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[daytrader2008]

Shilling: Stocks Will Plunge 32 Percent

Friday, May 15, 2009 5:08 PM

By: Dan Weil

Economist extraordinaire Gary Shilling says that a sharp drop is in store for stocks, thanks to continued economic weakness.

“We think that you’ve got to approach things very cautiously,” he tells Yahoo! Finance.

With the recession running at least through next year, Shilling anticipates earnings of $40 for the S&P 500 Index.

“Normally at the bottom you have a 10 or 12 multiple on that,” he explains.

“With low interest rates, 15 is probably possible. That would put you at 600 on the S&P 500.”

Indeed, that’s Shilling’s target, which represents a 32 percent drop from current levels.

“I don’t think we’re through with this sell-off in stocks,” he says.

“The only place to hide is really my 25-year favorite: 30-year Treasury bonds. They’ve just been a stellar performer.”

To be sure, with Treasury prices having jumped so high, they aren’t so compelling a buy anymore, Shilling acknowledges.

“I still own them, but I’m not sure I’d buy them at this point.”

His macro-market view: “We’re basically long the dollar, short commodities, short stocks and say long Treasuries.”

As for commodities, foreign currencies, and emerging markets, “they were supposedly at least neutral if not negatively correlated with U.S. stocks,” Shilling notes. “Guess what, the correlations are 1.0 on all of them.”

He’s not the only expert who’s bearish on stocks. Doug Kass, president of money manager Seabreeze Partners, says the market faces a “vicious correction.”

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