21 Jul 2010 Bill Miller - July 2010 Commentary
Having a long term strategy may seem a quaint idea in a market dominated by high frequency trading, the 24 hour news cycle, the ubiquitous and shrill blogosphere, flash crashes, and where it is repeated as though divinely given that buy and hold is dead.

A few weeks ago I sent a little note to our staff about Exxon Mobil.4 It pointed out that Exxon Mobil was on the 52 week low list, and was actu- ally lower than it was during the depths of the panic in the fall of 2008. It had (and still has) a [dividend] yield greater than the 10 year treasury, trades at a multiple well below the market, has returns on capital above the market, has grown the dividend over 9% per year the past 5 years, and uses its prodigious free cash flow to shrink its shares outstanding by between 300 and 400 million shares per year. If it keeps this up for the next 15 years, it will be just about out of shares. Yet it languishes at 5 year lows.

The point here is simple: U.S. large capitalization stocks represent a once in a lifetime opportunity in my opinion to buy the best quality companies in the world at bargain prices.The last time they were this cheap relative to bonds was 1951. I was 1 year old then, but did not have then sufficient sentience or capital to invest.

12 Jul 2010 Video/Transcript: Bill Miller on Morningstar
Right now in the overall market, you are looking at a market, which is at the same level it was 12 years ago, just after the Long-Term Capital Management crisis. Very predictably as the market goes lower, in this correction we are down about 14%, bearishness goes higher. That's sort of counterintuitive, since the lower stock prices go, the higher the future rate of return, and the higher the stock prices go the lower the future rate of return...

30 Apr 2010 Bill Miller Sticks With Goldman Sachs as Damage Seen Limited
Legg Mason Inc.’s Bill Miller said he is sticking with his bets on Goldman Sachs Group Inc. because the fallout from the fraud accusations against the bank will probably be limited...

23 Apr 2010 Bill Miller - Value Trust Q1 2010 Commentary
One would think that following such a bountiful year in the equity market, investors would be positively giddy with excitement. Nothing could be further from the truth. Anecdotal evidence from discussions with a number of friends who are financial advisors reveals that most investors remain very nervous and highly skeptical of the market’s recovery. Flow of funds data supports the same conclusion, as flows into U.S. equity funds have only recently turned modestly positive, after being hugely negative all last year, while flows into bond funds have been massive.

In our view, investors’ love affair with bonds is understandable, but wrongheaded. We believe they are yet again falling into the behavioral trap of buying today what they should have bought five years ago. In so doing, they are setting themselves up for another major disappointment, as we believe bond holders face the prospect of a secular rise in interest rates. No less an authority on bonds than PIMCO’s Bill Gross, perhaps the best known bond manager of our era, is of the same opinion. In a March 25 Bloomberg Radio interview, Gross said that the almost three-decade bond market rally which saw 10-year Treasury yields drop from a high of 15.8% in September 1981 to a record low of 2.03% in December 2008 – may be drawing to a close. “Bonds have seen their best days,” Gross said. “Real interest rates are moving higher. That’s the main bear element in the bond market.” If individual investors realized they were piling into bonds at the same time that Bill Gross was eyeing the exits, it might give them pause.

In early 2009, in many respects, it required a considerable leap of faith to be bullish on equities. Among other things, one had to believe that frozen credit markets would thaw, that gapping credit spreads1 would normalize, that the banking system would survive and that the sickening year-long decline in global equity markets would one day end. Many investors were unwilling or unable to make that leap of faith and, as a consequence, have missed one of the most powerful upswings in stock market history.

In our judgment, no such leap of faith is required today to be bullish on equities. An objective evaluation of the available evidence should be sufficient to do so, in our opinion. Credit markets have healed, credit spreads have narrowed and the banking system has been recapitalized. Most economic indicators point to recovery, and corporate profits have snapped back strongly. So far, for many investors the evidence has not been sufficient to persuade them to be bullish. This merely tells us that the reptilian portion of the brain, the most primitive element that controls fight-or-flight responses, is a more powerful motivator of human behavior than the more recently evolved neo-cortex, which houses our higher brain functions, including our ability to reason.

