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Bull and Bear Served at Fund Manager Dinner

Brett Arends

In the bull corner, as usual, was Jeremy Siegel -- professor at University of Pennsylvania's Wharton School of Business, and author of the popular investment tome Stocks for the Long Run. In the bear corner, also as usual, was Jeremy Grantham, veteran chairman of Boston fund firm GMO.

And if Wall Street takes a downward step in the next few weeks, I think I'll know why. Nearly 600 of Boston's top fund managers and analysts turned up Monday night for the annual Boston Securities Analysts Society's dinner. And when the two Jeremies went head to head about the stock market over coffee, the bearish Grantham probably took it on points.

He also had the added advantage of speaking second.

It was generally good-natured, fought with PowerPoint presentations and Bloomberg charts. But it had some pointed moments. Grantham, at one moment, accused Siegel of talking "B.S." and came close to suggesting his opponent was a bit of a shill.

Grantham, as often, outlined a doomsday scenario. "Everything is overpriced," he said. And he meant everything -- U.S. equities, foreign equities, emerging markets, bonds, housing and commodities. The whole shebang. Even fine art. "This year the cheap asset class is cash," Grantham said.

He mustered more than a dozen overhead charts to argue that, seven years after the Wall Street peak of March 2000, we are still in an equity bubble. Shares are too expensive compared to profits, he said. And those profits, currently at record levels compared with the national economy, are also artificially high, he said. He gave a 50% chance that profit margins would start to fall again within a year. Within two years, he added, it was "a near certainty."

Grantham concluded that investors who buy, say, an index fund -- such as Vanguard's (VTSMX Quote)Total Stock Market Index fund -- and hold it for the next seven years are likely to lose about 1.8% a year, after inflation.

Bull champion Siegel came armed with his own presentations but didn't seem to fight with conviction. He also argued that bonds and commodities, including oil, are overvalued. And he didn't claim that Wall Street was a bargain, either. "Stocks are not cheap by any means," he admitted.

It doesn't exactly make you want to rush out and invest.

So don't be surprised if a few fund managers pause before throwing more money into the market in the next few weeks. Boston is the home to Fidelity, Putnam, MFS, Evergreen and other big fund companies, and most had people present.

Yet the most intriguing question of the night went unanswered. And it goes right to the heart of Grantham's case and the small matter of whether you should be putting more money into the market or taking some out.

Today, from Wall Street to Washington, the debate is raging over skyrocketing U.S. company profits. The statistics appear to show these are now taking a far higher share of the economy than ever before in modern history. Naturally there are lots of cheerleaders who say how healthy this is. But stock market bears, like Grantham, argue it means profits must fall again back to average historic levels. Meanwhile, in Washington, many Democrats argue these record profits prove that ordinary workers are getting a raw deal.

Siegel, on Monday night, argued something completely different: that everyone has the numbers wrong. When you count U.S. company profits accurately, he said, they still take up a much smaller share of the economy than they did, say, 60 years ago. All that has happened in the past two decades, he argued, is that they have recovered ground lost during the '60s and '70s.

Why the discrepancy? The structure of the economy has changed, Siegel said. Decades ago, lots of firms were private partnerships, family businesses or mutual societies. Think of Wall Street investment giants like Goldman Sachs (GS Quote), big insurance societies like John Hancock, along with thousands of local thrifts and other companies.

Back then, these businesses made plenty of "profits," but they often didn't show up as such in the national statistics, Siegel said. Instead, partners drew surpluses as extra income. Mutual society members received benefits such as rates on accounts.

Today, many of those firms have joined the stock market or been sold to public corporations. And, said Siegel, those "surpluses" are now counted in the national accounts as "corporate profits." Same money, different label.

By his calculations, when you add all these surpluses together they are still well below the peak, as a share of national income, that they reached in the late 1940s.

Grantham, in response, questioned some of the data but didn't dispute the point completely. Stay tuned.

Meanwhile, the pair agreed on one thing. Large company "growth" stocks, they both said, are now much, much better value than the smaller company and "value" stocks everyone has been buying for the last seven years.

For these two to agree on anything is an event. If the past is any guide, it usually means they're right.

That would seem to be a good case for State Street's Large Cap Growth (ELG Quote) exchange-traded fund, which you can buy and sell like an ordinary stock. It closed Monday at $54.07 and has a 1.05% yield.

The ETF holds a basket of the biggest "growth" stocks. Top holdings are Microsoft(MSFT Quote), Procter & Gamble (PG Quote), Johnson & Johnson (JNJ Quote), Cisco(CSCO Quote), Wal-Mart (WMT Quote), Berkshire Hathaway (BRKA Quote), Pepsi(PEP Quote), Google(GOOG Quote), Time Warner (TWX Quote) and Comcast(CMCSA Quote).