A changing tide for the wave theorist
news.ft.com
By Mary Chung in New York
Published: October 9 2002 23:03 | Last Updated: October 9 2002 23:03
It is telling that during the Beanie Baby doll craze, Robert Prechter's wife bought him a Beanie Baby giraffe.
Why? Because he has built a 25-year career on sticking his neck out.
Mr Prechter, president of Elliott Wave International, is a technical analyst who developed a huge following in the 1970s and 1980s using the Elliott Wave theory to forecast the stock market.
He correctly predicted the bull market during the 1970s financial crisis but was wrong about how long the bubble would last. Missing out on the heady gains of the 1990s, he saw his fan base and credibility erode throughout the decade.
"From the late 1970s to the [market crash] in October 1987, Prechter was the most widely followed analyst because he was so good," says a veteran analyst who knows him. "But he was too early in painting a bleak picture of the market. When his hot hand cooled, his popularity waned."
But Mr Prechter may be having the last laugh. Even though he called the start of the bear market too early, when the technology bubble burst in March 2000 he was spared the heavy loss es suffered by many of his Wall Street compatriots. He has since made money by shorting stocks during the two-and-a-half-year market decline.
Now he is back in the spotlight with a controversial book called Conquer The Crash and a series of grim predictions about the economy. Mr Prechter, a soft- spoken, courteous Southern gentleman and a member of Mensa, shared his outlook on the markets with the Financial Times.
Warning that the US economy is heading towards a deflationary environment and is in the early stages of a depression, Mr Prechter believes that investors who complain about steep losses in the market haven't seen anything yet.
Bill Gross, the bond fund manager of Pimco, sounds like a raging bull with his prediction that the Dow Jones Industrial Average will fall to 5,000. The Dow is now trading at a five-year low of just over 7,300. Mr Prechter, on the other hand, warns that "by the time the 'washout' is over, the Dow will be under 1,000".
He expects the bear market to last until at least 2004, which is why he says that investors, big and small, should get out of stocks and put their money into cash, money market funds or Treasury bills. "It is not too late to sell," he says. "I am a safety advocate and I don't think anyone should be in stocks."
Mr Prechter also dismisses high-grade bonds and real estate, which he says are risky alternatives to cash.
"Many bonds that are currently rated investment grade will be downgraded to junk status and then go into default," he writes, "and the worst thing about real estate is its lack of liq uidity during a bear market."
Even the stock market allows investors to exit when they realise they made a mistake. But once you buy real estate, you are stuck with it until a new buyer is found, he maintains.
What about diversifying investments? The strategy is "bogus", he says, because during deflation everything goes down except cash.
The gloomy outlook is based on his interpretation of the Elliott Wave theory, developed in 1938 by Ralph Nelson Elliott, an accountant and social scientist, and popularised by Mr Prec hter.
The Elliott Wave measures the growth and contraction of the market using the assumption that a market is always composed of five pre-determined waves: three rallies and two intervenin g corrections.
According to his wave count, the fifth wave up in the old bull market ended in the first quarter of 2000 and the market is poised for a severe crash that would see it lose all its gai ns.
Mr Prechter knows that his predictions might provoke jeers from economists and market analysts but he adds, with a wry smile, that most of Wall Street thought he was crazy when he predicted in the 1970s that the Dow would surpass 3,000. At the time, it was only trading in the three digits.
"The most dangerous phrase in finance is 'economists agree'," he says.
Critics charge that his analysis is too fatalistic and does not rely enough on fundamental factors that could result in negative or positive price action, such as earnings visibility, economic data and corporate governance issues. But even his critics admit that Mr Prechter has persisted with his wave interpretation for many years, whether he was called a seer or derided.
He may lack the influence on Wall Street that he used to have - one analyst recalled that in the early 1980s "when Prechter caught a cold, the market caught pneumonia" - but those who understand his analysis say that it has validity.
"If I didn't know anything about Elliott Wave, I'd say he was crazy. But, knowing Elliott Wave, I respect his position. I don't agree with his count but if he is right, [the Dow] is g oing back under 1,000," says a technical analyst from a large brokerage company.
But even Mr Prechter acknowledges he has been wrong. In the foreword of his latest book he writes: "The biggest mistake of my career was in the stock market. After identifying the start of the great bull market and later forecasting: 'Investor mass psychology should reach manic proportions', even I never imagined that the stock mania would last as long or go as high as it did. So I jumped off the train too early."
That leads us back to his grim predictions of where the market is heading today. If he was wrong about the scale of the bull market, he may be wrong in his predictions about the bear market. This time the ride down may be shorter and less painful than his scenario suggests.
He accepts that many of his latest comments will be scoffed at by Wall Street. But these are brighter times for him financially. After missing out on the gains of technology boom, he is finally cashing in on the bear market. Sometimes it does pay to stick your neck out. |