The rise in the market of close to 50% over the past year and 75% from the lows in early March 2009 has contributed to investors’ view that they have missed the move in the market. Many companies however, especially the mega-cap names, are still priced at extremely attractive levels and boast strong balance sheets and a broadening reach globally, which will continue to provide for healthy growth rates.

22 Mar 2010 Legg Mason's Miller: Health Care Stocks to Outperform
Cheap U.S. healthcare stocks should perform well in the next few months now that legislative uncertainty about reform in the sector has been removed, said Legg Mason fund manager Bill Miller...

19 Mar 2010 Video: Bill Miller on SmartMoney
Fund manager Bill Miller has been on quite a winning streak lately. His mutual fund, Legg Mason Value Trust is up about 40% over the last year. So where is he looking now? Miller, a certified financial analyst at Legg Mason Capital Management, spoke with SmartMoney Magazine Editor in Chief Jonathan Dahl at the Charles Schwab 2010 Investor Outlook conference in Baltimore about his views on the economic recovery and which sectors he calls “fertile hunting ground.”

25 Jan 2010 Bill Miller - 2010 Market Commentary
What about the stock market? It’s clear that economically things are getting better, not worse. In addition to GDP numbers, credit spreads have returned to some semblance of “normal,” and the bond market has seen record refinancings. Yet stocks still sell below where they sold AFTER Lehman failed, when the world was falling apart. Even in the week after Lehman collapsed, the S&P 500 traded as high as 1255, over 10% higher than the market is today.

In the parlance of Jesse Livermore, the path of least resistance for the stock market is higher, yet investor resistance to stocks as evidenced by what people are actually doing with their money remains resolutely in favor of bonds, with money continuing to be redeemed from U.S.-oriented equity mutual funds, while flows into bond funds are running at record levels. This affinity for bonds over stocks is understandable when looking at the last 10 years, but perverse, we believe, when looking at the likely course of the next 10. Bonds crushed stocks the past 10 years, with riskless Treasuries returning over 6% per year, while stocks lost money on average each year of the past 10. Ten years ago stocks were expensive; now they are not.

In the next decade, the story is likely to be quite different. As the economy gradually (or quickly) recovers, the Fed will remove the extraordinary monetary accommodation it provided during the crisis, and shrink its balance sheet. A neutral fed funds rate would be in the 2.5% range or thereabouts, perhaps higher. Long term, the ten-year Treasury ought to yield about the nominal growth rate of GDP, so somewhere in the 4.5% to 5.5% range, leading to substantial losses in Treasuries and probably investment grade corporates as well. High-yield bonds ought to do better, but they had their big move last year, rising over 50% and providing the best returns relative to equities ever. All this, though, assumes benign inflation of 2% to 3%. If the inflation bears are right, bonds will be a disaster.

Stocks are quite a different story. After spending 10 years in the wilderness, high quality U.S. large capitalization stocks are cheap compared to bonds. Names such as Merck trade at 12x this year’s earnings and yield more than 10-year Treasuries. IBM has record earnings, trades at 12x this year’s expected results, buys back shares every year, and has grown its dividend 25% per year the past five years. Stocks have historically provided inflation protection that bonds cannot. Like Poe’s purloined letter, these values are hidden in plain sight.

12 Jan 2010 Video: Bill Miller on CNBC
Legg Mason Capital Management CEO Bill Miller, who beat the S&P 500 15 years straight, shares his investment strategy.

29 Dec 2009 Miller Makes Comeback After Three Years With Bet on Economy
“I was too optimistic at the beginning of the crisis,” said Miller. As the financial crisis deepened in 2008, “it was a very harrowing period,” Miller said.

“It is too early to pat ourselves on the back,” Miller said. “We’re just one year off of a very bad period, so we can’t get complacent.”

