Stocks $1 Trillion Loss No Reason to Sell for Funds

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By Rita Nazareth and Whitney Kisling

April 28 (Bloomberg) -- The largest equity-market declinesince February is failing to spur selling by the biggest U.S.money managers, who say losses will prove temporary as gains inearnings make stocks too cheap to pass up.

Greece and Portugal’s credit downgrades yesterday are noreason to doubt forecasts for profit growth exceeding 50 percentat Standard & Poor’s 500 Index companies through 2011, saidKenneth Fisher, who oversees about $39 billion as chairman ofFisher Investments. Almost $1 trillion of global equity valuewas erased on concern rising public debt will spur defaults,derailing the global economy, data compiled by Bloomberg show.

“It’s a little bit like yelling fire in a movie theater --it doesn’t mean the place is going to burn down,” said Fisher,who favors mining companies, computer makers and retailers, inan interview from Woodside, California. “The quality ofearnings is exceptional. Earnings are coming in overwhelminglyabove expectations. I don’t see any signs that will stop.”

While the global rally restored more than $21 trillion toequity markets since March 2009, investors are growing moreskittish about the Euro region, which combined makes up theworld’s second-largest economy behind the U.S. The Euro Stoxx 50Index has fallen 4.3 percent this year on concern about growingdeficits across the region. The MSCI Asia-Pacific Index gained 4percent in 2010 and the S&P 500 increased 6.2 percent, accordingto data compiled by Bloomberg.

Debt Downgrades

The S&P 500 rose 0.5 percent to 1,189.38 as of 9:52 a.m.today in New York. The MSCI World Index of 23 developedcountries slipped 0.5 percent, paring a 1.3 percent retreat.

The U.S. gauge lost 2.3 percent to 1,183.71 yesterday afterS&P lowered Greek debt to junk status and Portugal was cut twosteps. The Euro Stoxx 50 slid 3.7 percent and the euro droppedbelow $1.32 for the first time since April 2009. Greek two-yearnote yields surged to a record of almost 19 percent andPortugal’s jumped to 5.7 percent as credit-default swaps onEurope debt reached the highest ever.

Companies in the S&P 500 may increase profits 29 percentthis year and 19 percent in 2011, the biggest two-year advancesince 1998, estimates from more than 1,500 analyst compiled byBloomberg show. The index is priced at 14.8 times the averageprediction for 2010 income. Should the forecasts prove accurate,the S&P 500 would be trading at its lowest multiple since the1990s, excluding the six months after New York-based LehmanBrothers Holdings Inc. declared bankruptcy in September 2008.

Eight-Week Rally

Yesterday’s plunge, which came during congressionaltestimony by executives of Goldman Sachs Group Inc. over themarketing of subprime mortgage securities, follows eight weeksof gains for the Dow Jones Industrial Average, the longeststreak since 2004.

“I have been cautious since the third week of April,thinking that we were setting up for a correction of somewherebetween 5 and 10 percent,” said Jeff Saut, the chief investmentstrategist at Raymond James & Associates, which manages $230billion in St. Petersburg, Florida. “Greece, Goldman don’tchange my long-term view at all. We’re in a profit cyclerecovery. Profits are exploding at the biggest ramp rate indecades and we’re playing to that tune.”

The cost of options to insure against losses in the S&P 500as measured by the Chicago Board Options Exchange VolatilityIndex climbed 31 percent yesterday, to 22.8 from 17.5, thebiggest increase since October 2008.

DuPont, UPS

DuPont Co., the Wilmington, Delaware-based chemical maker,Atlanta-based United Parcel Service Inc., the largest package-delivery company, and Dearborn, Michigan-based automaker FordMotor Co. reported profits or sales yesterday that toppedanalyst estimates, and their shares fell 4.4 percent on average.The declines show Europe is investors’ focus, said DavidRosenberg, chief economist for Gluskin Sheff & Associates.

“On the Greece file, the big concern now is contagionrisks,” Rosenberg said from Toronto. “The headlines were allabout Greece, but the real action was in Portugal -- and it’snot pretty. So what we are talking about is heightened riskpremiums at a time when a 17 VIX index was underscoring a veryhigh level of confidence over the outlook for the economy.”

Almost 80 percent of S&P 500 companies reporting resultsthis earnings season have topped analysts’ forecasts, datacompiled by Bloomberg show. While profits may be outstrippingprojections, sales are matching analysts’ predictions when bankand brokerage results are excluded, according to Rosenberg’sdata.

IMF Estimate

The International Monetary Fund last week raised itsforecast for worldwide growth this year while cautioning that afailure to contain public debt may have “severe” consequences.Global economic expansion may reach 4.2 percent in 2010, thefastest rate since 2007, the Washington-based fund estimated.“Fiscal fragilities” pose the biggest threat to reaching theforecast, the IMF said April 22.

“I’m not saying we’re out of the woods,” said John Lynch,who helps oversee $155.5 billion as chief market strategist atEvergreen Investments. “The recovery is real and profits arestrong. The cyclical strength is still very powerful. We’ve justgot to make sure that the long-term challenges don’t derailit.”

To contact the reporters on this story:Whitney Kisling in New York at [e-mail];Rita Nazareth in New York at [e-mail]