Is It Time to Take the, Uh, Bear by the Horns?


What do you do in a stock market as dicey as this one? Here, four investment pros give their views on Wall Street’s current setback and how they’re playing it--or not. They were interviewed by Times staff writer Tom Petruno.


Mark Strome, principal, Strome Susskind Investment Management, Santa Monica

“I am the most bearish guy you’ll talk to,” Mark Strome says.

He’s not kidding.

Strome, who manages a $500-million hedge fund for big-money clients, says he is “really, absolutely convinced we’re in a bear market now. It’s just a question of how it’s going to unfold.”

His market call, he says, “comes down to a gut feeling,” but one formed by the same worries that gnaw at many investors: that stocks are overvalued, that corporate profit growth is slowing, that interest rates are going up and that too many investors have made too much money too easily for the last six years.


The market’s action in recent weeks is a classic early-warning signal, Strome says.

“You can just see the money coming out of these stocks,” where companies have issued disappointing news, he says.

Meanwhile, the reverse isn’t happening, he adds. “You don’t see companies reporting good earnings news and their stocks going up 15%.”

The bull market, Strome says, is old and tired. And yet, “nobody seems afraid of the market going down,” he says. “I think there is unbelievable complacency out there”--a perfect invitation to a slaughter, he figures.


He believes the U.S. market is set to decline at least 20% as measured by blue-chip indexes, “and I think it may be a dull, eroding slope down,” rather than a crash, Strome says. A slow decline, he says, would be much harder on many investors because it would grind away at their confidence.

Worse, he sees “no place to hide”--not in bonds or foreign stocks or other asset classes, other than cash.

“You name it, I’m short it,” notes Strome, saying this includes the Standard & Poor’s 500-stock index, technology stocks, financial stocks, European bonds, European stocks.


The fundamental problem isn’t a troubled world economy, he says. Just the opposite: “I think it’s synchronized global growth that’s going to” kill the bull markets in stocks and bonds, Strome says.

Faster growth that sucks money into real things “is the worst thing for these liquidity-driven financial markets,” he says.


Peter Canelo, investment strategist, Dean Witter Reynolds, New York

Peter Canelo is bullish, and generally without apology.

The great 1990s stock market advance, he says, is handing back some of its sensational gains, but it isn’t over.

He figures the Dow Jones industrials, 6,583.48 at Monday’s close, may fall as low as 6,300 in the current pullback, for a decline of about 11% from the first-quarter record high.

“We’ll see a good low in the second quarter and then continue up from there,” Canelo says confidently.

True, interest rates are rising, and that’s bad for stocks at the moment, he says.

“But the bullish news is that you’re going to have super corporate earnings this year,” he says, thanks to the same stronger-than-expected U.S. economy that is pushing rates up.


He expects an 11.5% rise in first-quarter operating earnings for the blue-chip Standard & Poor’s 500 companies versus the year-earlier period.

The sharp rise in the stock market from last summer until recent weeks was essentially foreshadowing the strong 1997 economy, Canelo says.

“You don’t go up 1,000 points because you’re going into a slowdown,” he says.

The problem now is that the bond market and the Federal Reserve Board have just begun to deal with the notion that the economy is robust, and that will mean continued indigestion in bonds, and stocks, for a while, Canelo says.


But he believes that investors will respond sooner than later to companies’ underlying earnings growth.

Moreover, he says, the bull market still has other important things going for it: the ongoing takeover boom, massive corporate share buyback programs, and the continuing flow of cash into the market from individual investors’ retirement plans.

Canelo also thinks the market could get a lift from a balanced federal budget deal and a cut in the capital gains tax--both of which he expects to get out of Washington this year.


If you believe this market pullback will be short-lived, where should you begin to nibble?

Canelo likes the energy sector, especially the big, high-dividend oil stocks, because “institutions are going to flock there in a nervous market.”

He also likes the retailing sector, thanks to strong consumer spending. “I think retail stocks are going to rally at least into May,” he says.

Finally, he sees good value in some computer-networking and semiconductor stocks, such as networker Cisco Systems. “It’s time to start making big bets in those areas,” he says.


David Decker, Janus Special Situations fund, Denver

While most of his peers are spending much of their time now worrying about which stocks to sell, David Decker has had the comparative luxury of mostly worrying about what to buy.