25 Nov 2009 The Comeback Kids
Smartmoney interview with Bill Miller of Legg Mason Value Trust...

23 Oct 2009 Bill Miller - Legg Mason Q3 2009 Commenatry
In 1933, consumption as percent of GDP was even higher than today, at 83%, and the savings rate was negative. The consumer deleveraged aggressively, pushing consumption as a percent to 73%, while the savings rate rose.Yet unemployment fell sharply, output grew rapidly, and the stock market went up over 100% from 1933-1937. There have been 8 times the consumer has deleveraged, and the market rose in 6 of those periods, with an average gain of 39%.

Since the bottom in March, the S&P 500 is up over 60%, and year to date returns exceed 20%, yet skepticism (if not downright pessimism) remains high. This judgment is not based on sentiment readings, or surveys. As market veteran John Mendelson often points out, it is not what people say that matters, it is what they do. And what they are doing is buying bonds and selling stocks.Through the first 9 months of this year, domestic equity funds had net outflows of $8 billion. During the first week of October, another $5 billion was redeemed. Bond funds, in contrast, had inflows of nearly $300 billion in the first 9 months of this year. Of the top 10 selling funds in America this year, 9 are bond funds and only one is a stock fund, and that one is the Vanguard 500 Index Fund.

Stocks are pretty unpopular, despite having had a decent year so far, and why not? “Riskless”Treasuries have trounced stocks over this decade, having risen 85%, while if you’d bought the S&P 500 at the end of 1999 and held it through Sept 30 of this year, you’d have lost 14% over the same period. No profits at all for a 10-year period of investing in the biggest U.S. stocks! Buy and hold is dead is a common refrain. Who wants to own a risky asset that does not go up, and one denominated in a currency that will surely go down? (We “know” the dollar will go down because it is on the front pages of the financial papers and magazines that it will do so. Everyone knows that—the only question is how far and how fast and will it collapse?)

22 Jul 2009 Bill Miller - Q2 2009 Commentary
Those looking for the economic numbers to validate the market’s move higher or for corporate executives to express optimism about the outlook are likely to continue to be disappointed. Economic numbers report the past, and corporations observe the present, while the market lives in the future. Corporations always express the most optimism about the outlook at the top, and the most pessimism at the bottom. Markets are about expectations, and expectations about the future are improving, on balance, and so are the markets. Our friends at GaveKal Research3 have reminded us there is a certain rhythm to the remarks surrounding recessions and recovery. The psychological cycle goes something like this: first it is said the fiscal and monetary stimuli are not sufficient and won’t work. When the markets start up and the economic forecasts begin to be revised up — where we are now — the refrain is that it is only an inventory restocking and once it is over the economy will stall or we may even have a double dip. Once the economy begins to improve, the worry is that profits will not recover enough to justify stock prices. When profits recover, it is said that the recovery will be jobless; and when the jobs start being created, the fear is that this will not be sustained.

Financials have been leaders off the bottom, just as they were off the bottom of the last banking crisis in the late 1980s and early 1990s. Banks still face mounting credit losses for the next year or so, but that should not impede their performance in the market, as it did not in 1991 when the same thing occurred. Pre-tax, pre-provision earnings at banks continue to rise, setting a new record last quarter, which means that banks are likewise set to report record results as the economy improves. They are a candidate for being among the leadership groups as they are under-owned, widely disliked, very inexpensive on price-to-book6 value or to normalized earnings, and the system has seen massive capacity withdrawn due to the disappearance of Bear Stearns, Lehman, Washington Mutual, and Wachovia. The powerful results of Goldman Sachs this quarter may be a preview of things to come in that sector in the next few years as the economy recovers.

I have not said anything about the risk of inflation, in part because it is remote over the next few years. But it is a common worry, and a constant topic of discussion. The issue arises because of the massive deficits being run now and for the next couple of years, and the inexorable growth of entitlements programs, which will drive debt-to-GDP ratios north of 100%, from the current level of around 65%, for the first time since World War II. Many believe we will have no choice but to inflate our way out of those obligations. I disagree and think the major threat remains deflation, not inflation. The U.S. government ran large deficits in the 1930s and even larger ones during World War II reaching nearly 40% of GDP. Yet except for a one-time rise in prices after wage and price controls were lifted when the war ended, there was almost no inflation for 30 years. Japan’s debt-to-GDP ratio is 170% now, and its problem is deflation, not inflation. Inflation can only arise if labor or business, or both, have pricing power. Labor is still around 70% of the cost of doing business, and there won’t be any inflation there with unemployment at 9.5% and rising. Capacity utilization is 68%, among the lowest in the postwar period. Businesses will have no pricing power until that number is at least over 80%, a long way away. If the so-called new normal is growth of between 1 and 2%, there will be no inflation.

