Good article on bears pt of view--recommends lucent
Bears Ready to Rumble
The market's pessimists are coming out of hibernation -- and a denful of indicators are on their side.
By Aaron Task
They're scary. They're hairy. And it looks like their once-feeble teeth have some bite again. We're talking, of course, about Wall Street's bears. Given the rising concern about the market's performance of late, we thought it prudent to illuminate the perspective of those holding distinctively dire views about the outlook for stocks.
Here, then, is the case for the Apocalypse from deep in their shadowy lairs.
Strike 1: Valuation
For some time, U.S. stocks have been trading at historically high price-to-earnings and price-to-book ratios, while dividend yield levels have sunk to record lows. That by itself has not been enough to shake investors' faith that the market would continue to go higher. But now, the bears say, with the economic unrest in Southeast Asia spreading to other emerging markets, there's something tangible that will undo those stocks priced for a perfect world.
"Valuation alone is not going to precipitate a downturn. The Japanese stock market was grotesquely overvalued many years before it turned over," said Jim Grant, editor of Grant's Interest Rate Observer in New York. "But in a state of extreme overvaluation, other causes might introduce themselves and turn the tide. The proximate cause is now in front of us all in the shape of currency and debt crises in Asia and South America, which is spreading to parts of Europe."
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Valuation alone is not going to precipitate a downturn. The Japanese stock market was grotesquely overvalued many years before it turned over.
-- Jim Grant Grant has been bearish for years and prefaced his comments with the admission that he's been "the world's leading authority on where stocks are not going" in this decade. However, he believes the day of reckoning is nigh.
"Bad things happen to overvalued markets," Grant says. "It strikes me as implausible to the extreme that the U.S. stock market can remain at Dow 8,000 while asset values are violently deflating in foreign markets."
Geraldine Weiss, senior editor and publisher of Investment Quality Trends in San Diego, Calif., believes that the U.S. market's unraveling will come not so much from the real impact of global woes on our economy, but from fears of future effects.
"The stock market is a barometer, not a thermometer. If we now see a good economy, it's already reflected in the stock market," Weiss said. "But the market looks six months ahead and sees straws in the wind in Asia. That creates an aura of uncertainty."
Then there's the argument that as the global currency turmoil leads to wealth elimination, pressure mounts on U.S. investors to keep the flow of funds coming unabated.
One player concerned about the theory is Doug Myers, vice president of stock trading at Interstate Johnson Lane (IJL) in Atlanta.
"You're going to lose more and more buyers. To keep the Dow at these levels, more money is going to have to come out of pockets here at home," Myers said. "American investors have been conditioned to buy on pullbacks, but at some point they're going to run out of money."
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With everything else, the higher the price goes, there's less demand. In the stock market you get the opposite.
-- Terry Bedford
Strike 2: Human Nature
Terry Bedford, president of Bedford & Associates in Toronto, Canada, believes that, when he weighs the two emotions that drive the stock market, there's just not enough fear in the market yet to outpace greed. He attributes the condition to misplaced complacency: "With everything else, the higher the price goes, there's less demand. It's common sense. In the stock market you get the opposite."
Within the next three weeks, Bedford foresees the Dow tumbling about 1,000 points from its present level, which -- if you recall -- is already about 800 points off its all-time high. When the index reaches about 6,500, "panic" will ensue, he predicted, and only then will he think about becoming a buyer again.
"Momentum investing is a double-edged sword," he said. "It drove all prices to ridiculously high levels, and it's going to drive 'em to ridiculously cheap levels."
One factor the bulls raise in support of continued market gains is the staying power of the retail-investment community -- that is, the individual investor. There's been a lot of talk on Wall Street about how Mom and Pop have learned the lesson of buying on market dips and won't panic if the market slides again.
The bears think that's bunk -- contending that the public has been spoiled by the glorious returns of recent years and will head for the exits when tough sledding persists.
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Mutual funds are fully invested. When they get calls for redemptions, they have to sell to raise cash. It's going to snowball.
-- Geraldine Weiss
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Speculation is rampant that the economic lassitude in Southeast Asia will cause a global economic slowdown.
"Retail does not 'hang in there.' It never has," Grant says. "I think Wall Street has been trying to flatter its customers by asserting over and over that cool hands on Main Street won't panic. But the public panics at the bottom, not the top."
Weiss sees a harrowing scenario unfolding as a result.
"The thing that alarms me is that so many investors are now in stock mutual funds. When they become frightened and see their beautiful nest egg dwindle, they're going to want to cash out," she said. "Mutual funds are fully invested, so there's no safety net. When they get calls for redemptions, they have to sell to raise cash. It's going to snowball, that's the terrifying thing."
