Bear Market May Be on Its Last Legs
By KENNETH N. GILPIN
ARCH 10, 2000. For many investors, it was the day the music died.
Three years ago tomorrow, the Nasdaq composite index peaked at 5,048.62. The Standard & Poor's 500-stock index did not stop rising until two weeks later, but investors look back on that Nasdaq peak as a turning point, the end of a decade-long run.
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Steven C. Leuthold, the chairman of Leuthold Weeden Capital Management in Minneapolis, has dealt with bull and bear markets for more than four decades. Last week, he discussed his view of the future. Following are excerpts from the conversation:
Q. Investors have turned away from technology stocks. Are they right?
A. We believe technology is the way to make money now. About 25 percent of our money is in tech stocks. Three years ago, we had zero. One of the things that has happened in the intervening period is that analysts, who have been beaten up so badly for so long, may be underestimating earnings growth.
Cuts in expenses and costs have been so dramatic that a little bit of revenue growth may translate into much bigger profits than analysts can currently see.
At a time like this, when some of these stocks have been beaten down so badly, I think if you are patient you can make six or seven times your money.
Q. Are stocks cheap?
A. At a level of 840, the Standard & Poor's 500 index is exactly at its median multiple from 1957 to date. That's not particularly cheap but it's not expensive, either. Three-quarters of all bear markets have stopped at median valuation levels.
Q. Is this bear market over?
A. I think so. We are going through a testing process. But if we can't make new lows with all the bad stuff that has happened so far this year, it implies to me we have a pretty solid base. If we do go to war with Iraq, the odds are that it will be over very, very quickly.
Q. What other segments do you like?
A. We have a 12 percent holding in what we call diversified metals and mining — copper stocks and other diversified mining companies like Inco.
We really do see a pickup in industrial commodity inflation, and these companies will benefit from that. Inventories are relatively low, and prices are rising.
And we have a double market weight in health care stocks. But we are not buying any of the big drug companies yet.
Of that, we took a new 6 percent position in biotechnology stocks. The rest is in health care/cost containment, including a lot of generic drug companies and companies that provide outpatient treatment.
In the cost containment area, we own Omnicare, Diagnostic Products and OraSure Technologies. Our generic drug holdings include Barr Laboratories, Teva, the Israeli company, and Sicor.
Q. Which technology stocks do you like?
A. Stocks like Cisco Systems and Qualcomm, as well as some of the old regional Bell companies, like SBC Communications. We own Avocent, which is in networking equipment. We just bought F5 Networks, which is also in the networking area. One stock that is a sleeper but is also a bit riskier is Foundry Networks. We also own stocks in the office electronics area, Xerox and Canon.
Q. Which groups of stocks are you avoiding?
A. We have nothing in financials. We look at 12 subsets of financial stocks, and not a single one is ranked attractive. People are overenthusiastic about financials; they now represent 21 percent of the S.& P. 500.
It has been our experience that when you get these big overweight parts of the market, like energy was in the 1980's and technology was in the 1990's, ultimately the market tends to correct. We don't have anything in utilities or transportation, either. But eventually some people will make big money in the airlines. It is a critical area, and people won't allow them to go out of business.
Q. Do bonds have any appeal?
A. We have nearly doubled our exposure to junk bonds over the last year. And yields on municipal bonds are the same as on governments of the same maturity. That is the first time that has happened since 1975-1976. That encourages me to do a spread trade and go long munis and short Treasuries. It's an attractive trading opportunity.
Q. What lessons can we draw from what's happened over the last three years?
A. What we had before, that was the biggest bubble we have ever seen. Peak to trough, the S.& P. 500 is down almost 50 percent.
I think you have wiped out the public as a serious investor for maybe 10 years. Equities were 70 percent to 75 percent of the typical 401(k). I would guess that will fall to 40 percent to 50 percent. I think that is probably appropriate, but the public will probably miss out by doing that. |
