Faber Says S&P 500 May Drop 20% on

Economic, Earnings Prospects

January 27, 2010, 10:25 AM EST

By Rita Nazareth

Jan. 27 (Bloomberg) -- The Standard & Poor’s 500 Index may retreat 20 percent from a 15-
month high because stocks are expensive given prospects for economic and profit growth,
Marc Faber said.

The benchmark index for U.S. stocks, which closed at 1,150.23 on Jan. 19, may fall to 920,
said Faber, 63, who recommended buying stocks in March, before the biggest rally since the
Great Depression. The index surged 70 percent from a 12-year low in March before dropping
5.1 percent to 1,092.17 through yesterday. The S&P 500’s price-earnings ratio had jumped to
25, the highest since 2002, data compiled by Bloomberg show.

“The market has become overbought,” Faber, who publishes the Gloom, Boom and Doom
report, said in a phone interview from Switzerland. “There isn’t a meaningful improvement in
the economy taking place. The economy may disappoint somewhat in the next few months.
The statistics that are being published are very questionable. The economy has stabilized, but
isn’t really expanding.”

Consumer spending, which accounts for about 70 percent of the economy, probably increased
at a 1.8 percent annual rate in the fourth quarter after rising at a 2.8 percent pace in the
previous three months, economists said before a Jan. 29 report from the Commerce
Department. The jobless rate held at 10 percent in December, near a 26-year high, the Labor
Department said on Jan. 8.

Not That Great

“With unemployment staying at a relatively high level and with the revenue side being weak,
I don’t think that corporate profits will be that great in 2010,” Faber said. “Basically, the
profits have been boosted by aggressive cost-cutting. The revenue side of corporations is
weak.”

A record nine-quarter profit slump for S&P 500 companies is projected to have ended in the
fourth quarter with a 73 percent increase in earnings. Sales at the 122 S&P 500 companies
that have reported results for the period since Jan. 11 have increased 13 percent, Bloomberg
data show.

Faber, who advised investors to buy U.S. stocks on March 9, when the S&P 500 reached its
lowest level since 1996, said the gauge may end the year lower than the close on Dec. 31.
The index rose 23 percent in 2009, ending the year at 1,115.10.
“This year, investors will never achieve returns as high as in 2009,” he said. “Stocks are
relatively high compared to the fundamentals.”

Financials, Commodities

While Faber said he cannot predict which industries will be the laggards, he highlighted
weakness among financial and commodity-related companies.

“Financials have already been quite weak,” Faber said. “It’s kind of a warning sign for the
market. They may weaken further, especially the banks. Also commodities-related stocks
could weaken somewhat as commodity prices ease.”

The S&P 500 Financials Index rallied 146 percent from a 17- year low in March before
dropping 5.2 percent last week as President Barack Obama called for limiting the size and
trading activities of financial institutions as a way to reduce risk- taking and prevent another
financial crisis. Measures of energy and raw-materials and energy shares in the S&P 500
have retreated more than 1.5 percent in 2010.

Faber correctly predicted in May 2005 that stocks would make little headway that year. The
S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500
was more likely to fall than rise because the threats of faster inflation and slower growth
persisted. The S&P 500 climbed 10 percent between then and its record of 1,565.15 seven
months later.

In his interview this week, Faber said that the S&P 500 may rise as high as 1,250 or 1,300
this year before declining again.

“Usually March, April are seasonally strong months,” he said. “We’ll get a rebound. In
general, high-quality and large market capitalization stocks are reasonably priced considering
you have zero interest-rates. As these markets go down, the high-quality, large-market-cap
stocks will go down less than the smaller-cap stocks.”

Marc Faber will be live in London at the Global Financial Trading Day with Jim Rogers and Vince 
Stanzione on Friday 19th March 2010. For more details and to book please go to 
www.traders2010.co.uk