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Joseph Granville's Profits of Doom

For decades, Joseph Granville has epitomized the head-for-the-hills market bear. He was one of Wall Street's most influential and oft-quoted analysts during the depressing days of the 1970s. An economist by training, the World War II vet has written several books on the art of investing -- as well as poetry and volumes on such diverse subjects as stamp collecting and how to win at bingo. His Granville Market Newsletter, first published in 1963, is still considered the bible for bearish investors.

Granville's reputation suffered a blow in 1982, after he incorrectly predicted a market crash. In 1999, in the midst of the bubble economy, many investors found his bearish outlook laughable. But at 78, Granville is still at it, putting out his market letter, writing books, and providing a daily stock market fax service. And guess what? He's bearish about the future. On May 7, Granville talked to BusinessWeek Online reporter Olga Kharif. Edited excerpts of their conversation follow:

Q: What should investors do now?

A: They should be short. All my people are short, betting on the downside. My last call was when I gave a bear selling signal right on Mar. 19, at 10,635 in the Dow. The outlook is getting increasingly worse.

When I look at the market as a whole, I look at it as an army, with the generals and the troops. And it's very, very disturbing to the troops when you see a number of key stocks -- the generals -- such as General Electric (GE), IBM (IBM), and Merrill Lynch (MER) leaving the line and retreating. On top of that, smart people have been leaving the market all this year.

Q: Why is the market rolling downhill? And when should we expect a rebound?

A: It's happening because money is leaving those stocks. They're going to keep going down until money begins to come back. And there's no sign of that in evidence at this time. There's no sign of any parameters getting stronger. On the contrary, they are getting weaker and weaker.

On top of that, look at the Standard & Poor's 500. It has carved up what we call a head-and-shoulders top curve -- left shoulder, head, right shoulder. The head was way up there at over 1,400. Today [May 7], it went down to 1,049 on the close. You were only 50 points away from breaking under the neckline of that four-year head-and-shoulders top.

If you come down to 990, as with the S&P 500 it looks like we might, it will not only come down to September lows, but it will go much lower -- for years! That's how important this is. Also, if the September lows are broken in the Dow, that will also extend the downtrend -- for what could even be for years. We don't even realize how serious this market is.

Q: What else are you recommending that investors do?

A: The only long positions I have are around gold stocks. I love them. I turned bullish on gold in the first week of January and have become increasingly bullish on it all the way up.

Gold is in the early stages of a major long-term rise. People are so used to [this pattern with gold]: It would go up, and then it would go down, go up, then go down. We have to leave that now. We are in the early stages of what eventually will be a parabolic curve -- then, and only then, will we get out of gold.

Q: What do you think about tech stocks?

A: These stocks have been ruined. In fact, I called the top at 5,048 in the Nasdaq on Mar. 10, 2000.

Q: How do you make your prognoses?

A: I put all my stress in reading the market through parabolics. A parabolic is a curve that's not only going up, but the angle of its rise becomes increasingly acute until the rise is going vertically. When you see that, you know that's the top.

That's how I called the exact day of the top in gold, at $875 an ounce on Jan. 20, 1980. And then, when I saw all these parabolic curves in the Nasdaq...I called the exact day of the top at 5,048. Then, I called the exact day of the bottom last September. We were down to 8,200 in the Dow. And, of course, more recently, I predicted the top of 10,635.

Q: Does technical analysis really work? You've predicted many things right, but you've also made some mistakes, such as predicting a crash in 1982.

A: When I make a mistake, I do something no other market letter does: I apologize for it, like when I called the market wrong in 1982. My mistake was, when the market bottomed, I stayed bearish. I predicted it for the previous two years correctly.

It's very important to always own up, because we learn by our mistakes. Therefore, every mistake I make is a very, very valuable experience.

What I stress is that everybody in the market should always have a stock loss under everything they own. For instance, if you're long on a stock at $50 a share, you're going to have a stock loss at the $45 level, a 10% stock loss. If you go short on a stock, you have to have a buy stop above it. It's Wall Street myth that, "Oh, you can't go short, because if you go short you can have unlimited loss."

You've heard of a stock called Enron. When that stock was $95 a share, you should have had a stop loss under it at $86. You would have been out of Enron at $86. Wall Street committed the crime of the century. They let people ride Enron all the way down to 24 cents a share, and never apologized for not having a stock loss under it.

Q: Do you think technical analysis is superior to Wall Street's analysis?

A: Wall Street is the exact opposite of the market. We need them because, when we are bearish, we need somebody to sell our stocks to. If we are bullish, I need someone to buy stocks from. Wall Street is the opposite of what I do. To prove that, just look at their record -- one mistake after another.

Q: Can your model work forever?

A: Of course. Truth is never out of date. There's only two things that can change the value of a stock -- supply and demand, the only thing I teach.

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