Market Watch : How Fierce Is This Bear?

The real mystery about the stock market's January plunge may be this: How could so many people have been so completely fooled coming into the new year?

Warning flags were flying all over Wall Street at the end of December: Long-term interest rates were rising here and overseas; corporate profits looked lousy and were just about guaranteed to get worse in a faltering economy; banks were fast turning off the credit spigot for mergers and takeovers. Yet on the first trading day of the year, Jan. 2, the Dow Jones industrials soared 56.95 points to a record 2,810.15--and many investors figured we were on our way to 3,000.

Instead, five weeks later, the Dow is off 150 points for the year, and some investors are afraid that a bigger collapse looms. The problem is that there's not enough fear, say some market pros: There's still too much complacency, too much of a feeling that this is a minor setback, that the market will soon head higher again--as shown by mini-rallies last Wednesday and Friday.

Suresh Bhirud, investment policy chief at Oppenheimer & Co., warned clients in December that the sad state of corporate profits left stock prices vulnerable. Even if the United States avoids a recession, he sees no recovery in profits until 1991--mainly because companies are facing rising labor and materials costs, yet often are unable to raise prices much in an increasingly competitive world market.

So this year's drop in stock prices is "just a start," Bhirud says. "My sense is that we've entered a cyclical bear market that we could be in for six to 12 months" as stocks fall to match lower profits. His initial target for the Dow: a bottom of 2,200 to 2,400. And if it doesn't hold there? "Then we've got panic," he says.

Carmine Grigoli, chief stock strategist at First Boston Corp., also was bearish at the start of the year--and still is, at least looking ahead for the next few months. Grigoli, too, worries that most investors are dangerously complacent. To comfort themselves, he says, "everybody points to the cash positions that everybody else has"--believing that those alleged cash hoards are the fuel for the next bull market leg, any day now. That kind of thinking usually turns out to be sadly self-deceiving.

This may be a great time for long-term investors to hunt for potential bargains, but for the short term, Grigoli says, "It's hard to pick something that's going to go up."

THE DAMAGE SO FAR

% Change Index Friday yr. to date Dow industrials 2,602.70 -5.5% H&Q; growth-tech 579.08 -6.2% NYSE composite 182.75 -6.3% S&P; 500 330.92 -6.4% OTC composite 422.21 -7.2%

January Barometer: The bears now have history on their side. Since 1950, the stock market generally has had a down year whenever prices finished lower in January. Likewise, a gain in January has usually heralded a good year. Using the Standard & Poor's 500-stock index, the so-called January Barometer has been wrong only seven times since 1950. And only three of the seven wrong calls were way off (in 1966, 1968 and 1982). The other four were close--such as in 1970, when the S&P; fell 7.6% in January. It finished up for the year, but just barely: a gain of 0.1%.

Biotech Bargain? If biotechnology is one of the premier growth industries of the 1990s, Applied Biosystems Inc. of Foster City, Calif., should be a big beneficiary. The firm is one of the world's leading makers of instruments and chemicals used in biotech research. But late on Jan. 25, Applied dropped a bomb on shareholders, announcing that earnings in the quarter ended Dec. 29 plunged 57%, to 16 cents a share from 37 cents a year earlier, even though sales rose 5.1% to $40.8 million.

Applied had plenty of excuses: the strong dollar (more than 50% of sales are made overseas); a shift by customers to lower-priced instruments, anticipating short-term cutbacks in government research grants, and price cuts in some Applied equipment lines, an effort to protect market share. Investors, however, were in no mood for excuses, logical or otherwise: They dumped Applied's stock like crazy on Jan. 26. The price closed at $15.50 over-the-counter that day, down $9.50, or 38%. The stock has languished since, closing Friday at $14.75. It traded as high as $38.50 earlier last year.

Is Applied cheap at $14.75? Analysts, taking a cue from the company's now-cautious view of the next six months, figure that it will earn about 75 cents a share in the fiscal year ending June 30 (versus $1.38 last year). So at the current price, you'd be paying nearly 20 times earnings--not exactly bargain-basement territory.

Still, if you've got a long-term view, analyst Robert Kupor at Kidder, Peabody & Co. calls Applied "the best company in the world at what it does. And it's in an (industry) that has got to grow." Japanese and European orders are strong, so the firm's big question mark is short-term demand from U.S. medical centers and other research outfits. Long term, Applied figures it should benefit handsomely from the proposed 15-year, $3-billion federal research project to map the human genetic code--the 3 billion-plus chemical instructions that create a human being.

OFF A CLIFF

Applied Biosystems, Foster City, Calif. Equipment for biotech research. Friday close: $14.75, up $0.75

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