Bear turns bullish

How bad is the market? It's so bad famous bear Jeremy Grantham thinks stocks are worth buying.

That's got to be really bad. Grantham hasn't just been cautious about the stock market for years. The chairman of Boston's Grantham, Mayo, Van Otterloo Co. was the kind of perma-bear people like me called when they wanted a really gloomy comment about equity prices. Since the 1990s.

He was a reliable, articulate voice explaining why you were blind or nuts or both if you couldn't see how overpriced the stock market had become. In recent years, Grantham argued that practically every market around the world had become too expensive and flat out dangerous. We all have the portfolio scars that prove he was right.

Now Grantham, whose firm invests $107 billion, is buying stocks. Of course, some other notable people also see long-term opportunities in the stock market. But I can't think of any who have changed their point of view to such a striking degree.

"Most of the damage is behind us now and the US market is trading exactly at fair value," Grantham, 70, said in a recent conversation. In fact, stocks have lost about 7 percent of their value since I spoke to him, due mostly to the punishing setbacks of the past two days. Overall, the stock market has plunged about 42 percent from its peak in October 2007.

One catch to his market endorsement: The fact that stocks are a value at these prices does not guarantee they will appreciate directly from here. Grantham reads history and believes the market will likely overshoot on the way down and stocks will become even cheaper before they recover. He looks at the Standard & Poor's 500 index, which closed yesterday at 904.88, and believes it could sink next year to 800 or even lower before bouncing back.

Still, he's buying some stocks now. Grantham concedes he's probably too early, but tells investors stocks are cheaper than they have been in 20 years.

"With the S&P at 900, we can say that stocks are cheap in the US and cheaper still overseas," Grantham wrote to clients last month, when the S&P index stood almost exactly at its current level.

He points to three particular kinds of stocks as prime opportunities. Stocks in emerging markets and shares of Japanese companies blink on his computer screen as exceptionally cheap. Shares of blue chip US companies also pop up as big values.

Grantham believes the world's financial crisis has passed its most critical stages but worries plenty about a serious economic recession he sees straight ahead. "We've probably stumbled into doing enough things right that the meltdown is finished," he says. "We're in for a bit of a recovery followed by a meat grinder."

Like lots of other people, he thinks government should stimulate the economy by spending bushels of money. The sooner the better.

Grantham sees all kinds of jobs that would do the trick and serve as useful investments as well. That means roads, alternative energy, and even better railroad transportation. And he doesn't mind if government raises taxes to do it.

"The idea that tax and spend is a bad idea is completely wrong," says Grantham. "It may be a bad idea 90 percent of the time, I shouldn't doubt it. But now it's a terrific idea, especially the spending part."

For a moment, I thought Grantham had completely lost touch with his inner grump. Then I mentioned two of his favorite targets, hedge funds and private equity firms. He sounded like his old self again.

Grantham has long said most hedge funds and private equity firms offered few bargains for their investors. Higher profits were achieved with greater risks, less liquidity, or borrowed money that jacked up otherwise normal returns. That doesn't seem like such a good deal anymore. "When the smoke clears," he said, "people will reassess."

Listen to Grantham and you hear a forecast that sounds like a rough ride for everyone over the next year and perhaps beyond. But Boston's most reliable bear has changed his mind when it comes to the future of the stock market.

The Red Herring

One more grim economic indicator: It's getting harder to sell a mouse. Shares of Charles River Laboratories International Inc. of Wilmington plunged $7.03, to $26.87. The company that supplies laboratory mice and rats cut its earnings forecast and warned customers were spending less. Charles River stock has sunk 59 percent this year.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.