Bull vs. bear rematch > Buckingham, Tice argue their positions, again
By Deborah Adamson, CBS.MarketWatch.com
Last Update: 12:03 AM ET Oct. 15, 2002
NEW YORK (CBS.MW) - The way the market's been behaving in recent days gives bulls plenty to cheer about.
Last week, market technicians pointed to key reversals that could signal that a bottom and the bear's return to hibernation. And yet, a similar situation in July brought out the same prognostications.
Fearful investors sold off the Dow by July 23 to nearly a five-year low at 7,700, yet the next day the industrials rebounded in its biggest rally in 15 years. But it didn't stick.
CBS.MarketWatch.com spoke in early August to fund managers John Buckingham and David Tice, who argued for the bull and bear sides, respectively. Buckingham of the Al Frank fund (VALUX: news, chart, profile) boldly predicted the market had turned after two and a half years. But Tice, manager of the Prudent Bear fund (BEARX: news, chart, profile), wasn't convinced the excesses of the tech boom could be wrung out by going through a mild recession and a few down years.
Now the market's roaring again. So what's their present perspective? Welcome to the bull vs. bear rematch as Buckingham and Tice square off anew.
The bull
"Just like in July, there are many signs that the market has hit bottom," said Buckingham. "There's such negativity. I've never seen so many sell ratings on stocks...investor sentiment was atrocious."
The CBOE Volatility Index (VIX: news, chart, profile) hit 50 last Thursday, he said, which indicated strong investor fear.
Moreover, bad news has been priced in. It's the same observation he made in July, noting that one sign of a market bottom is that stocks stopped falling at the advent of bad news.
Last Friday, Buckingham noticed that mediocre news about GE (GE: news, chart, profile) and IBM (IBM: news, chart, profile) fueled a bull stampede despite reports of flagging consumer confidence, a drop in U.S. retail sales to its lowest in 10 months and retailers' cautious remarks about profits. GE met its third-quarter profit target and reaffirmed 2002 earnings while Lehman Bros. upgraded IBM.
"The economic news was worse than two to three weeks ago when the market collapsed," the fund manager said.
Also, he noticed that an analyst decided to downgrade a sector because of negative investor psychology, not fundamentals.
"It was like 1999 (but in the opposite direction) - fundamentals didn't matter," he said. "It was amusing. Fundamentals do matter."
In addition, the S&P 500 and the Dow are more than 20 percent below their 200-day moving averages, which generally heralds the occurrence of "snapback" rallies, he said.
The soaring markets last Thursday and Friday "were very positive because we haven't had two up days in a row for eternity," he said. "The market breadth was very good."
Meanwhile, stocks have become "cheap" while bonds are in a "bubble," he said. "So much of the excesses have been wrung out of the market. Expectations have come down a lot."
With $2 trillion sitting in cash awaiting a catalyst to move into equities, the potential for a strong upside is there, he added.
Investors should be accumulating stocks now, said Buckingham, who expects a "decent" market in 2003 and 2004, with the Dow up to 9,000 as long as the war on terrorism doesn't take a terrible turn.
"Most people would still be underwater, but it's a good return from here," said the manager, who didn't see equities in the grip of a or long-term bear market.
His fund is adhering to the "buy-and-hold" strategy, which the manager noted has worked for a century.
But Buckingham puts in a caveat: "Is (the rebound) real or not? It's more likely to be real. But there were so many false starts that I won't bet the ranch that it won't go back down."
The bear
In contrast, Tice is more entrenched in his views than ever.
Have we reached bottom? "We feel strongly that we have not," he said. "This is still the aftermath of the biggest bubble in the century."
Stock market history shows that "long bear markets follow long bull markets," said Tice, who expects this bear to last more than 10 years.
As he did three months ago, the fund manager noted that 1928 ushered in a 17-year bear market, which was followed by a 20-year bull market, then a 17-year bear and an 18-year bull.
Moreover, the economy "is in trouble," he said. "This is an economic bubble that has popped."
Corporate and household debt has reached record levels as a percentage of the gross domestic product, the fund manager said.
"We can't continue to borrow from the future," Tice said. "We had an asset (stocks, bonds and real estate) bubble."
Together with a poor savings record, these factors cause imbalances in the economy that need to be corrected, he added.
Tice sees similarities to 1929 and Japan of 1989, at the start of its decade-long recession when the Nikkei fell from 40,000 to 8,000. One criticism about Japan's handling of its economic malaise is a reluctance to let financial institutions fail - and purge the losers.
"They didn't let their banks fail but will we really let our banks fail?" the fund manager countered. "There are going to be bailouts."
Tice also expects fourth-quarter corporate earnings to come in below last year's levels, even though analysts are expecting higher profits.
"Wall Street is too doggone optimistic," Tice said. "They always have been and they always will be."
While stock prices have fallen, they're still not cheap, he believes.
Even at roughly $10 a share, Cisco (CSCO: news, chart, profile) still trades at 27 times trailing earnings and four times sales, he noted. Meanwhile, its backlog of orders is declining. He sees Cisco's fair value at $4.
"We said the same thing about Sun Microsystems when it was $10," Tice said. The stock (SUNW: news, chart, profile) now trades at around $3.
As for investor sentiment, he thinks people are still too complacent. "There have been $1.6 trillion in mutual fund inflows over the last 11 years. There have been virtually no (relatively significant) outflows."
"People haven't sold yet," Tice added. The bottom will come when "people are sick about it and sold their stocks."
Tice has parked most of his fund's assets into either cash or short positions. Of the small amount he holds in long stock positions, the majority was invested in gold stocks.
Gold "has a long way to go. It was in a 20-year bear market," he said.
Deborah Adamson is a reporter for CBS.MarketWatch.com in Los Angeles. |
