The US Govt will not be able to move rapidly enough---Fred Hickey In the WSJ tells the Buyers to wait.......
March 14, 2001
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Heard on the Street
Big Bear Studies the Past,
Tells Buyers to Hibernate
By SUSAN PULLIAM
Staff Reporter of THE WALL STREET JOURNAL
Sure, it has been a rough year in the stock market. But we haven't seen anything yet, at least in the view of Fred Hickey, who publishes a widely followed, and very bearish, technology-stock newsletter.
Just how bad could it get in Mr. Hickey's gloomy view? Try the Dow Jones Industrial Average at 5000, the Nasdaq Composite Index below 1000 and the Standard & Poor's 500 at about 600, about half the current levels for all three indexes. And that is just for starters, he says.
"We are seeing the unwinding of a bubble, and that will take us not only back to levels of normalcy but below that," he says. Indeed, he says, a Nasdaq 1000 would bring the index down to a price-earnings multiple of about 40 times trailing 12-month earnings; that wouldn't be too far removed from the average level of about 50 that Birinyi Associates cites since 1985. That multiple currently is approximately 150 times trailing 12-month earnings, according to Birinyi.
The Dow at 5000, by comparison, would trade at a multiple of about 10.5 times trailing 12-month earnings, roughly in line with historical levels; the Dow now stands at about 21 times its trailing 12-month earnings. In neither example, Mr. Hickey says, would the indexes fall to price-to-earnings levels seen in past bear markets.
Mind you, Mr. Hickey, who composes his missives in Nashua, N.H., and dispatches them via the U.S. Post Office, is a veritable grizzly compared with the average bearish investor. And his views are a far cry from the ones generally found on Wall Street, which mostly says that the market is near its bottom.
But some well-timed -- albeit dire -- prognostications, particularly concerning technology stocks, have earned Mr. Hickey a following not only among big investors on Wall Street but among small investors as well. "Nothing will save the computer industry" from high saturation levels, he told subscribers in March 2000, a prediction that was borne out later in the year when demand for computers plummeted. Later in the year, he warned for the first time in an interview that the Nasdaq would drop below 1000 in the coming year.
Now, Mr. Hickey's bleak predictions made at the height of the tech bubble are starting to look prescient. And -- in true bear fashion -- Mr. Hickey is convinced the worst is far from over. "I don't think anyone knows if we are going to have a depression," Mr. Hickey says. "But I think, for sure, we are going into a recession," he says. "It all depends on where we end up on the scale between recession and depression. It's clear we are going to be in this for a very long time."
So, fine. The good times are over. But what does that mean for investors? Is it too late to sell? Too early to buy? Too scary for words?
All of the above, to a certain extent, in Mr. Hickey's view. While it may seem a little late to sell, especially if you buy the consensus view on Wall Street, Mr. Hickey,i> believes you could still save a bundle by getting out now. That is especially true for the Dow, which has farther to fall than the Nasdaq, according to Mr. Hickey, making it worthwhile for investors to consider bailing out.
But, he cautions investors, "Don't do what most do, which is to sell at the bottom. We haven't had capitulation yet," he says, suggesting that the worst time investors could choose to sell would be in a panicky, rapidly declining market.
On the other hand, he says, it is way too soon to be bargain hunting. "I've been telling people it is too soon to buy. You should be in cash. There is nothing wrong with a 5% money-market fund when your mutual fund could be down 50%. I personally have no money in the market in this time of turmoil. I don't want to be in a market that is as overpriced as this."
Take for instance, Micron Technology, which at its current price is trading at about four times this year's sales estimates. "If you look at other declines, or even periods of [semiconductor]-inventory corrections, Micron has sold at lower levels," Mr. Hickey says. "In the 1995 [technology-sector] downturn, it sold at under one times sales. Here, Micron is still selling at peak multiples, and earnings estimates are coming down rapidly," he says.
Then there is the case of Applied Materials, which currently sells at about 4.5 times this year's sales. Between 1995 and 1996, when technology companies saw a slight drop in their growth rates, Micron traded at a multiple of under one times its sales estimates for 1995, he says. To get down to the level of prior multiples, Applied Materials would need to drop by two-thirds from current levels.
Even mighty General Electric, which has held up better than the vast majority of large stocks this year, is trading at 6.5 times last year's sales, compared with about two times sales in 1995 and one times sales between 1990 and 1991 when the economy took a turn down.
At least one bright spot: Boeing, which has held steady for the year as well, is trading at only about one times this year's sales, compared with roughly 0.8 times sales in 1995 and 0.5 times sales in the 1990-1991 period.
Mr. Hickey, for one, never bought the idea of a "V" recession, with a rapid, but short-lived decline in the economy followed by a fast-order recovery. "It's possible to have a 'V' recovery with an inventory correction," he says. "But that's not what this is. We've had the destruction of a lot of wealth in the market and a world-wide [economic] decline. If you believe it's a bubble, the outlook isn't good. The Japanese market is lower than it was 16 years ago" after collapses caused by investment bubbles.
What sign is he looking for as evidence that it's safe to come back in the water? "I would be looking for valuation levels that are at least normal," he says. "The Dow should be showing multiples of trailing numbers of 12 to 13 times," he says. "Nasdaq needs to be below 1000 before I'll start looking."
An even more crucial sign that the smoke has cleared, he says, will be a classic "capitulation" by small investors, finally throwing in the towel on their stock holdings, leading to a steep sell-off. "The longer it takes for the capitulation to come, the longer the whole thing drags out," he says.
But, he warns, don't be fooled by more "sucker" rallies, which, he believes are bound to materialize. Indeed, he says, following the 1929 crash there were a total of seven or eight rallies and declines before the market finally bottomed. "If you are a great trader," he says, "you can buy things in anticipation of a rally, using technical indicators to determine [when stocks] are oversold." But, he says, "your average guy shouldn't try to do that." |
