Bears Grin While Bulls Must Bear It : A Few Newsletter Market-Watchers Predicted Tumble

James B. Stack writes a stock investment newsletter from his home in northwest Montana, a few minutes from Glacier National Park, the last refuge of grizzly bears in the Lower 48 states.

“One of the first lessons you learn up here is that if it looks like a bear and growls like a bear, you don’t wait around to shake hands,” Stack, a 35-year-old former IBM computer designer, said Tuesday with a laugh.

Stack could laugh because he had applied that lesson to the stock market. After picking up signs in recent weeks that the roaring bull was turning into a ferocious bear, he urged his subscribers to sell their stocks and convert to cash. And he followed his own advice.

“We were 88% cash on Oct. 5, when the Dow (Jones industrial index) was at 2,640, and we stepped out of the final stock positions last Friday and went to 100% cash,” Stack said in a telephone interview from his home overlooking Whitefish Lake.

Stack is one of a handful of professional market-watchers around the country who bucked the bull market and advised clients to beware of an impending downward tumble. It was a difficult task because the vast majority of their colleagues were urging customers to invest heavily.

“There are people who are bearish and have been bearish for some time,” said Mark Hulbert, editor of the Hulbert Financial Digest, which monitors stock newsletters. “I’m not predisposed to say they predicted it, but they are looking pretty good today.”

Among those Hulbert identified as top prognosticators of the bear market were Stack, who publishes Investech Market Letter; Charles Allmon, editor of the Growth Stock Outlook in Bethesda, Md., and Martin Zweig of New York, editor of the Zweig Forecast.

Fund Rose in Value

For instance, on Sept. 29, Stack put the following message on his subscriber hot line: “Unless our key indicators quickly turn around, we feel the market is heading into a steep decline in the coming weeks. This is the strongest warning that we’ve given in over two years--we don’t feel it should be taken lightly.”

And Allmon, who manages $430 million worth of funds, had ruffled the feathers of his own customers for months by converting their holdings to cash.

“A lot of people were throwing rocks at me, but I kept telling them they weren’t paying me to lose their money,” Allmon said.

When Monday’s plunge hit, Allmon’s management fund, Growth Stock Outlook Trust, had 77% of its assets in cash and much of the remainder in gold stocks. As a result, it was one of only a few companies on the New York Stock Exchange to rise in value Monday and Tuesday.

Zweig hedged his bets another way--he invested 1% of his portfolio in “put” options, which gave him the right to sell stock at a profit if the market dropped. As a result, his investments were up 9% at the end of Monday.

While the credibility of the few who foresaw the bear market has been enhanced, that of some of their colleagues has fallen as far as the market itself.

Over the past seven years, Hulbert’s digest has picked the Santa Monica-based Prudent Speculator as the nation’s best-performing newsletter. Its editor, Alfred Frank, was a king of the bull market, advising clients to maximize their investments by using margin accounts that allow buyers to purchase stocks by borrowing against their value. Such a strategy also increases the risk in the event of a collapse.

Losses Were Doubled

“I was fully margined (Monday) and I took a big beating, and I imagine that my subscribers did, too,” said a morose Frank. “We were quite in error, quite unprepared.”

Frank’s personal portfolio fell 15% to 17% on Monday. Because he was fully margined, Frank had borrowed half of the money he invested in stocks. When the market plunged, his actual losses were double the 15% to 17%.

“We’re getting margin calls right now, and I have to come up with some more money or sell some stocks,” he said Tuesday afternoon.

Another guru of the bull market was Georgia-based Robert Prechter, whose Elliott Wave Theorist newsletter had long predicted that the Dow industrial index would climb above 3,600 by 1988. Prechter wasn’t answering telephone calls Tuesday, leaving a message on his subscriber hot line that suggested that he’d leave the talking to the Federal Reserve Board for the time being.

Prechter may have been silent, but Allmon was willing to speak about him, saying: “The guy who is really looking like a fool is Bob Prechter. You can see why they used to call the Elliott Wave the Idiot Wave back in the 1930s.”

While a little gloating may be natural for Allmon and others who went against the stampede, there is also sympathy for those who were not so prescient.

“I feel a little like a guy out in a rowboat watching the Titanic sink,” Zweig said. “This is something worse than 1929, and I couldn’t be happy about it.”

And what do the bears say the future holds?

Allmon, who estimates that he now holds more cash than any money manager in the country, expects further drops in the market and says he doesn’t expect to begin buying until the Dow hits 1,500--and then he says he will only “nibble.”

Stack is also playing it conservatively.

“We are staying in cash,” he said from his office near Glacier National Park. “It’s a very comfortable position to be in.”