The noted financial guru told Bloomberg News yesterday that he has begun short-selling U.S. equities again.

His reason? He has no confidence in the Obama Administration's handling of the financial crisis.

Because I can see these guys don't know what they're doing," he said.

We're still in a big, big mess.


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Thinking about U.S. blue chips? Don't, guru says

Thursday, February 12, 2009
The Globe and Mail

Jim Rogers has a message for investors who ran screaming from the stock market Tuesday in response to Washington's disappointingly vague financial sector bailout plan: You were right.

The noted financial guru - whose 45 years in the business have featured a stunningly successful partnership with fellow guru George Soros, a penchant for exploring remote corners of the world and a knack for spotting the next big thing - yesterday told Bloomberg News that he has begun short-selling U.S. equities again.

His reason? He has no confidence in the Obama Administration's handling of the financial crisis.

"I covered most of my shorts back in the fall, but I've been shorting again, because I can see these guys don't know what they're doing," he said.

And what stocks is Mr. Rogers selling?

"IBM, GE, JPMorgan - you know, same old companies."

It was clear this wasn't meant to be an exhaustive list of the stocks Mr. Rogers is shorting, but the names he highlighted are telling.

He specifically named some of the biggest blue-chip stocks in the U.S. market, the kinds of stocks usually seen as the safest and best performers in weak markets. He named a big bank generally considered among the strongest and most stable in the sector. He named well-established stocks that people might think are undervalued and worth buying as they cautiously look to re-enter the equity market.

The message: Don't. They're worth too much as it is, given the financial mess that the U.S. government looks no closer to resolving.

When guys like Mr. Rogers speak, less accomplished investors feel obliged to listen.

This is a man whose Quantum Fund, co-founded with Mr. Soros, turned in returns of 4,200 per cent over the 1970s, a period in which the S&P 500 was essentially flat.

While the rest of us were first hearing the term "dot-com," he was obsessing over China. In the late 1990s, when commodity markets were going nowhere fast, he launched a commodity index fund and declared commodities "the world's best market."

But as good as his instincts have been, they haven't been perfect.

Mr. Rogers had been shorting equities last year, but he decided that the market was ripe for a rebound, and unwound his short positions in many of those same big-name U.S. blue chips in October. Unfortunately, that was roughly a month too soon; by the third week of a miserable November, U.S. stocks had dropped another 20 per cent from their October close.

Mr. Rogers has also steadfastly stuck with commodities, even as prices imploded over the fall and have shown few signs of life since.

Okay, so the guy can't time the market. Who can?

His point is, we should be selling equities, especially in the U.S. market, because we're still in a big, big mess, which implies that any gains the stock market has made since the November lows weren't really built on any improved fundamentals. The credit crisis isn't getting fixed, and the economic crisis may be worse.

On the economic front, that's hard to dispute. But the fact is, some of the underlying conditions for credit and financial markets have, in fact, improved.

The key indicator for U.S. stock market volatility and risk levels, the VIX index, is below 45, compared with a record level of 80 on Nov. 20. It has mostly been below 50 since mid-December, after residing well above that level through September and October. A reading of 45 is still elevated by historical standards, but it does indicate a more rational investing climate.

Much of that improvement is tied to an easing of credit conditions, which has calmed the rampant panic liquidations that were behind the massive selloffs in the fall.

The TED spread, a key yield-spread indicator of credit market tightness, has narrowed to less than 100 basis points from more than 450 in October. Credit is still tighter than usual, but money is flowing again.

Of course, a willingness, even an insistence, to zig when the rest of the market zags is pretty much what makes a guru a guru. You don't get famous by following the herd. And right now, Jim Rogers, guru, is implying that the herd is wrong - that things aren't really much better than they were in the fall, other than the fact that stock prices are a little higher.

That fact, he suggests, presents more an opportunity to sell than to buy.

Could he be right? Could the recent sentiment in financial markets (Tuesday's selloff notwithstanding) be, essentially, a grand delusion?

To both questions, one answer is hard to avoid - it wouldn't be the first time.