1,000-point one-day Dow drop needed for 'healing'
Strategist sees sharper falls ahead
1,000-point one-day Dow drop needed for 'healing'
By Thom Calandra, CBS MarketWatch
Last Update: 4:04 PM ET Sept. 6, 2001
CINCINNATI (CBS.MW) - Most individual and professional investors refuse to believe the stock market is headed far lower, an American strategist says.
"The crowd is right at the trends but wrong at both ends - that's a time-honored saying," says Bernie Schaeffer, whose Cincinnati research firm, Schaeffer's Investment Research, tracks equity options contracts and sentiment indicators such as investor complacency. "Very few people get it right at the bottom and the top."
Schaeffer says professionals - equity analysts, economists and strategists at Wall Street banks - are putting the 18-month decline in stock market valuations in the best possible light. Most of the Wall Street crowd is unwilling to accept the stock market's verdict that corporate profits and the American economy at large will languish.
"The strategists are fundamentally based and they have this approach where the lower the market goes, the more attractive it becomes," Schaeffer said Thursday. "Go through Abby Cohen's comments (Goldman Sachs strategist) and she will gratuitously add that if the market goes any lower she'll be even more bullish."
Schaeffer, who started his company in 1981, uses Worldcom (WCOM: news, chart, profile) shares as an example of sloppy professional analysis. "It's a death spiral," he says of the telecom stock and the company's business prospects. "On a valuation basis, the Wall Street analysts viewed the stock as not only attractive but reiterated their 'buys' at $60, $50, $40, $30. It was only at $20 or $15, with the prospects of the company so low, that it finally became a 'sell' in their linear way of thinking." The stock closed Thursday at $13.29.
Schaeffer says Manugistics Group (MANU: news, chart, profile), a once-high-flying software company, is another timely example. The shares lost 29 percent of their value Thursday after the Maryland company projected a surprise quarterly loss. "Finally, the stock is imploding before our eyes, and yet I look at the 28 analysts who cover the company and there are still 19 'buys.' How can that be?"
Several investment banks, including SWS Securities, reduced their opinion of Manugistics shares after Thursday's fall to "neutral." Scores of software stocks Thursday touched fresh 52-week, and in some cases all-time, lows.
Schaeffer says market strategists also behave in a state of willing disbelief. "The market's price action looks terrible, yet the economists and strategists are relying on models that see growth early next year, with nice corporate profits," says Schaeffer, 54. "But the market is saying, 'No, this is not going to happen.' So if the market is right, and I think it is right, these economists and analysts will tip over to the bearish camp at some point and the S&P will be at 900 by that time."
The Standard & Poor's 500 Index, a gauge of America's largest stock-market companies, sits at 1109, down 2 percent Thursday afternoon. "At some point in the professionals' eyes, lower doesn't become 'more attractive' or 'cheaper,' but instead a manifestation of the worst possible scenario," he said.
At that point, most investors - whether they are mutual funds, pension managers or plain old you and me - have been burned beyond recognition.
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