Strike 3: Disinflation
Speculation is rampant that the economic lassitude in Southeast Asia will cause a global economic slowdown. If disinflation seems new or somewhat trendy, you haven't been listening to the folks at Merrill Lynch.
Led by chief market strategist Charles Clough, who's currently recommending a mere 40% investment in equities, the Merrill gang has been warning of deflationary pressure for at least the past six months. We recently spoke with Lisa Cullen, an investment strategist at the firm, who elucidated the viewpoint.
"We've had an under-weighting in equities for some time due to concerns about the quality of earnings. We continue to have those concerns and think it's a good time to be over-weighted in bonds," Cullen said. "We think the activity in Southeast Asia is certainly not isolated, and the problems stem from overbuilding and over-capacity, which have long-term deflationary implications worldwide."
Until the recent currency woes, Southeast Asian economies had been rapidly building their manufacturing capacity to make stuff like semiconductors, cars and toys. Merrill Lynch is concerned that U.S. corporations already hampered in efforts to raise prices due to competitive pressures will be swamped further with a sudden influx of cheap Asian imports.
What To Do
Given the backdrop of falling asset values, Cullen recommends investors search out "bond substitutes" or interest-rate-sensitive stocks poised to benefit from a deflationary scenario. Financial-services stocks like insurance companies and banks, which are also benefiting from an ongoing consolidation cycle, are a clear choice. Less obvious, perhaps, are companies with "defensive characteristics," notably media firms with heavy debt burdens.
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<Picture>Subscribers can access a list of debt-heavy, financially strong publishing companies in the Investment Finder.
In Cullen's view, lower bond yields will result in refinancing opportunities for these debt-laden firms -- and the money that once went out the door to pay interest can go instead to the bottom line. In addition, the strategist believes corporate bonds will also come back in favor as stocks lose their luster in the eyes of institutional investors, adding to the better performance.
As an investment strategist, Cullen said it's "not our job to do the stock-picking," but did note that Merrill's anlaysts have long-term "buy" ratings on the likes of Gannett (GCI), Cognizant (CZT), Golden Books Family Entertainment (GBFE), McGraw - Hill (MHP) and McClatchy Newspapers (MNI).
The other group Cullen favors is telecom equipment, because firms in that sphere are "able to increase units and maintain firm pricing." Merrill currently has long-term "buy" ratings on Ericsson (ERICY), Nokia (NOK/A), and Lucent Technologies (LU).
As for the rest of the bears, they too see a few investment opportunities despite the gloomy predictions.
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<Picture>Subscribers can access a list of profitable S&P Industrials with rising dividend yields in the Investment Finder.
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If this auspicious body agrees on anything, it's that the worst is yet to come.
Weiss, who focuses on companies with a long history of dividend payments, cited 10 stocks "down for one reason or another" but that look undervalued. Heading up the lists were the likes of Archer Daniels Midland (ADM), C . R . Bard (BCR), Barrick Gold (ABX), Deluxe Corp. (DLX), Luby's Cafeterias (LBY), Pall Corp. (PLL), Hasbro Toys (HAS) and Electronic Data Systems (EDS).
"As long as you pick good-quality, dividend-paying stocks, whatever happens in the market, you'll be fine," Weiss said.
Why's that? Because "dividends are paid out of earnings," she said. "If you're got a company with a history of increased dividends, you know real earnings are increasing."
Bedford says he "manages money in the way hedge funds do -- always flat the market," which means being short and long an equal number of stocks. He recommends safe names like Ralston Purina (RAL) and Campbell Soup (CPB). But more than what to buy, Bedford focused on what not to buy.
"You should be avoiding all temptation to buy tech stocks, unless you're going to trade them," he said.
If this auspicious body agrees on anything, it's that the worst is yet to come.
Of course, these folks have been singing the song of doom for some time. The bulls may not be as much in evidence these days as they were over the summer -- when the market powered to all-time highs -- but they're still out there.
And they still believe stocks will be OK when all is said and done, because the U.S. economy remains sound and stable; interest rates are low and falling; and the retirement needs of the baby boomers will keep a steady flow of cash into the market for the next decade, at least.
To which the bears can only reply with a sigh: Just wait until those boomers start to retire.
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<Picture>The Dividend Connection by Geraldine Weiss and Gregory L. Weiss
<Picture>Minding Mr. Market: Ten Years on Wall Street with Grant's Interest Rate Observer by James Grant
<Picture>Money of the Mind: How the 1980s Got That Way by James
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