Decker’s fund started life on Jan. 1 and in the span of three months has accumulated $110 million from Janus customers.

“I’m actually enjoying this market quite a bit,” he says. As such, he may be a good role model for cash-heavy investors who are eager to go bargain-hunting as stocks sink but aren’t sure where to start.


Decker’s idea with Special Situations was to bring a fresh eye to the market, to see, perhaps, what other managers can’t or won’t as they focus on protecting the portfolio gains racked up over the last two wild years on Wall Street.

In the investment business, the term “special situations” often refers to shares that are out of favor and-or misunderstood on Wall Street--which typically means “value” stocks.

Decker, who cut his teeth assisting Janus manager Jim Craig at the flagship Janus Fund, agrees his new fund is value-oriented--to a point.

“I do buy a lot of names that have been beaten up,” he says. But just because a stock is cheap doesn’t mean it’s a smart investment, he says. “I’m looking for a catalyst,” Decker says--something that will eventually draw other investors back to the stock.

One favorite such catalyst: substantial free cash flow, which is a company’s net earnings plus depreciation and other noncash charges, less dividend payments and capital expenditures.

“If a company is generating a huge amount of free cash flow, you will get paid eventually” as a shareholder, Decker says.



Case in point: media company Harte-Hanks. Decker identified it as a great cash-flow generator with an exciting and fast-growing subsidiary in the direct-marketing business.

Wall Street, however, was focused more on the company’s slower-growing newspaper and TV-station properties.

But since Harte-Hanks on March 5 announced plans to sell the traditional media businesses and reinvest the proceeds in the higher-return direct-marketing business, its stock has jumped 13%.

Similarly, Decker scored with auto-parts maker Federal-Mogul, whose shares rose 12% in the first quarter as new management finally took over what Decker believed was a company with significant inherent value, yet one that had been “dreadfully run.”

In Federal-Mogul’s case, the management change was all the catalyst Decker needed to see, while much of Wall Street was still ignoring the company after years of disappointment.

Decker concedes that many of his stocks--like Universal Outdoor, a billboard company with steady cash flow and low capital expenditures--aren’t exactly glamorous.


“But I’ve found you can make a lot of money in boring stocks if you pick them right,” he says.


David Schafer, Strong Schafer Value Fund, Milwaukee

He isn’t sure how deep a market decline we’re in for, but David Schafer knows one thing: He won’t be selling his stocks into this slide, if he can help it.

Schafer’s $685-million-asset fund remains virtually fully invested in stocks, and that’s the way this veteran wants to keep it. He says he learned the hard way in the 1970s that trying to time the stock market is a losing proposition.

Instead, Schafer focuses on buying and holding high-quality stocks whose price-to-earnings ratios are below the market average and whose expected earnings growth is above the market average.

“It’s the simple notion of trying to buy growth at a discount,” he says.

And despite the widespread view that there haven’t been many of those stocks to pick from in recent months, Schafer says, “we haven’t had trouble finding them.” And now, as the market dives, “there are a lot more of those names out there,” he says.

Schafer finds the comparisons between this bull market and the “Nifty Fifty” era of 1972--which preceded the horrendous bear market of 1973-74--to be vastly overstated.


Price-to-earnings ratios on today’s blue chips, he notes, are nowhere near the 50 to 60 or higher levels of 1972’s Nifty Fifty blue-chip names.

“You don’t have a comparable situation,” he says. “It’s not a wildly overvalued market, although it’s not a cheap market, either.”

He agrees, however, that there is risk of a deeper slide in the biggest blue chips that dominate the Standard & Poor’s 500 index, if only because some of the money that flowed into those stocks via index mutual funds may quickly flow out.

“That is going to unwind at some point,” Schafer says.

But if his shareholders are willing to sit still with him, Schafer hopes to be adding to his favorite stocks if they continue to slide: names such as National Bank of Canada, which currently is priced at about seven times estimated 1997 earnings per share; LaSalle Reinsurance Holdings, now at six times ’97 estimates; PaineWebber Group, at 8.5 times ’97 estimates; and General Motors, at seven times ’97 estimates.

His portfolio overall, he says, is priced at about 12 times estimated 1997 earnings per share, versus a P/E of about 18 for the market overall.

With his stocks already at such a discount, Schafer says, “I don’t feel badly--and I don’t feel like I need to run for cover.”