Bad News Bears Can Scare You Into Reality Check
Wall Street’s bears have tasted blood over the past week. But they haven’t gotten nearly enough to satisfy them.
Far from seeing the week-ago, 120-point Dow Jones crash as a fluke, the bears believe that stocks are going a lot lower. Never mind the market’s calm in recent days--that’s just a natural cooling-off before the next plunge, the bears argue.
But just as there are degrees of bullishness, there are degrees of bearishness. In other words, some analysts are virtual grizzlies, while others look more like pandas in their forecasts.
Whether you buy the bearish case, these analysts serve a purpose: At the very least, they force the bulls to do periodic reality checks that help keep stock prices in line. And if they scare some go-go investors into rethinking their portfolios--leading to better diversification and lower risk--well, that’s not so bad, is it?
Here’s a look at a few bear scenarios:
* Robert W. LaMorte, the LaMorte Group, Malibu: So far, so good for LaMorte, who had predicted that the Dow would peak within 1% of 3,100. The Dow’s high was 3,077.15 on Oct. 18.
Now, he sees an “imminent” crash that will ultimately take the Dow to 2,100--an 833-point, 28% plunge from Thursday’s close of 2,932.69.
LaMorte says his precise 2,100 forecast is based on a “new economic law of price behavior” called Unit Theory, which he contends has predicted price peaks and bottoms when back-tested against the Dow over the past 100 years.
If you don’t buy his theories, LaMorte says, just look at the market purely in the context of the faltering economy: “The Federal Reserve is easing (credit), but it’s having no impact.”
* Michael Murphy, Overpriced Stock Service newsletter, San Francisco: As a “short-seller” who bets money that stocks will slide, Murphy can hardly be called an impartial market observer. He needs lower stock prices to put food on his table.
But to be fair, his bearishness is measured, depending on how far overvalued he believes the market has become relative to anticipated corporate earnings. Today, we’re talking way overvalued, Murphy insists.
He scoffs at the bulls who seem to believe that the market can magically rise even as the economic recovery appears to recede from the horizon: “If the economy doesn’t recover by the first quarter of 1993, can the stock market get to 4,500? If it doesn’t recover until 1994, can the market get to 5,000?”
Sarcastically, he continues in his latest newsletter, “Say, if the economy never recovers, that must be the most bullish possible scenario.”
Fair value for the Dow today would be 2,127, this grizzly says--but 1,724 is possible in a panic.
* Richard Carney, GIT Special Growth stock fund, Los Angeles: Carney is proof that being a bear doesn’t always mean bailing out of stocks. It just means owning the right ones--he hopes.
Like Murphy, Carney sees the economy sinking again. And that could mean a Dow of 2,000 or lower before the next bear market ends, he says.
But his $65-million mutual fund remains 75% invested in stocks and only 25% in cash. Why so many stocks, still? Because Carney mostly invests in small and medium-size firms, and he believes that those stocks will fare much better than blue chips in 1992 and beyond.
What’s more, “Most of my big holdings really are recession plays,” Carney says--such as deep-discount toy retailer Value Merchants ($38.50 Thursday, NASDAQ), low-cost auto insurer 20th Century Industries ($21.25, NYSE) and low-price cruise line firm Carnival Cruise ($22.875, AmEx).
Had enough of the bear case already? OK. You don’t have to believe them. But if they make you think twice about speculating in this uncertain market--as opposed to investing for the long haul--then they might serve a good purpose even if they’re wrong.
Bond Fund Seized: The assets of Alpine California Municipal Asset bond mutual fund have been frozen by court order, in a rare Securities and Exchange Commission action against a mutual fund. The Denver-based fund, which invested in California muni bonds and thus was marketed to investors here, saw its assets plunge from $27.7 million on Oct. 15 to $17 million by last Friday.
The SEC alleges that the fund paid dividends above its actual interest earnings, had an improper board and had failed to honor redemption requests promptly, among other things. A court receiver will be named to decide how best to liquidate the fund and pay shareholders, an SEC official says.
The Bears’ First Blood
Here are the stock industry groups that sank the furthest in the market’s latest setback, starting with the 120.31-point Dow plunge last Friday through Wednesday’s close. Also included are representative stocks in each group.
Nov. Nov. 15-20 15-20 Group pct. drop Example pct. drop Hotels -10.2% Promus -15.4% Leisure -9.9% Handleman -11.1% Insurance* -9.4% Aetna Life -9.0% Truckers -8.7% Yellow Freight -15.2% Machine tools -8.5% Cin. Milacron -9.0% S&Ls; -8.5% Ahmanson -11.5% Autos -8.2% GM -9.3% Shoemakers -8.2% Reebok -15.0% Paper containers -8.1% Stone Container -10.9% Railroads -7.8% Conrail -8.6% S&P; 500 index -4.7%
* multiline companies
Source: Smith Barney, Harris Upham & Co., using S&P; indexes
