S&P 500 Plunge Fails to Shake Gabelli on Technology

The combination of record earnings growth and the fastest withdrawals from mutual funds since before credit markets froze is creating opportunities for Mario Gabelli.

Apple Inc. and Google Inc. are poised to rally after technology companies in the Standard & Poor’s 500 Index fell 7.8 percent this year and bearish options on chipmakers climbed to the highest level since 2003, according to Howard Ward of Gamco Investors Inc. Gabelli’s firm says falling valuations will offset more than $560 million of redemptions from global technology funds at the end of January, a 71-week high.

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The biggest rally since the Great Depression has given way to a 7.3 percent retreat in the S&P 500 since Jan. 19, erasing $1 trillion from U.S. markets. Pacific Investment Management Co. Chief Executive Officer Mohammed El-Erian says the losses will get worse, while Ward and Carlyle Group’s David Rubenstein say prices are low relative to earnings and governments have eliminated the chance of another credit crisis.

“There’s always going to be a reflexive action, a knee- jerk reaction, but it’s not a signal that the bull market is over,” said Ward, who helps oversee $22 billion in Rye, New York. “I see rising earnings this year and next year pulling the market higher. There’s a good a chance the S&P 500 sees 1,300 before the year is out.”

Earnings Slump

The benchmark gauge for U.S. equities has retreated 7 percent to 1,066.19 since Alcoa Inc. reported results on Jan. 11, compared with average gains of 9.1 percent for the last three earnings seasons, data compiled by Bloomberg show. Stocks dropped as governments in the U.S. and China acted to limit banks and investors seeking the shelter of fixed income helped corporate bonds beat shares by the largest margin in a year.

Futures on the S&P 500 rose 0.5 percent to 1,065.10 as of 4:06 a.m. in New York.

Equities declined worldwide on Feb. 5 after the U.S. Labor Department said employers unexpectedly cut 20,000 jobs in January. Concern that Greece, Portugal and Spain will slow global growth sent the MSCI World Index in 23 developed countries down 3.8 percent on the final two days of last week, the biggest slide since March, data compiled by Bloomberg show. Speculation the European Union will propose a solution to the budget deficit in its smaller economies prompted a rally in U.S. stocks in the final hour of trading.

Group of Seven finance ministers pledged at a Feb. 6 meeting in Iqaluit, Canada, to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget shortfalls. The G-7 officials, who oversee about half of the world economy, are betting that spending now will generate enough growth to help erode their fiscal imbalances and make it easier for them to pull back later.

‘Just a Precursor’

The four-week drop in the S&P 500, the longest streak since July, has reduced its rally since reaching a 12-year low in March 2009 to 58 percent. Bears say the failure of stocks to rise even as companies beat analysts’ earnings estimates at the second-fastest rate on record may mean the advance is finished.

“Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian wrote in a Bloomberg News column. “Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S.”

Technology stocks, whose 60 percent increase was the biggest among 10 industries in the S&P 500 last year, have slumped 7.8 percent in 2010 for the third-largest decline. Fourth-quarter results from software developers, computer producers and Internet companies weren’t enough to stem the retreat even as 45 out of 50 companies that reported since Jan. 11 exceeded analysts’ estimates.

Bearish Options

The number of bearish options on the Semiconductor HOLDRs Trust jumped to 1.71 times bullish contracts at the end of January, a six-year high, even though fourth-quarter earnings at S&P 500 companies are poised to rise 78 percent from a year ago, the biggest jump on record, data compiled by S&P and Bloomberg show. Profits are breaking a nine-quarter streak of declines.

Ward, the chief investment officer for growth equities at Gamco, is scooping up Cupertino, California-based Apple, maker of the MacBook laptop and iPhone, and Google, which runs the world’s most popular Internet search engine in Mountain View, California. He’s betting companies will boost spending on computer equipment to match demand as the economy rebounds.

Morgan Stanley estimates that 38 percent of the companies it follows intend to raise capital spending over the next three months, up from a low of 3 percent in August, according to a Jan. 15 survey from the New York-based bank. Technology stocks trade at 12.8 times estimated profit for 2011, half the median valuation since 1994, data compiled by Bloomberg show.

‘Spare No Expense’

Rubenstein, who helped start private-equity firm Carlyle in 1987, says energy producers are attractive as fuel prices rise with the expansion in emerging economies. Health-care companies are a good bet because aging Americans will “spare no expense” to stay healthy, he said at the annual World Economic Forum in Davos, Switzerland, last month.

“The U.S. economy has largely recovered in the view of professional investors,” Rubenstein said in a Jan. 27 interview. “There are a lot of great opportunities we see in the United States and abroad.”

More than 73 percent of S&P 500 companies that have reported fourth-quarter profit beat analysts’ estimates, the second-highest percentage since Bloomberg began tracking the data in 1993. A record number of companies exceeded forecasts the previous earnings season.

The performance has helped push down valuations in the S&P 500 to an average of 18.3 times earnings, from as high as 24.4 at the end of 2009. Technology shares in the index trade for 18.5 times profits in the last 12 months, compared with 25.8 when the U.S. market peaked in the fourth quarter of 2007.

Cutting Exposure

Whitney Tilson, whose mutual fund at T2 Partners LLC in New York has beaten 97 percent of its peers in the last year, says prices already reflect a recovery in earnings as the S&P 500’s valuation has almost doubled since March 9. T2 is about “25 percent net long” equities, the lowest level in more than 11 years as a fund manager, he said. Tilson owns shares of the world’s biggest companies on speculation they’ll hold up better should the stock market keep falling.

Investors pulled more than $9 billion out of global equity funds in the week through Jan. 27, the most since October 2008, according to data compiled by Cambridge, Massachusetts-based EPFR Global. Another $981 million was taken out last week, the data show.

Extremely Conservative

“We’re positioning ourselves extremely conservatively,” Tilson said in an interview from New York. “Given how much stocks have rallied since March, it’s hard to imagine a big bull market continuing from these levels.”

Ward, whose forecast that the S&P 500 may reach 1,300 this year implies a 22 percent surge, disagrees. The slump in equity prices in the past month will reverse as profit forecasts for the next two years climb, he says. Earnings for the S&P 500 are projected to grow at the fastest rate in two decades, surging 61 percent from 2009 to $93.89 a share by 2011, according to analysts’ estimates compiled by Bloomberg.

“We’re getting greater evidence that the economy is beginning to kick into gear,” he said. “There’s every reason to expect a good year for stocks.”

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