Leuthold's Midterm

Steve Leuthold, chairman and investment strategist for the Leuthold Group, a Minneapolis investment research firm, doesn’t always make the right calls, but his mid-July decision to pull $400 million out of equities turned out to be spot on. Just five trading days later, the stock market stumbled into its worst week in nearly five years.

The reason for Leuthold’s big swing? His “major trend index,” the sum of an intimidating stack of 180 market indicators, was suddenly headed south. That kicked up a rush of selling by traders at his Minneapolis-based Leuthold Group, enough to tug their equity exposure down from 50 percent to 30 percent of their overall portfolio.

The stock market’s tailspin arrived, for the most part, on Leuthold’s schedule. He had predicted in his annual forecast last December that the Standard & Poor’s 500 index would rally from 1,412 then to a high of 1,500 to 1,550 in the first half of 2007. The peak, 1,552, came on July 13. Then came the plunge. “Well, you can’t be perfect,” he jokes. “Sometimes you get lucky.”

Leuthold expects the Standard & Poor’s 500 to bottom out at 1,250 sometime in the second half, then rebound to 1,325 or 1,350 by year’s end.

Stocks occupy just one precinct in Leuthold’s forecasting universe. Each December, he sizes up the prospects a year out for some of the nation’s most closely watched economic indicators. Six months later, he issues a “half-time report,” grading his own outlook. Investors in the Leuthold Group’s portfolios get both reports.

Leuthold’s forecasts, which sometimes predict the direction and timing of a particular indicator rather than specific numbers, lack the formality of most economists’ outlooks. But his mastery of long-term securities market cycles, his punchy prose, and his often contrarian approach make for good reading. Forecasting is typically freighted with pretentious jargon—slogging through the verbiage can be like getting a root canal.

Steve Leuthold pumps pizzazz into his research. Over the years, he and his staffers have dreamed up colorfully named stock indexes designed to lead investors to undervalued stocks. There was Gimme Shelter, which tracked depressed housing stocks; the Inflation Hedge Index, which identified stocks benefiting from inflation; and Buy Texas, which featured stocks of Texas companies beaten down by energy industry havoc. One of the latest of these indexes is his Undervalued and Unloved fund (Quotron/ADP: UGLYX), which seeks to unearth doggy stocks poised to turn into tigers.

So how is Leuthold’s 2007 shaping up compared to his December forecast? “Better than average,” he argues. Here’s a look at his midyear review of how his forecast has played out, plus some of his provocative opinions.

Interest Rates

In December, Leuthold envisioned the 90-day Treasury bill rate ranging between 4.55 and 5 percent for the year. On July 1, it was 4.73 percent. He expected long-term rates to rise a full percentage point over the year. On July 1, rates on long-term Treasury bonds had risen about half that amount, but 20-year corporate rates had fallen. Now, inflation fears and rising credit risks have led Leuthold to ratchet up his year-end forecasts for all of these rates. If he’s right, brace yourself for more credit-bubble jitters: “The ‘L’ in [LBO] stands for ‘leveraged,’” he says, “and I’m afraid the ‘B’ [‘buyout’] may come to stand for ‘bankrupt.’”

Economy

Leuthold, in his December outlook, anticipated a 2008 recession. That’s still in his crystal ball. He thinks consumers won’t be able to sustain their high spending levels, ushering in the nation’s first recession since 2001.