By Rita Nazareth

March 16 (Bloomberg) — Sam Zell, the billionaire investor who once called himself a grave dancer for profiting from troubled assets, said U.S. stocks are poised to extend the biggest rally since the 1930s as the economy rebounds.

“The market is not overbought,” said Zell, 68, founder of Chicago-based Equity Group Investments LLC. It’s “maybe less than or even on par of where it ought to be. If the recovery continues, and there’s less interference in the economy by the government, that bodes well for the market improving.”

The Standard & Poor’s 500 Index surged 70 percent through yesterday from a 12-year low in March 2009 as the Federal Reserve kept its benchmark interest rate near zero and the U.S. government spent, lent or guaranteed more than $8 trillion to stimulate the economy. Zell, the world’s 237th-richest person in a Forbes magazine tally published this month, said the economy is slowly improving.

“Conditions are getting better,” he said. “But there’s a lot of uncertainty and the real question is: Can confidence return enough so that what you call the green shoots or whatever would continue forward?”

The U.S. economy expanded at the fastest pace in more than six years in the fourth quarter, reflecting stronger business investment and a greater contribution from inventories. Employers have eliminated jobs in 11 of the past 12 months, cutting 3.3 million positions.

$39 Billion Sale

Zell made his fortune investing in real estate, and sold Chicago-based Equity Office Properties Trust to Blackstone Group LP in New York for $39 billion in 2007. He said in yesterday’s interview that the U.S. housing market will start recovering toward the end of 2010 and strengthen in the middle of 2011.

Now chairman of Equity Residential, the largest publicly traded U.S. apartment owner, Zell said real estate investment trusts will have enough cash to boost dividends in the future. Almost 70 percent of REITS tracked by Morningstar Inc. have cut or eliminated their payouts since the second quarter of 2008 as commercial real estate values plunged.

Equity Residential reduced its quarterly dividend to 33.75 cents from 48.25 cents last year.

“I doubt that in the near future it will be in its interest to reduce its cash cushion,” Zell said when asked about boosting the payout to the prior level.

The billionaire expects more takeovers in the real-estate industry. The battle for General Growth Properties Inc., owner of more than 200 U.S. malls from Boston to Los Angeles, is turning into the biggest real estate fight since the sale of Zell’s Equity Office Properties.

More Takeovers

“I wouldn’t be surprised if there’s more M&A activity in the space than has been historically,” Zell said.

Zell, who’s also the chairman of Tribune Co., used more than $8 billion in loans to take control of the publisher of the Los Angeles Times and the Chicago Tribune in 2007. One year later, he put the company into bankruptcy.

He favors distressed debt over other assets in the U.S.

“Willie Sutton said it all when he was asked why he robs banks,” Zell said. “That’s where the money is. We’re in distressed debt because that’s where the value is.”

Zell also said he likes investing in Brazil, where his firm is the biggest shareholder of Sao Paulo-based Gafisa SA, the nation’s second-largest homebuilder. Brazil’s Bovespa index of stocks surged 83 percent in 2009, rebounding from a 41 percent plunge the year before.

“The No. 1 country in the world for investment right now is Brazil,” he said. “We see no bubble in Brazil.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net.

Last Updated: March 16, 2010 11:50 EDT

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