Bull markets typically begin when the following four conditions are present: the economy is bottoming, profits are bottoming, the Fed is stimulating, and valuations are low. That’s where we are now. The path of least resistance, as Jesse Livermore used to call it, is higher.

06 Jul 2009 It's Miller Time Again; Has New Streak Begun? Value investor Bill Miller talks to IBD
The last couple of years have been the worst in U.S. market history. But historically, every time the compound rate of return for the market has been negative or zero, the next 10 years have been among the best. People are unhappy. This is exactly the time to put money into U.S. large caps, which are at their cheapest since 1982. There is $4.7 trillion on the sidelines earning zero. That money will come back in. But if you wait for the market to be up a lot to prove itself, it will be too late.

07 May 2009 Legg Mason's Bill Miller Sees Opportunity In Financials
The Standard & Poor's 500 Index will probably be 20% to 30% higher by the end of the year, perhaps more, and U.S. financials will likely offer the greatest return over the next two years...

Looking at the overall equity market, "everything is on sale," Miller said...

Among financials, Miller currently likes Wells Fargo (WFC), Capital One Financial Corp. (COF), American Express Co. (AXP) and in the broader insurance area, Aflac Inc. (AFL) and Prudential Financial Inc. (PRU)...

02 May 2009 Bill Miller, Q1 2009 Market Commentary
Let’s start with what banks do. Banks are, broadly speaking, in the business of collecting liquid short-term assets in the form of deposits and turning them into illiquid long-term assets in the form of loans. Not only do they take our liquid assets and make them illiquid (they do retain enough liquidity to meet anticipated demands from depositors for cash), they create many more loans than they have capital to support if too many of the loans go bad. This leverage is about 10 to 1. Since the assets are 10x the capital supporting them, it doesn’t take more than third-grade arithmetic to conclude that if the value of the assets they hold fall more than 10 percent on average, they are “insolvent” (the quotation marks are there because the whole argument of those who support some kind of nationalization turns on confusing the different predicate logics of the single term “insolvent”). Last year the S&P 500 fell 38%, which is a reasonable proxy for how much asset values declined on a mark-to-market basis. Ergo, the system is insolvent and either needs to be nationalized or it needs, say, a trillion dollars of new capital (which was an estimate from a bank analyst last week).

When I was in grad school well over 30 years ago, I had a professor who would occasionally mark “ISSW?” next to what I had thought was a particularly clever argument. It stood for: “If so, so what?” and might also be appropriately appended to the argument about insolvency. Sometimes those who make that argument say the banking system is “technically insolvent,” which begins to shed some light on the “so what” part. The notion of insolvency, as typically understood, means you don’t have the wherewithal to meet your obligations as they come due. But that is certainly not the case with the banking system as a whole, or with any major bank. Banks, in fact, are flush with cash, have deposits flowing in, and have $800 billion of EXCESS reserves on deposit at the Fed. Most of the big banks that have reported results recently are profitable (Wells Fargo had record profits), and most improved their capital ratios. Not surprisingly, the same analysts who expected the banks to report losses in the first quarter dismiss the earnings as due to nonrecurring items, unusual market conditions (very wide spreads) and accounting gains. Of course, when those same conditions led to large losses being reported last year, those losses were considered all too real.

Consider the issue of mark-to-market accounting, which has been the subject of so much controversy. Supporters say it serves the goal of transparency and helps illuminate the true financial condition of the enterprise. Opponents say it does no such thing, just the opposite, in fact, confusing market prices with underlying values, and injecting needless volatility and confusion into bank financial statements.

