NYT -- opinions of (1999) stock market "bears" (now).
September 29, 2002
Humbled Bears in 1999. Market Sages Today.
By GERALDINE FABRIKANT
FOR years, bears were out of fashion on Wall Street. In
December 1999, when Money & Business interviewed five
prominent stock market pessimists, all said they thought
the market was about to fall, and some were mystified by
its relentless climb.
Today, with the Nasdaq trading close to its 1996 low, their
advice is very much in demand from investors who missed the
market's negative undercurrents.
But while none of the investors now believe the stock
market is about to soar, they have divergent views. Barton
Biggs, chief global strategist at Morgan Stanley, says he
thinks that the market is near its bottom, although he does
not expect to see another bull market for years. And James
Chanos, a professional short-seller, is starting a hedge
fund where he will pick long investments as well as sell
stocks short.
At the other end of the spectrum is Marc Faber, an
investment adviser based in Hong Kong, who has become even
gloomier than he was three years ago. And Leon Levy, a
founder of Oppenheimer & Company, worries that the country
may be on the verge of a "contained depression."
James Grant, who runs a prominent market newsletter, says
he has given up forecasting but believes that the market's
decline is not over.
A Changed Short-Seller
Mr. Chanos, a zealous short-seller, was among the first to
publicly question Enron's accounting, particularly its
dealings with its affiliates.
His bets against Enron were correct, but in the rising
market of the late 1990's, shorting stocks was increasingly
difficult. Mr. Chanos, who runs Kynikos Associates, an
investment firm, said he learned the importance of managing
risk during that time. "There are short-sellers that got
the fundamentals right but were not around to profit from
their forecasts," he said.
During the market bubble, he modified his pure short
strategy by starting the Beta Hedge fund, which is both
long and short. The long picks, however, were
computer-generated. It gained 22 percent in 1999, when
Ursus Partners, the short-only fund he manages, was down
less than 1 percent. The Beta fund has been flat this year,
while Ursus is up more than 30 percent.
Mr. Chanos said that as the market has plummeted, he has
searched for bargains. He said he will soon introduce a
fund that will do research to pick individual stocks to go
long as well as short. While he is not ready to discuss
which stocks he thinks may rise in price, he said, he is
now shorting cable companies and video game stocks,
including Activision and THQ.
He has been surprised by the extent of market scandals. "We
were short WorldCom because of pressures in the
long-distance business," he said, "but we never even
dreamed there was fraud."
Mr. Chanos believes the bad news isn't over. "We are going
to see more and more accounting issues come to the
surface," he said. "They may not be the size and magnitude
of WorldCom, but we will see."
An Early Worrier
Mr. Levy was a bear as early as the mid-1990's, worrying
that the technology craze would undermine corporate
economics by prompting too much capital investment.
Vindication was a long time coming, but Mr. Levy, who with
Jack Nash, ran a highly successful hedge fund, Odyssey
Partners, until it was disbanded in 1997, has been proved
right. With capital investment declining and, in his view,
with the housing bubble ready to burst, Mr. Levy foresees a
"contained depression."
"It won't be as serious as the 1930's," said Mr. Levy, who
is 77, but he said unemployment could be painfully high. As
to the length of the episode, he said, "it is likely to go
on for at least a year and probably a lot longer."
Mr. Levy said he is heavily invested in government bonds
because they are the investment that people trust the most.
Last year, he was short the Nasdaq, long the euro and
invested profitably in Russia.
The Harder They Fall
Mr. Faber, author of The Gloom Boom & Doom Report, was
pessimistic in the mid-1990's and is more so today. While
he thinks the market may rally this winter, he sees it
sinking below current levels by spring.
Once credit expansion slows down or reverses, "it will mean
the consumer falls off a cliff, which will hurt the
housing, car and financial sectors," Mr. Faber said during
a brief visit to New York.
As for stocks, he said, "if you overshoot on the upside
into a mania," as the market has, "then you overshoot on
the downside."
"The average bear market in the 20th century has given up
about five years of previous capital gains," he said, which
would move the market down to 1995 levels. But because the
most recent bull market was so powerful, he expects stocks
to fall further. "I think we should fall back to levels of
1990 to 1995," he explained. "That implies a Dow between
2,500 and 5,000 and the S.& P. between 300 and 500." On
Friday, the Dow closed at 7,701.45 and the Standard &
Poor's 500 closed at 827.37.
