Glenn,
Sorry I didn't have time to fully respond to your excellent question.
Here's a partial answer from today's WSJ:
Heard on the Street
With Nasdaq in Bear's Grip,
How Bad Will Mauling Be?
By SUZANNE MCGEE, SUSAN PULLIAM and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
For the second time in less than two years, Nasdaq stocks have plunged
into a bear market.
The previous bear was born in Russia and left quickly. But this one is home
grown, and may stick around for a while.
The Nasdaq Composite Index's 7.06% plunge Wednesday caps a
nosedive of 25.3% since its high on March 10. This means the index, a
New Economy bellwether, has entered bear-market territory, generally
defined as a drop of 20% or more.
Last time around, of course, the slide began at much lower levels. When
the Nasdaq peaked on July 17, 1998, it stood at a mere 2008.76, almost
half the level the index was at after Wednesday's close. The 1998 slide into
bear-market territory gathered momentum in September, and by Oct. 8,
the nadir, the index had recorded a 29.3% slump before beginning to
recover.
Now, the questions are: How fierce will the bear be? When will it turn?
And how and where should investors take shelter?
"There are some worrying signs here," says Richard Schmaltz, a portfolio
manager at J&W Seligman, a New York investment management firm.
"We're seeing even the technology leaders suffer here now, a sign that a
bear market is here. In a bear market, you sell even the things you love,
because you feel you have to raise cash and flee to safety."
Ed Kerschner, market strategist at PaineWebber Group, warns that
investors should brace themselves for another 33% decline in what he calls
the "new new industrials," or speculative technology companies without
earnings that have soared in recent months, carrying the Nasdaq to its
March records.
"Despite recent price declines, valuations of 'new new industrials' still look
excessive by traditional metrics," he said in a note to clients Wednesday.
"Further price declines seem likely."
It's been less than two years since investors last grappled with the
dilemmas created by a bear market. In mid-July 1998, only a year after
Asian economies stumbled, the U.S. stock market was buffeted by another
string of external shocks. The virtual collapse of Russian financial markets
raised the specter of a global financial meltdown, and triggered a flight from
risk of all kinds.
The result: a world-wide liquidity crisis that cost investors billions of
dollars. The casualties included Long-Term Capital Management, a fund
for wealthy investors that lost more than $4 billion in the liquidity crunch.
The pain, though intense, was relatively short-lived. Despite a flurry of bad
news from global markets, and the havoc wreaked by the LTCM collapse
on U.S. markets, an interest-rate cut by the Federal Reserve in early
October marked the turning point.
By Thanksgiving, the Nasdaq composite had regained all the ground it had
forfeited during the bloodbath and was poised to set another string of
records. But some scared investors didn't jump back into the markets until
way after the rebound began, and ended up kicking themselves.
This time, it may be different. For one thing, the causes of the current
carnage are internal.
"You've come off a period of pretty heady speculation in the market, so
you're adjusting valuation measures back to levels that seem more
reasonable," says John Ballen, a portfolio manager at MFS Investments in
Boston.
And trying to grapple with internal valuation issues can be trickier than
dealing with external shocks. When the catalyst for a market sell-off comes
from something that isn't linked to corporate fundamentals, it is easier for
investors to understand, if not accept.
"In some ways, this bear has the potential for being a scarier bear market
because it is falling of its own weight as investors start to recognize that
they have to factor in risk and not just reward," says Edward Yardeni,
chief economist at Deutsche Bank Securities.
"In previous sell-offs in Nasdaq, there were external events that dissipated
quickly, so the market regained its move to the upside. This time around, it
looks like a lot of speculators are learning the hard way about
old-fashioned valuations."
They are also learning how supply and demand issues can cause market
woes, as last year's record crop of initial public offerings of stock come
back to haunt investors.
In March, about $58.6 billion in stock that insiders couldn't previously sell
as a result of lockup agreements became available to sell, according to
Bradley Alford, who runs an information Web site on lockup expirations
called IPOLockup.com.
And there is more to come -- lots more. Mr. Alford says an additional
$67.3 billion in locked stock is free to be sold in April and a massive $137
billion in May.
"I don't like to be a dooms-dayer," says Mr. Alford, who also runs the
alternative asset portfolio for the Duke Endowment in North Carolina. "But
people are starting to call my site 'short.com.' "
Some argue that the differences from 1998 will make it harder for the
market to snap back to life this time. Mr. Schmaltz notes that the Nasdaq
composite closed Wednesday near its lows of the day, as investors
dumped not just the highflying dot-coms but also longtime market favorites
with solid operating histories like Cisco Systems and Intel.
"That's a hallmark of a bear market," says Mr. Schmaltz.
Others are still more pessimistic. Mark Strome, who runs a hedge fund,
Strome Investment Management, is betting that incessant waves of selling,
followed by attempts by the market to rally, could continue for as long as
several years. He foresees a 30% to 40% slide in the Nasdaq from current
levels.
"It could get quite panicky yet. These things tend to go in stages," he says,
adding that he believes the market may continue to sell off through the
summer and then rally. "It could go two years like that or more. The air
could just keep coming out," he says.
"But the level of excitement and greed out there was off the charts. Three
weeks ago, my caretaker told me he was selling his dirt bike so he could
day trade. It's just unbelievable," he says.
Amid that kind of carnage, investors such as Mr. Strome and Mr.
Schmaltz are turning to blue-chip stocks in a handful of sectors they believe
will withstand a storm. Mr. Strome says energy stocks could go up slightly.
"Oil and oil services will do OK," he says.
Mr. Schmaltz argues that it is time to move into the highest-possible-quality
companies, such as downtrodden but solid technology companies such as
Microsoft that boast solid revenue, and food companies such as ConAgra
or Bestfoods, which jumped Wednesday after reporting
better-than-expected first-quarter earnings. Among the buyers of
Bestfoods Wednesday was Elizabeth Bramwell, who runs a
fund-management firm that bears her name.
Of course, not everyone is so gloomy. "Even Joe DiMaggio could strike
out sometimes," says David Liu, manager of the Strong Overseas Fund.
"The fundamentals are still there, earnings are there. If the [first-quarter]
earnings come through well in the next two or three weeks, people will
scratch their heads and wonder why they sold."
It is all a matter of perspective, some say. "Call it a bear market with a little
'b,' " says Jay Tracey, manager of the Oppenheimer Enterprise Fund. "I
don't see evidence that there's the kind of economic problem now that
leads to a more extended decline that wears everybody out. It's not like
everyone is selling every kind of stock. This is limited to the sector where
the excess was."
Paul Cook, manager of the widely watched Munder NetNet Fund, says he
is nibbling at stocks, trying to pick up some bargains. But he is looking for
seasoned companies or those with solid business plans. "We don't want to
try to catch a falling knife," Mr. Cook says.
So, when will the bear stop growling? When you "get down to valuations
that are reasonable and not outrageous anymore," says Mr. Ballen of
MFS. "Probably, we're going to have to suffer a bit more to shake out the
perception that people have acquired that somehow it's fast and easy to
make money in the stock market. You need to put fear back into their
hearts and minds."
--Aaron Lucchetti contributed to this article |
