Steven Lehman is avoiding the U.S. stock market in his $1.7 billion Federated Market Opportunity Fund because he says equity prices may be lower 10 years from now.

"I would view any rally before the end of the year as a selling opportunity," said Lehman, 47, in a telephone interview from his office in Pittsburgh. "It isn't a new bull market."

Lehman had 55 percent of his mutual fund's assets in cash at the end of July, the highest since Federated opened the fund in December 2000, and just 4 percent in U.S. stocks, down from more than 50 percent in 2001. He said he's bearish because stocks are expensive and the economy is overburdened with debt.

Reducing his U.S. stock holdings helped shield investors from stagnant markets. The Federated fund rose at an average annual rate of 8.2 percent during the past three years, ranking fourth of 41 funds that have the flexibility to invest in a variety of assets such as stocks, bonds, real estate and cash. The Standard & Poor's 500-stock index gained an average 0.8 percent a year in the same period.

The S&P 500 is trading at 20 times what its members earned during the past year and that's after the benchmark index dropped 25 percent since the end of 1999. While the price-to-earnings ratio is down from a peak of almost 66 in 2002, the level remains high by historical standards, Lehman said. The S&P 500 also was trading at about 20 times earnings in the six months before the market crash of October 1987.

"If you enter a market that is rich, the odds are against you," said Lehman, who also thinks U.S. stocks are overpriced relative to book value. The S&P 500 is up 0.6 percent this year, including reinvested dividends, compared with the 2.4 percent gain of the Federated fund.

Lehman is concerned that tax cuts championed by President Bush and the Federal Reserve's policy of keeping borrowing rates near the lowest levels in almost 50 years have led to a surge in debt without a corresponding rise in economic growth.

The economy expanded at an annual rate of 2.8 percent during the second quarter, and the Congressional Budget Office projects the U.S. budget deficit will reach a record $420 billion in this fiscal year.

Gains in the gross domestic product "came at a heavy cost," Lehman said. It took $5 of debt growth to produce $1 of GDP growth, he said. Normally it takes $1 to $2 of debt, said Lehman, who has a master's degree in public policy from the University of Chicago and worked for Sen. Tom Harkin (D-Iowa) from 1982 to 1984, when Harkin was in the House.

"Government attempts to prop up any market are doomed to failure," Lehman said. He declined to say how he'll vote in November's presidential election.

He joined Federated in 1997 as a money manager after 12 years of overseeing trust accounts and investments for wealthy clients at First Chicago Corp.

Lehman said his holding in the Federated Market Opportunity Fund is his "primary" personal investment. Most investors use the fund as a way to diversify their portfolio, he said.

The Federated fund is managed to avoid what Lehman perceives as major risks. In addition to 55 percent in cash and 4 percent in U.S. stocks, the fund has 9 percent of its assets in U.S. and non-U.S. bonds that mature in less than three years; 26 percent in non-U.S. stocks; 4 percent in U.S. high-yield bonds, and 2 percent in contracts that gain value when stock prices fall.

Investments in real estate investment trusts boosted the fund's returns during the past three years. Lehman cut his holdings in REITs during the second half of last year and then repurchased some shares in April after they plunged because of concern that prices would be hurt by rising interest rates.

One of his purchases was 753,000 shares of Health Care Property Investors Inc., an investor in more than 500 health care facilities, including 30 hospitals. He also bought shares of Regency Centers Corp., a U.S. owner and developer of shopping centers anchored by grocery stores.

Performances of the two stocks since April 30 have been mixed: Health Care Property Investors rose 7.3 percent to close Friday at $25.65, while Regency Centers declined 3.2 percent and ended last week at the same point -- $25.65 per share.

Lehman said his biggest blunder this year was holding onto shares of gold producers such as Harmony Gold Mining Co., the biggest miner of South African gold. The mistake was retaining the stocks after gold prices peaked at about $430 an ounce in April, he said. Shares of Harmony Gold are down about 19 percent since then and ended the week at $11.77.

The Federated fund has profited from the increase in stocks such as OMV AG, Austria's biggest oil company, and Husky Energy Inc., a Canadian oil and gas producer. He reduced his positions in the two stocks after they more than doubled in the past two years.

The fund also owns shares of Petro-Canada, Canada's third-largest oil company, because they trade at a low price relative to earnings and book value, he said. Petro-Canada's common stock has risen 8.4 percent since April 30 to close Friday at $47.73 per share on the New York Stock Exchange.

Top holdings at the end of July included New Zealand government bonds maturing in 2005, Swedish Treasury bills maturing next March and an option contract on the S&P 500 whose value at expiration depends on the benchmark's value being below 1250.

Lehman's fund charges lower fees than similarly managed funds. Its expense ratio is $1.30 per $1,000 invested. Because the fund is marketed through financial advisers and brokers, it also has an upfront sales commission of $5.50 for each $1,000 invested.