This WSJ article may have something to do with it.
May 7, 2000
Bears Find Deaf Ears Turning Sympathetic
As Investors Look to Salvage Their Portfolios
By SUZANNE MCGEE
Staff Reporter of THE WALL STREET JOURNAL
For years, Wall Street's stock-market bears seemed fated to become an endangered species.
One after another, they retreated from the fray as the market roared higher to set record after record. As the value of technology stocks doubled, tripled or even quadrupled in a matter of months, the bulls who had predicted the dizzying gains grabbed the spotlight and celebrated the "new paradigms" of investing.
But now, only a few weeks of treacherous market conditions have been enough to bring the bears out of hibernation once more. They're starting to find a more appreciative audience among investors who have been bloodied by the violent sell-off of mid-April and the past week's jitters and who want to avoid more pain in their portfolios.
"The name of the game right now is earnings," says Michael Eggly, a telecommunications portfolio manager at Northern Trust in Chicago. In the wake of the April market meltdown, "It's back to fundamentals again, and old ways of thinking about stocks are re-emerging. Profits are popular. So are revenues. So are businesses with a track record."
In Wall Street parlance, a bear is a market participant who sees more risk than reward in the stock market, and growls at the mere idea of committing cash to what seems a dangerously overvalued market. As investors start to reacquaint themselves with the concept of risk, The Wall Street Journal Sunday asked three well-known bears to assess where the market is headed and what you should do about it. Here are their words of caution -- and guidance.
'I Am Worried'
May could be the cruelest month for stock-market investors this year, says Byron Wien, market strategist for Morgan Stanley Dean Witter.
"I am worried about the next few weeks," he warned in a recent letter to clients. Among his reasons: the excessive volatility in stock prices, which he says is usually bad news for the market; the risk that Federal Reserve policy makers will continue to raise interest rates; the probability that current earnings-growth rates aren't sustainable, and the rise in inflation.
Mr. Wien figures that broad market indexes like the Dow Jones Industrial Average or the Nasdaq Composite index could fall as much as 10% over the coming weeks -- and that some sectors of the market could plunge even further.
"The market is trying to find a new base here after the two sell-offs [in April]," he says. "It's not clear to me that there won't be a test of those lows" before the bad times are over.
So what's a cautious investor to do? Mr. Wien suggests steering clear of the type of "dot.com" technology stocks that until recently have been so popular among individual investors. Their risk level isn't likely to dissipate quickly, he warns.
ADVICE: "I would say that you have to be very careful and selective in technology stocks now," he said. On the other hand, there is "tremendous value in energy, basic materials, airlines, capital-goods stocks and probably some retailers as well."
'The Biggest Risk'
Ed Yardeni, chief economist at Deutsche Banc Securities, has spent the past few years asking hard questions about the market's infatuation with fledgling technology stocks, which have little in the way of operating history, let alone profits. Until recently, though, the roots of his stock-market "bearishness" were based more on fears that computers around the world would be crippled when their internal clocks failed to roll over to Jan. 1, 2000. But the fact that Y2K passed without incident hasn't turned him into a bull by any means.
"The biggest risk we're facing is that the Fed seems intent on imposing a series of rate hikes that they figure will break the back of inflation," says Mr. Yardeni. He figures that a series of interest-rate boosts -- which could continue at the Federal Reserve policy meeting May 16 -- is more likely to "break the back of earnings growth, and stock prices."
Mr. Yardeni believes the stock market will continue to struggle with the impact of higher interest rates through the summer. The groups most at risk, he believes, are technology and telecommunications, where investors expect to see the most growth and have assigned the biggest valuation premiums.
Ironically, Mr. Yardeni still likes the long-term prospects for large technology stocks, arguing that "we're in the very early stages of a multidecade technology revolution." In particular, he's an avid fan of companies that promise to bring together a range of new technologies in arenas such as wireless communications, electronic commerce and hand-held Internet appliances.
But in the shorter term, Mr. Yardeni thinks that traditional defensive sectors will benefit from the continuing uncertainty and volatility in the stock market.
ADVICE: "In this kind of environment, defensive stocks typically do best....A good example is food stocks: They're already outperforming, and they're a good place to hide."
'Dangerous Environment'
Last week, when Steve Leuthold participated in a Chicago conference of money managers and research analysts, he noticed a decided change in mood.
"It's been a very long time since I've heard so many people admit to being worried," says Mr. Leuthold of Leuthold Weeden Research. "It was astonishing to hear so many speeches emphasizing caution about the market."
Mr. Leuthold is used to uttering words of caution -- and, after the market rally of the late 1990s, accustomed to feeling like an outcast for doing so. And even now that other Wall Street inhabitants are gradually beginning to echo his words about the importance of earnings and the need to seek out undervalued stocks, he's still outside the mainstream.
For one thing, Mr. Leuthold still only has 40% of his portfolio in stocks -- and he has "hedged" half of that by making bets that the value of some stocks and market indexes will continue to fall. The remainder of his assets are in corporate bonds, government bonds and cash.
"I'm afraid of losing money; this is a dangerous environment," Mr. Leuthold admits. "I think this will be a year that if you see any gain at all, you'll be lucky."
He believes the risk is greatest in the biggest stocks, which command price/earnings multiples nearly double those of the average publicly traded stock.
His favorite sectors include the energy industry: he has about 26% of his stock portfolio in small and medium-sized drilling companies, oil-service companies and even petroleum refineries. He also likes health-care stocks -- indeed, some of his only large-company stockholdings are in the big pharmaceutical companies. He has just finished adding to those positions, bringing them to 11% of his portfolio.
"These could well re-emerge as the market leadership after technology bites the dust," Mr. Leuthold predicts. And how much downside is ahead for the broader market? "If the public finally becomes frightened, and valuations come back to historical medians, we're looking at another 45% decline," he says cheerfully. "It's not a bad time to be a bear."
ADVICE: "I think this is a good time to do some selective buying in smaller-cap stocks." |