The irony is that we have been here before: the same arguments were made in the 1930s when for most of the decade banks marked assets to market. As asset values fell, depositors fled, banks collapsed, and the depression wore on. In July 1938, the Federal Reserve bulletin announced that mark-to-market accounting was being suspended, and that bank assets should be valued on long-term safety and soundness, and not daily price fluctuations. That was also the time the uptick rule was instituted to slow down short selling. Coincidence or not, those two policy measures coincided with the end of the vicious bear market of 1937 and 1938. It is eerie how the relaxation of mark-to-market accounting rules a few weeks ago and the announcement that some form of uptick rule would be reinstituted also coincided with the bottom of this bear market. Policies and rules matter.

A couple of other points on mark-to-market: Showing market values, or estimated market values, for assets is a good thing. But requiring bank capital ratios to be adjusted accordingly is not. Leaving aside the current controversy, consider that whenever we have another asset bubble and irrational exuberance returns, banks will have to mark up their assets, no matter how absurdly overpriced they are. It is also telling that the bears appear to want only those assets that can be marked down marked to market. None are calling for buildings built years or decades ago whose value is far in excess of carrying value to be marked up. And none has ever been heard to call for the deposit bases of major banks to be marked to market, which would generate billions of excess capital for those banks if the deposit franchises were carried at market...

02 Mar 2009 Legg Mason Value Trust - Q4 2008 Report
This financial crisis began with housing in the U.S., but has spread to encompass the global economy. It will not end until the financial system is stabilized and credit flows are restored. As Federal Reserve Board (“Fed”)E Chairman Bernanke said in an important speech on January 13, “History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively.” I believe if 2009 is a bad year for U.S. equities, it will be a bad year for financials, and if it is a good year for equities, I believe financials will outperform.

Quoting Chairman Bernanke again: “The global economy will recover, but the timing and strength of the recovery are highly uncertain. Government policy responses around the world will be critical determinants of the speed and vigor of the recovery.” The question for investors centers on the evaluation of policy and its impact on securities. So far the picture is, at best, mixed.

The problem with credit, by the way, is not that banks are not lending, a statement one reads almost every day in the Wall Street Journal or the Financial Times, or hears from some politician or other. The facts are, according to the Fed, that bank lending has grown 5.7% since the recession began in December 2007, and consumer loans grew 8.9%. Only home equity loans actually declined.

The problem with credit is that it is far too expensive to make it economic to use it to grow. With investment grade debt having yields greater than the growth rate of nominal U.S. gross domestic product (“GDP”)G, the cost of new debt in the system exceeds the ability to earn enough to pay for it. Hence, the deleveraging going on. The government, on the other hand, can borrow at half the growth rate of nominal GDP, and hence, it is the government that will, and should, borrow aggressively to invest in the country’s future.

All of this was explained a generation ago by Keynes when we last had a crisis like this, and anyone seeking to understand it should either go to the source, or to the second volume of Robert Skidelsky’s monumental three volume biography.

I remain optimistic that the new administration, which is staffed with first-rate financial talent, coupled with the Fed, will craft policies that will be effective in stabilizing the financial system and restoring the flow of credit.

Despite the raggedy start, I also think this will be a pretty good year for equity investors. Last year was the worst for U.S. (and most other) stocks since the 1930s. Pessimism and gloom abound. Short-term trading has replaced long-term thinking. The consensus is for economic growth to resume in the second half of the year but, of course, no one knows. But growth will resume, and when it does, equity prices will be much higher, in my opinion. Valuation-based strategies had a strong December and early January and we performed very well, as one would expect when that is happening. The sell-off in Financials and the market in the past two weeks has interrupted that trend, and the S&P 500 Index has now had its worst start to a new year ever. Fear has returned to the fore.

In my opinion, the long-term opportunities for the Fund have never been better and the overall quality of the portfolio has never been higher. Financials are now under 10% of the market’s capitalization for the first time since 1992, which was a great time to buy Financials. In my opinion, this is also the best time to buy quality in my investing career; it has never been cheaper and we continue to look for, and to find, names with excellent financial strength, good and growing dividends, leading positions in their industry, and trading at 5- or 10-year lows and at historically low valuations. We believe this should lead to quite satisfactory results over the next 5 to 10 years.