Stock rally is "dash for trash": hedge manager Bullman

LONDON (Reuters) - Speculation rather than economic fundamentals has driven this year’s sharp rally in stocks, and equities may now be 20 percent overpriced, said the managing partner at hedge fund firm Bullman Investment Management.

Nick Bullman, who told Reuters he has this week placed bets on falling share prices, is concerned that government stimulus packages have not revived bank lending as much as hoped and that conditions remain as tough for companies as they did last year.

“The rally has been a ‘dash for trash’ based on speculation ... On Wednesday (I) went short on the S&P (500) and financials via ETFs (exchange-traded funds),” he said in an interview on Friday.

“Stocks that were on their knees have risen to pre-Lehman levels, but the fundamentals haven’t changed at all. Credit card debt in the U.S. is getting worse. I think the U.S. equity market is potentially up to 20 percent overvalued over the short term.”

The S&P 500 .SPX index has risen more than 50 percent from a March low on hopes the recession will not be as severe as some had originally feared and that government action will help stimulate an upturn.

However, Bullman said he is concerned that quantitative easing -- whereby central banks flood the banking system with new money by buying up assets from banks -- will eventually push up inflation in some assets.

This has led him to buy into gold, often viewed as a hedge against inflation.

Data on Tuesday showed UK inflation unexpectedly held steady in July at 1.8 percent, above forecasts of a fall to 1.5 percent but below the Bank of England’s 2 percent target rate.

“Eventually quantitative easing is highly inflationary, but the second-round effects can take longer than people imagine,” he said.

“I think inflation will come through non-financial assets such as food, clothing, agriculture, oil (and) commodities.”

The Bullman Global Fund is down 8.1 percent in the first six months of the year. It rose 7.3 percent last year, when the average hedge fund lost around 19 percent, according to data provider Hedge Fund Research.

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Editing by John Stonestreet