Global equities look shaky but investing players are already weighing the chances of the next bull market writes Proinsias O'Mahony

WITH THE global bear market in financial stocks almost a year old, some of the biggest names in the financial world remain divided as to whether long-term investors should be casting their net for bargains or whether the worst is yet to come.

Embattled investing legend Bill Miller, who famously beat the SP 500 for 15 consecutive years between 1990 and 2005, is advocating the former. In his most recent letter to shareholders, Miller said that financials had reached "the most oversold levels since the 1987 Crash and the lowest valuations since the last great buying opportunity in 1990 and 1991". He opines that the market today is all about momentum and trend, joking that value managers like himself need "a 12-step programme to cure us of our addiction to buying beaten-up stocks trading at large discounts to our assessment of their intrinsic value".

Some critics respond by saying that Miller's record was a statistical fluke and that his underperformance over the last three years has brought his long-term performance below that of the market as a whole.

Others say that he has lost his touch. Miller's fund was the second-largest holder of Bear Stearns stock when it collapsed in March, a mistake that looks like it might be replicated with Freddie Mac. He has consistently added to his holdings as the share price fell and now holds more than 12 per cent of the company. Freddie's share price has lost over 90 per cent of its value over the last year.

Investors have been deserting Miller, whose fund has lost 30 per cent of its value in 2008. He remains optimistic, saying that it is obvious the credit crisis will end, and it is obvious the housing crisis will end, and that credit markets will function satisfactorily and house prices will stop going down and then start moving higher. Over the longer period, the American consumer will spend sufficiently to keep the economy moving forward long-term, he argues.

Like Miller, David Dreman is a contrarian with one of the best long-term records on Wall Street. Also like Miller, 2008 is proving difficult - his fund has lost almost 20 per cent of its value. He's not a raging bull, warning that analysts are "too optimistic for both the second half of this year and the first half of next" in that they're predicting earnings gains in both periods "when in all probability there will be drops".

He also admits that the liquidity crisis has been far worse than he expected and that a single big investment bank's default might make its competitors seize up too, since nobody can unravel who owes what to whom.

Whilst understanding the rationale of those who choose to flee the market, Dreman nevertheless cautions against being too clever.

"You don't see market timers who own yachts," he writes. "If you pack up now, chances are you'll miss a good part of the next bull market." Dreman, who prefers out-of-favour "value" stocks rather than highflying growth companies, says that "this is one of the worst periods I've seen for value" but that the probabilities of a major upswing are very strong. Historically, the more it (value) underperforms, the more it normally snaps back, he adds.

That's backed up by acclaimed Société Générale analyst James Montier, who cites research showing that value investing goes through periodic spells of underperformance before bouncing back. In 2007-2008, the difference between value and what Montier calls "glamour" stocks has been even wider than in 1998-1999, when investors ditched old-fashioned blue chips in favour of high-flying technology stocks.

"For those with patience this pain is more than compensated. Following periods of poor value performance, value tends to rebound strongly - delivering about 17 per cent a year over glamour ," says Montier.

Despite this, many see further falls in store. New York-based economics Prof Nouriel Roubini has been a prophetic voice during the credit crisis, warning that "we have a subprime financial system, not a subprime mortgage market".

Roubini insists that the housing recession is not bottoming out by any standard and that the problem is actually getting worse. He says that regional American banks will see a huge increase in homeowners choosing to walk away from their mortgage commitments, leading to the possibility of a 30 per cent failure rate among these banks.

Dr Marc Faber has earned himself a reputation as something of a "seer" in his investment calls over the years. He warned of an impending bear market last August and remains bearish, cautioning in this week's letter to investors that "a vicious economic downturn is about to unfold" and that China could surprise on the downside.

Global equities look shaky, he says, although the US market is less so than the rest of the world. Faber says that despite its recent falls gold will, over the next few years, outperform US equities and bonds as it has done already since 2000.

Jim Rogers is even more forceful. Rogers made his name as co-founder of the Quantum Fund with George Soros in the 1970s, returning over 4,000 per cent in a decade of stagnation for stocks.

Rogers was famously prescient in calling for an oil bull market when prices were trading in single-digits in the late 1990s as well as correctly predicting a major housing crash and an Armageddon scenario for then-bubbling financial stocks. He said this week that the end of the crisis is "a long way away".

Heavily critical of the Federal Reserve, he characterises Ben Bernanke's failure to identify the housing bubble as "mind-boggling". Shocks like the Bear Stearns implosion and the current turmoil at mortgage lenders Fannie Mae and Freddie Mac "keep getting bigger" because the authorities keep bailing everyone out.

The next shock's going to be even bigger still, he says. Bullish towards China, Rogers sees America as being in terminal decline and warns that the end of the crisis may not be in our lifetimes.

It's a dismal view, although Rogers's recent actions suggest it may not be all doom and gloom for financial investors. He admits that he covered most of his long-running financial short positions last week.