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HIGHLIGHT: Jeremy Grantham sees lots of alternatives to U.S. stocks.

Here's a dreary forecast: The stock market will go nowhere for the next seven years.

That's the word from Jeremy Grantham, chief investment strategist of Boston money management firm Grantham, Mayo, Van Otterloo (GMO), who is also known in investment circles as ''the other Jeremy.'' While Wharton School finance professor Jeremy Siegel, author of Stocks For the Long Run, is famous for his bullishness, Grantham is renowned as a bear, often debating Siegel.

Both men are so convincing that after their most recent debate in December, the moderator quipped: ''Well, I agree with Jeremy.''

Characterizing Grantham as simply a ''bear'' is misleading, however.

''People often think I'm bearish about everything, but I'm a raging bull on emerging-market stocks because they've been crushed,'' Grantham says.

GMO, which runs $23 billion mainly for institutional investors, has been in business for nearly 25 years.

(For individual investors, there are two funds: GMO Pelican and Vanguard U.S. Value.)

The firm has 53 investment products that collectively have a 340-year track record.

He employs the same open-minded approach to investing, buying big-cap, small-cap, or foreign stocks or bonds -- whatever his quantitative models determine to be the best values.

''Throughout history, every asset bubble -- from gold and oil in the 1970s to Japanese stocks 10 years ago to U.S. stocks in 1929 -- has fallen to its long-term historical trend,'' Grantham says.

Its long-term average p-e over the past 75 years is 14, but the current number is 26.3, using the S&P 500's trailing 12-month operating earnings.

To get to that number, either earnings have to rise or stock prices fall.

But profit margins already are at historic highs with little room to grow, he believes, so earnings growth through margin expansion will be tough.

Small-cap p-e ratios are higher, but small companies have faster growth rates, and there's also a takeover premium.

That translates into a better market outlook -- roughly in the 7% to 9% a year range.

He thinks Treasury inflation-indexed securities (TIIS), which yield 3.5% above inflation, are an even better bet.

''A 3.5% real yield protected against everything -- no credit-quality or inflation problems -- is simply not bad,'' he says.

Emerging-market bonds should also deliver 9% per year, because of their hefty yields.

He's also bullish on REITs, publicly traded companies that invest in real estate, because of their high dividend yields, averaging about 7%, which compare well to the S&P 500's 1.4%.

------------- Summarized by Copernic Summarizer

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