Interesting approach.
Here's an article from the front page of the business section (Ottawa Citizen) from a Bloomberg News writer. He presents the case for the bear maket andthen proceeds to try and discredit it. If I read it right (I found the flow rather disjointed), essentially he's trying to use the argument that the bear strategy was wrong in 1997 and by inference their negative outlook for '98 is also flawed. Time will tell.
PS sorry for any typos, had to do manual transcription. Couldn't find the article in the online edition.
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Sat. 12/27/97 The Ottawa Citizen
Bears see U.S. bull market ending
To pessimists, the writing is on the wall. The party is over for stocks. Phil Serafino reports.
New York
To hear some of the biggest names on Wall Street tell it, the bull market in U.S. stocks is history.
At Merril Lynch & Co., chief investrment strategist Charles Clough urges investors to look to U.S. Treasury bonds and shares of big Japanese exporters for gains in 1998. Barton Biggs of Morgan Stanely, Dean Witter, Discover & Co. says the Standard & Poor's 500 Index could drop 15 percent next year. He, too, recommends buying Treasurys.
"My guess is that a bear market will embrace the U.S. and Europe through much of 1998," Mr. Biggs said in a year end report to his clients. "The Asian contagion is like a virus that is incredibly malignant and keeps mutating as it spreads around the world and infecting other markets."
The high-profile bears agree that slowing economies and falling currencies in Asia will hurt U.S. corporate profits next year.
Of course, many of these bears come from the "I wasn't wrong, just early" school of forecasting. They were realitively pessimistic about 1997, which turned out to be a bad call, as U.S. stocks finish their third year of gains of 20 percent or more as measured by the Standard & Poor's 500 Index.
Next year, the bears say, will be different.
At Merrill, chief market analyist Richard McCabe said a 25 percent decline is possible next year.
That would bring the Dow Jones Industrial Average down from around 8,000 to 5,970 - where it was in October, 1996.
Mr McCabe cited statistical measures of the market that point to a peak in prices and historical precedent for his forecast. Not once in this century have U.S. stocks posted four straight years of gains of 10 percent or more, he said.
The U.S. economy will slow next year because there's less demand for the products being churned out by the factories built with the flood of world-wide investments, as evidenced by the crisis in Asia, Mr. Clough said.
We're seeing technology (stocks) break, which we think is a signal the investment cycle may slow," Mr. Clough said. "Profits and investment are highly correlated; it will probably have a broader profit impact than simply on technology."
At the start of this year, Mr. Clough recommended investors pt 40 percent of their assets in stocks, 50 percent in bonds and 10 percent in "cash," or short-term, liquid securities. Among 17 market strategists tracked by Bloomberg News, only Oppnehiemer & Co.'s Michael Metz recommended a lower stocks weighting.
Since then, the S&P 500 has surged 31 percent, following a 20 percent gain in 1996 and a 34 percent rise in 1995.
Mr. Clough's current weighting is little changed from late 1996, with 40 percent still in stocks, 55 percent in bonds and five percent in cash.
"Our asset allocation didn't work in 1997," Mr. Clough said last week. ""It did in the second half. Since July it's been the righ mix."
The Dow industrials peaked in early Aughust at 8,299, and the S&P 500 record of 984 on Dec. 5 was less than a point above its October high. Bonds, meanwhile, have surge since mid-year, taking yields to a four-year low.
Among U.S. stocks, Mr. Clough recommends airlines, cable television and financial companies, all of which benefit from lower interest rates.
Mr. Biggs, the global strategist at Morgan Stanley, at the start of the year recommended investors put 33 percent in U.S. stocks.
He told Forutne magazine a year and 1,350 Dow points ago that the U.S. stock market "is blowing a world-class bubble. It may be awhile before it bursts, but the longer it lasts and the more buoyant it becomes, the more painful it's going to be on the downside."
At the time, Mr. Biggs was bullish on Thailand, the worst performing market this year in dollar terms, and Japan, where the benchmark Nikkei 225 has fallen 29 percent in dollar terms.
If anything, his view has become more apocalyptic. Profits for the companies inthe S&P 500 could drop as much as 10 percent next year, he said, compared with a consensus among analysts for a 14 percent gain.
That in turn could cause a consumer-led recession "in an economy in which 50 million families own stock," he said. In that cse, the bears market only worsnes, Mr. Biggs said.
"Asia is close to chaos and economic anarchy, and that's not good for anybody, us or them," wrote Mr. Giggs, who allso is chairman of the firm's asset management business.
Mr. Bigggs and Mr. Clough both work for Wall Street firms that sell stocks and bonds. One of the market's biggest bears is Egar Peters, chief investment officer at PanAgora Asset Management, a Boston money-management firm.
Mr. Peters' results illustrtate the hazards of underweighting U.S. stocks. He runs $4 billion in asset allocation portfolios, switching funds from stocks to bonds to cash based on his outlook for the markets.
From May until late November, he had no money in stocks. His stock allocation went to 20 percent in late November.
Year to date, his portfolios are up about 12 percent, about six percentage points behind the benchmark he uses to measure his performance and 17 percentage points behind the S&P 500 index.
"It's possible that the bear market started g August," Mr. Peters said. He sees the Dow Jones Industrial Average dropping to 6,400 next year.
Phil Seafino writes for Bloomberg News.
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