BEYOND THE BUBBLE
by Jay Akasie
Eric J. Fry 07:00 AM 07|27|2001
Post-bubble, Street veterans Henry Hackel and Jay Shartsis still see years of unwinding ahead. But they also see opportunity -- in options, gold and individual stocks. We say: Read on.
If you want a real lesson on irrational exuberance, just ask Henry Hackel, president of R.F. Lafferty, to show you his box of money. Henry's simple cardboard box is a kind of currency archaeological dig, brimming with now-extinct banknotes. There are 50 million-deutschemark bills from the Weimar Republic, pesos from the 1950s' Battista regime in Cuba and rubles from pre-Soviet Russia. One of Hackel's favorites is an elegant, 1928 10-franc note from France. "To think," he says, "at one time, someone held up this note and said, 'It's as good as gold.'"
Implicit in that statement -- indeed in Hackel's entire collection -- is the message that faith in paper money is bound to disappoint. Not one bill in his box is, literally, worth the paper it's printed on. "Just think how many times the franc has been devalued since '28," says Hackel. But suppose the holder of that 1928 note had added another to it and "bought a 20-franc Rooster gold piece," instead, he proposes. "It would be worth about $55 today. You could buy 2 1/4 barrels of crude oil with the Rooster, where the two notes might buy you four drops of gasoline."
This profound historical perspective, coupled with an acute awareness of the changing nature of markets, guides Hackel's search for investment opportunity. Both he and colleague Jay Shartsis, director of options trading at Lafferty, have seen their share of market ups and downs during their combined 57 years on Wall Street. Both veterans believe a significant bubble has burst, and, interestingly, neither one believes the rupture is complete. "For me," Shartsis says, "the dominant theme these days is the bursting of the bubble and what will be a very long period down. No event in the last hundred years -- not '29, '68 or Japan -- is commensurate with what has just happened. The bubble this time was much bigger."
To them, the current market is a place where the dollar remains, as they put it, the "can-do-no-wrong currency," where the Dow continues to be curiously overvalued and where no one would ever think of investing in gold (except, of course, Hackel and Shartsis). Case in point: Shartsis notes that since the beginning of the year, the second-best-performing Rydex sector fund is the precious metals fund, which has been bested only by the firm's leisure stock fund. "People threw money at the leisure fund," he says. "Its assets increased 300%. The gold fund is the second-best performer and nobody put any money into it. You mention this to people and they laugh at you. Gold? Why would anyone invest in gold, they ask."
So Hackel and Shartsis take one look at today's post-bubble world and say, "It ain't over yet." The tremendous forces that created the late 1990s' stock market bubble won't be expunged overnight, Shartsis believes. Sure, there will be rallies, he says, but it could take years for the excesses to unwind and for investors to see a bull market again. Shartsis rests much of this grim forecast on a thesis detailed in "How to Make the Stock Market Make Money for You," an influential book by 1960s' market guru Ted Warren. Warren argued that a stock is a buy when it emerges from, at the very least, a three-year base, and the longer the base, the better. A healthy market, he reasoned, is one in which the majority of stocks are settled into long-term bases.
Hackel describes this phenomenon more poetically. "Each stock has its own personality," he says. "It trades a certain way, eats a certain way, walks a certain way. It has a shareholder core that creates this personality, and it comes out of the base for a reason. You've got to buy when it emerges."
"Right now, you can't find any long-term bases," adds Shartsis. "We're still in the descent stage. You've got to keep going down and settle in at the base for at least three years -- probably more like five or six. And that brings you to the end of the decade. I'll bet you Warren is right."
Further validating his cautious stance, Shartsis cites the nearly invisible or nonexistent dividend yields that most stocks now pay. During the bubble years, many companies eliminated dividends altogether. "It became a negative sign if you paid them," Shartsis says. "Investors wanted the companies to plow the money back into their crazy technology schemes. Now the companies can't pay for anything.
"Remember that, after World War II and into the '50s, stocks yielded more than bonds," Shartsis goes on, "and people today say, 'Why?' They yielded more because they're dangerous! What's really changed since then?" he asks rhetorically. "They are more dangerous than bonds. Could you imagine where stocks would have to be to do that again?" (We did imagine -- and we even did the math. The answer is a drop of about 6,500 points for the Dow, more than 60% below its current level.)
The Dow is ripe for a washout, agrees Hackel. "I don't see why one day we couldn't come in here and see a Dow 8,000."
Clearly, the cautious Hackel and Shartsis are in the minority. Both offered anecdotes aplenty illustrating the indefatigable bullishness most investors still exhibit. Referring to another best-selling investment book of the 1960s, "Happiness Is a Stock That Doubles in a Year," Shartsis says, "You mention this book to people and they say: 'A year? I ain't waitin' no year.'" Of course, it was the Nasdaq's explosive rise in the late 1990s that has led many investors to expect such robust gains in perpetuity.
