As Bears See It, We’re Not Out of the Woods Yet : Markets: The Dow’s slide could take it as low as 1,700, some say, as the ‘debt bomb’ goes off and the recession gets worse than many have expected.
To most investors, the stock market’s frightening slump is a bleak period that can’t end soon enough.
But to the market’s hard-core bears, this finally is their day in the sun. And they believe the worst news is yet to come.
Peter Eliades, editor of the Los Angeles-based Stockmarket Cycles newsletter, sees a drop to “at least” 1,000 on the Dow Jones industrial average before it’s over. Many of his bear peers are reluctant to name a specific bottom, but most agree that it’s below 1,700 on the Dow--a further drop of at least 30% from Friday’s close of 2,398.02.
Charles LaLoggia, editor of Special Situation Report newsletter in Rochester, N.Y., explains his bearishness this way: The United States has entered “a Star Trek recession,” he says. “We are going where no economy has gone before.”
Eliades and LaLoggia are among a handful of market advisers who have been harping on stocks’ vulnerability since late 1989 or early this year. Most were very bullish through the 1980s; they aren’t the survivalist types who have been proclaiming the end of the world for 30 years. But something changed their minds over the past 12 months.
Now, with the Dow off 20% from its peak, the bears feel vindicated at last. Call them the princes of financial darkness, the new nattering nabobs of negativism, the horsemen of Wall Street’s apocalypse. Just don’t call them lucky, because nothing makes them more angry than the suggestion that, except for Saddam Hussein, there would be no bear market.
“That’s a crock of baloney,” says LaLoggia. The market may not have gone down this fast, he says, but the collapse would have come, and sooner rather than later.
Like most of the bears, LaLoggia’s grim outlook is rooted largely in the deepening crisis in the nation’s financial system. Too much debt was piled on in the 1980s, he says. Too many marginal loans were made, and too many companies and individuals--not to mention Uncle Sam--have been living beyond their means. We’re simply overdue for a shakeout, he says, and that means many more bankruptcies and defaults, ending in a deep recession.
The Mideast crisis may have lit the fire, but the kindling has been building up for years, LaLoggia says. “Saddam Hussein didn’t create the loan problems that Citibank and Manufacturers Hanover have. He didn’t put Travelers Corp. into commercial real estate.”
What is difficult for many investors to understand, though, is why the bears should be right about the “debt bomb” now. As far back as the late 1970s, analysts were warning that excessive debt would cause an economic crunch. Yet the banking system sailed through the Third World debt crisis of the early 1980s relatively unscathed. And the recessions of 1980 and 1981-82, although harsh, were sparked by a cyclical drop in demand for goods and services rather than by a severe deterioration of the financial system.
“There has been a hell of a lot of gloom and doom talk about the debt problem for 15 or 20 years,” Eliades admits. There’s no simple explanation for why the debt load finally became too much, the bears say. All they know is that, in Eliades’ words, “The contraction of credit has actually begun. . . . The ball of yarn is becoming unraveled.”
The evidence is in the financial problems of major banks, many of which have been forced to slash their dividend payouts to shareholders--an unprecedented move--as wave after wave of borrowers have defaulted on loans.
It isn’t a coincidence that the bank and S&L; stocks began plunging a year ago, Eliades and LaLoggia say. Now, the rest of the market is simply beginning to telegraph the tough times coming in 1991.
Richard Russell, editor of Dow Theory Letter in La Jolla and a bear since January, looks at the destruction of Hilton Hotels and Marriott Corp. shares--both off more than 75% from their 1989 highs--and sees a clear message that “people aren’t going to be renting expensive hotel rooms” next year. Since most hotel rooms are booked by business travelers, the implication is that business will get much worse for many companies.
Indeed, the basic premise for the bears’ prediction of a much steeper slide in stock prices is that the recession will be far worse than most experts now believe. A mild recession still is the expectation of most economists. LaLoggia, noting that the vast majority of economists couldn’t see the current debt crisis coming, asks why anyone should believe that those experts could be right about a mild recession.
“They’re saying it’ll be a shallow recession for precisely the same reasons that they missed it in the first place,” LaLoggia says, which is: They’re refusing to believe that the financial shakeout from the ‘80s will bite deeply.
But how do the bears add it all up and get a low for the Dow of 1,700 or less? They admit there’s no scientific way to pick a bottom in a bear market. It’s gut feeling--and some help from history.
In the last truly destructive bear market--in 1973-74--the stock market lost 45% of its value from peak to trough, as measured by the Dow. The eeriest similarity between then and now is that an oil shock helped precipitate both bear markets.
There are other similarities as well. For one, the values ascribed to companies’ assets had become outrageously overblown, as evidenced by stocks selling for 40 or 50 times earnings per share in 1973. This time, though stock prices aren’t nearly as overblown versus earnings, the assets purchased with all that borrowing in the 1980s--remember takeover mania?--clearly weren’t worth the prices paid.
Perhaps more important, the stock market faced the same strong sentiment then that it faces now: a sense of disbelief that a killer bear market could actually happen.
“Everybody’s looking for a rally now” because the market has plunged so sharply, says Dan Sullivan, who writes the Chartist newsletter from Seal Beach. Yet, in the slide of 1973-74, he says, there were four occasions when his indicators suggested that the bear market should have bottomed, because stocks were “completely sold out.” Instead, the market continued to fall.
If the Dow loses 45% from its peak this time, it will bottom at 1,650. A drop to 1,000, as Eliades predicts, would be a loss of 66%.
To many investors, that would seem to herald the end of civilization. But most bears aren’t planning for Armageddon.
“This is a cleansing,” Eliades says of the bear market, “not the end of the world.” And as stocks fall, “the people who are out of debt are going to find great opportunities over the next two to three years” to buy into the market and catch the next bull wave.
“We’ll survive this,” Russell agrees. But as a nation and an economy, he says, “we may survive looking a lot different from what we look like now.”
HOW THE BEAR ATE WALL ST. IN 1973-’74
Investors who weren’t around for the 1973-’74 bear market don’t know how bad things got--and how long the bear market continued. From a peak of 1,051.70 on Jan. 11, 1973, the Dow Jones industrial index plunged 45% to a trough of 577.60 on Dec. 6, 1974. Jan. 11, 1973: Bull market peak, 1,051.70 Oct. 21, 1973: First oil shock. Arabs cut sales to U.S. for supporting Israel. Late March, 1974: Market rallies despite recession concerns. Late June, 1974: Market begins to plunge onr ealization a severe recession is under way; Washington paralyzed by Watergate crisis. Dec. 6, 1974: Dow bottoms at 577.60 as recession nears end.