Mr. Faber, who predicted the decline of the Japanese
market, said he believes that the United States is
fundamentally different, but he warned that consumers here
could stop spending. "They are overindebted, and the
lending institutions, due to rising loan losses, will
reduce their lending," he said.
He continues to be a believer in gold, convinced that as
people worry about the monetary system, they will some
assets in precious metals.
A Chance to Bounce Back
Of the five, Mr. Biggs has become the most upbeat.
Not
that he thinks investors are on the cusp of a bull market.
"My views are that we are bouncing around the bottom of the
bear market," he said. Mr. Biggs reasons that there has
already been a huge decline in stock prices. He
acknowledges that valuations are still not cheap in
absolute terms. But, he says, it is a very different world
today. Inflation is low, he said, and 10-year Treasuries
yield 3.66 percent "instead of the 10 percent yield of
1974, so that relative to interest rates and inflation,
stocks are almost as cheap now as they were then."
Mr. Biggs said that 1974 offered a great buying opportunity
for long-term investors and that conditions then were
somewhat similar to those today. After 1974, he said, "you
didn't get a good bull market for another six years," and
predicted that "the S.& P. will be in a trading range for
the next five years of between 750 and 1,250."
When the market was roaring in 1999, Mr. Biggs recommended
a portfolio allocation of 65 percent equities. By early
2000, his allocation became more conservative, with half in
equities and half in bonds.
Last June, he became more bullish, pushing the allocation
to 72 percent equities.
Behind this muted optimism is a belief that the fourth
quarter will yield better-than-expected corporate profits.
Still, he said, "there are tremendous imbalances in the
economy and the world, and we are coming out of one of the
biggest bubbles in history."
Mr. Biggs said he has taken away from the bubble the lesson
that "things always go further than you thought."
"They go higher and last longer, and when the bubble
breaks, they go down much more than you can possibly
imagine," he said. "But I think the worst of the agony is
over. The enduring pain will be boredom."
'You Can't Be Agnostic'
The bull market was not kind to
Mr. Grant, but he is now reaping the rewards of skepticism.
"Business is great," said Mr. Grant, owner and editor of
Grant's Interest Rate Observer. "We have more than 3,000
subscriptions. It is not because we have all the answers,
but people know they have to think about the answers."
He certainly didn't have the answers in the 1990's, when,
he acknowledged, he was far too negative far too early.
That experience has chastened him. "Having obtained the age
of wisdom, I have given up soothsaying," he said. "You have
to have a view. You can't be agnostic. But the big picture
is not the way you make money. You look for individual
opportunities."
Still, he can't resist peering into the future. "The bear
market has a way to go because it is still not cheap," he
said. "It would be truly amazing if, in the aftermath of
the greatest bubble of all time, the stock market stopped
going down at fair value and didn't correct all the way to
cheap. Bear markets end when the public has reached a stage
of revulsion."
While the American market was soaring, Mr. Grant decided
that opportunities were better in Japan. In 1999, he and a
colleague, Alex Porter, started Nippon Partners, a hedge
fund seeking small-cap stocks that seem to be bargains.
The fund "is down a bit this year, but has averaged about 4
percent since inception against major losses in the
Japanese indices," Mr. Grant said.
"We think we have some good companies, but fundamental
Japanese economic and financial policies are in complete
tatters," he added. "The policy makers are not interested
in getting us rich faster."
His efforts in the United States are limited to his
newsletter, in which he cites particular companies that he
thinks are ready for a fall.
The newsletter was critical of J. P. Morgan on Dec. 7, when
the stock was at $39.77. It is now at $18.34.
He is gloomy about bonds. "There is a lot more risk than
reward in the bond market," he said.
Interest rates are so low, he said, that rising rates will
be particularly painful.
"When rates were 15 percent in 1981," he said, "you could
lose 15 percent of your principal and still break even
because of the high coupon payments. Now there is no coupon
protection at all, the rates are 4 percent or less, so that
does not protect you much from a loss in the market price."
Given Mr. Grant's concerns about the bond and stock
markets, he may finally be more in tune with the wider
world of investments, where, recently, little has seemed
very safe.
Copyright 2002 The New York Times Company. |