"Whoever thought the Nasdaq would double from October 1999 into March of 2000? Whoever heard of it doubling in five months?" Shartsis asks. "Doubling in a year would have been insane."
He goes on, "Remember Qualcomm? The whole country was talking about that stock. People who were never in the market before didn't think anything of buying it at $200 -- and then it doubled again."
Because the Nasdaq rocketed so quickly, Shartsis was prepared for the day when it would crash 500 points in a single session. That final vortex hasn't occurred -- yet. Perhaps the lack of a single cataclysmic event speaks to just how long and steady the road down from the peak could be. Still, says Shartsis: "It's amazing, considering the total decline and the extent of margin debt, that there wasn't some final washout."
Nonetheless, there should be no doubt that Shartsis and Hackel continue to trade. The opportunities they look for might involve more short selling than buying, but not all is gloom and doom in their forecasts. Shartsis says he's not so pessimistic as to rule out a rally or two over the next eight months. He likes the fact that readings of the TRIN indicator (which compares the stock market's advance-decline ratio to the ratio of advancing-to-declining volume) are easing from their incredibly high (bearish) levels in the spring, suggesting the likelihood of a rally over the next few months. "I think you can run with that," Shartsis says.
But clearly, Shartsis' heart is not in that trade. Rather, he sees other opportunities uncovered by the recent bubble's short but dramatic life. The fact that it blew up and deflated so quickly is an indication of the maximum accelerative force the market can muster, he says. "My idea is that the market has just entered a period of far lesser volatility. The forces are spent. That's why I think this will be a golden era to sell options. You could sell both sides instead of wondering when the bull market will come back."
In the course of implementing his various options strategies, Shartsis routinely scrutinizes put-call ratios -- both the volume-based and the dollar-weighted versions. He homes in on charts where the volume- and dollar-weighted ratios coincide. Another put-call ratio practitioner, Phil Erlanger, was recently featured in the options column that Shartsis occasionally writes for Barron's. Erlanger, a market technician, studied the ratios for all the components of the Dow and found that every stock except Du Pont had experienced extremely high levels of buying. He considers the high number of calls a very bearish sign. In other words, investor optimism is peaking. Like Shartsis and Hackel, Erlanger believes a Dow 8,000 might not be too far away.
"The Dow has held up amazingly well," says Shartsis. "A lot of people who were disillusioned with the Nasdaq stocks are taking refuge in the Dow. By Erlanger's reasoning, you're going to get clocked with the Dow." More proof, as Shartsis sees it, is the fact that, in pre-recession 1972, the price of the average stock was down while the Dow hit new highs.
When pressed to divulge current "buy" or "sell" signals from his work, Shartsis obliges. He notes heavy call buying in Microsoft, Oracle and AOL, suggesting that the three tech giants might be heading into a rough patch. [Editor's note: Shortly after our interview, AOL announced disappointing earnings, including revenue growth that slowed to 3.3%. The stock dropped 9.7% on the news.] By contrast, Shartsis has observed heavy put buying in two silicon chip makers, Advanced Micro Devices and Applied Micro Circuits Corp., which indicates that it could be time for the contrarian to check out these stocks. Other put-heavy picks include Disney and Allstate, both of which "could be in line for some short-term growth," he says.
The men at Lafferty remain bullish on gold stocks, of course. That's one sector they say was not part of the last bubble (unless, of course, it was the concave part). "We're going to make a lot of money in gold stocks," says Shartsis. "[The metal] went down for 22 years, and nobody wants it."
To illustrate the abysmally low estate to which gold has fallen, Hackel tells a story about the time the coin store he owns in Hollywood, Fla., offered some "retired" Beanie Babies for sale -- a set of three particularly coveted babies for $1,100.
"We put [the sets] one at a time in the window of the store. . . . People were daggering each other for them. At the same time, an elderly gentleman comes into the store and asks: 'How much is a Kruggerand?' $285. For an ounce of gold you couldn't even get one Beanie Baby. No interest in gold, but these Beanie Babies were flying out the door. It was amazing."
Hackel winds up, "As ludicrous as the spike in stocks was, the aversion to gold is just as mind-boggling."
Shartsis agrees, "If you told me 20 years ago that the whole North American gold industry would be worth one tech stock, I would have told you that's ridiculous. How could that be?"
Shartsis admits that today's market might be one of the trickiest he's ever faced. But he shares a good laugh with Hackel when they recall the late '60s, when it was difficult to get a taxi in New York City because all the drivers had become stockbrokers. "But don't forget," reminds Hackel, "in the '70s, all the brokers were becoming cab drivers."
Perhaps the best take on the history of the Street is the appellation Shartsis plans to put on his next batch of business cards. Under his name, he wants the words, "Customer's Man," a quaint 1920s' moniker for a broker. "I'll have the last laugh, let me tell you," he says with a grin. |
