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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: sciAticA errAticA who wrote (32539)	4/27/2003 11:56:01 AM
From: sciAticA errAticA	Read Replies (1) \| Respond to of 74559

Still bearish after all these years Financial Times By Philip Coggan Published: April 25 2003 12:18 \| Last Updated: April 25 2003 12:18 Tony Dye is a contented man. In the late 1990s, he became known as Dr Doom for his statements on the prospects for the stock market and his deep scepticism about the technology sector. As the dotcom bubble inflated, it led to Dye's abrupt departure as chief investment officer of Phillips & Drew, the fund management group, in February 2000. But canny investors should have recognised Dye's demise as the ultimate sell signal. Within weeks, the Nasdaq Composite index in the US had peaked and the long bear market had begun. "If pension funds had followed the policies I espoused in the late 1990s", he says now, "they would be in a lot better financial shape." Dye is now sitting pretty as head of his own hedge fund operation, Dye Asset Management, where he has scope to give full rein to his bearish tendencies. For many clients, he is clearly the right man for the times. Over the past year, funds under management have soared from €30m to €200m (£128m). "I wish I'd made the move many years before I did," he says. Although the halving of most global equity markets might appear to have proved Dye right, he does not yet feel totally vindicated. "Given what my views were at the peak, we need to see the US economy have several years of sub-trend growth before that," he says. "It needs to be more like Japan." Dye says the economy is now the key driver of the stock market. "The first signs of the bubble were in 1995," he recalls, "when the markets were driving the economy. My nervousness about markets at the moment is that the economy looks to be in a poor shape. The excesses of the bubble period have hardly been worked out at all." In the 1990s, Dye argues, the US economy was "borrowing growth from the future". The problem is that this growth has to be paid back, just as in Japan, where the very high growth rates of the 1980s were followed by the sluggish 1990s. Companies and consumers took on far too much debt in the 1990s and thus fuelled the rapid economic growth rates. But Dye believes we are now seeing the first signs that people are unwilling to take on more debt. This is despite the historically low level of interest rates. Those low interest rates may have protected the economy for a while. "The bursting of the stock market bubble hasn't had such negative effects as might have been expected because the rapid fall in interest rates has kicked off another bubble in the housing market," he says. "But all it has done is to push the nastiness further out into the future." Among the bad news that Dye believes could happen is the collapse of a financial institution. "It has to be a strong possibility," he says. "It almost happened in 1998 but LTCM [the US hedge fund] was baled out." The problems could arise in the over-the-counter derivatives market, which Dye says is "completely opaque". He quotes the size of the market at $130 trillion (£83,000bn) and says that, if only part of that market turns sour, there could be significant problems. But the main issue is economic. Dye believes the US economy will suffer the sluggish growth period he has long been expecting, probably over the next five years. This will not be particularly good news for equities or for the housing market. "We could easily see 20-30 per cent off house prices in the UK," he says. A big problem for stock markets is that valuations are not yet attractive despite the falls over the past three years. "You can make a weak case for European equities because dividend yields have moved towards the long-term average," he says. But Dye thinks US equities are clearly overvalued. Even if they were fairly valued, that might not be enough. "The history of bear market lows is that they occur when price/ earnings ratios are in the single digits and dividend yields are 6 per cent." With the UK stock market yielding less than 4 per cent and the US market under 2 per cent, that implies big falls in share prices from current levels. However, Dye says a big crash may not be necessary. The Japanese example shows that the Tokyo market had a big fall when the bubble burst but then spent a long period trading in a volatile range. Markets in the US and the Europe could spend a lot of time trading at around current levels until dividends and profits grew sufficiently to make them highly attractive. Dye's gloom at the macro level is reinforced by his daily experience as an individual stock-picker. His hedge fund runs a "long-short" strategy, allowing him both to buy stocks and to speculate that others will fall in value. "Our problem has always been finding enough stocks to buy," he says. "There are quite a number of stocks with yields that look, on the face of it, attractive." But close examination reveals flaws. In contrast, Dye is still finding plenty of stocks to short. He says the market is still "obsessed with growth" and there are some companies where "expectations can only be met if the economy delivers more growth than we think is possible". There are other cases of highly-rated stocks where the accounting standards look dubious, he adds. "People still aren't analysing companies in a very diligent manner." Most long-short funds tend to have a net long position because share prices tend to go up in the long term. But Dye's fund is "market neutral"; in other words it has as many short as long positions. It all adds up to a pretty gloomy outlook. So what would Dye advise a private investor? "I'd tell him to look after his own money and to put some effort into doing so. Don't be intimidated by all the investment jargon. It should be a mixed portfolio. Have a few shares, because there are some opportunities out there. "Have as much in bonds as in shares," he adds. "There is still the potential that bonds could be very cheap if we head into inflation and long bonds are a hedge against that. But a lot should be in cash - at least you get a positive return." news.ft.com