BT: Global earnings bubble is forming: Dr Doom (13 Sep 2008)

Global earnings bubble is forming: Dr Doom

By LYNETTE KHOO

AN earnings bubble is in the making and many companies will see earnings disappoint next year, warns Marc Faber, aka Dr Doom.

Dr Faber, who earned his nickname from his often contrarian approach to investing, was speaking at the OCBC Global Treasury Regional Economic and Business Forum yesterday.

'I don't think we have a valuation bubble at this point in time. Stocks have been reasonably valued,' he said. He noted that between 1990 and 2007, corporate earnings grew rapidly as a result of speculative gains, leverage and interest rates, but that this trend has since reversed. 'I think we have an earnings bubble in the world, and by next year, many companies will disappoint,' he added.

While some analysts are still estimating real earnings per share of S&P companies next year to be US$110, Dr Faber sees EPS hovering around a lower US$70.

Once bullish on commodities, he has turned cautious and expects prices to correct further in the short term. He advises investors to hold cash, gold, or other physical assets such as silver. But he prefers to wait for a further correction in gold prices to US$600 an ounce before increasing his position in gold meaningfully. Dr Faber correctly predicted in March that commodity prices would fall in the second-half because of slowing global demand. But he believes the long-term secular uptrend in commodity prices remains intact.

He also reckons that commodity currencies have been oversold and the US dollar overbought amid the recent easing of oil prices. Over the next few months, commodity prices should rebound and lift commodity currencies such as the Australian and New Zealand dollars.

Along with rising commodity prices, Dr Faber expects inflation and interest rates to rise over the next few years. 'In the next 20 years, inflation is more likely than deflation,' he said.

While equities may see further downside, he is bullish about Singapore stocks such as CapitaLand, SPH and ST Engineering.

'I own more Singapore shares than any other shares,' he said.

'I don't think these stocks will go up. I think they will go down. But at least I get more yield from them than US treasury bonds.'

While the Singapore economy and asset prices may slow in the short term, he reckons it is unlikely that Singapore will suffer a deep recession given its sound infrastructure.

Dr Faber founded the investment, fund management and brokerage firm Marc Faber Ltd, and publishes the Gloom, Boom & Doom Report.

He has been a strong critic of the US Federal Reserve's bailouts. Commenting on the latest rescue of Fannie Mae and Freddie Mac, he said: 'I'm not sure it's such a great plan. I think the best is to split them up into smaller units.'

But the Federal Reserve is likely to bail out any investment banks in trouble given the implications any collapse would have on the derivatives market, he added.

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