The World According To Bears

A bear in a bull market is like a prohibitionist at a cocktail party. At first, some people take his admonitions to heart and sip soda water. But as the party goes on, nearly everybody joins in the drinking. Scorned, scoffed at, and--worst of all--ignored, the prohibitionist slips out to await the morning after.

Well, if you talk to a stock-market bear now, it's almost the morning after. Sure, you've heard that before. The bears said it when the Dow Jones industrial average was at 3800, at 4000, at 4500, and now in the 4700 neighborhood--where the Dow has been stuck for the past month (chart). But the longer the duration of the upmove--and the greater its magnitude--the better the odds that the bears will be right. Among many signs, the bears point to wild speculation in initial public offerings--shares in Netscape Communications Corp. zoomed from 28 to 75 when stock in the Information Highway company went public en Aug. 9--as a sure sign of trouble. The stock closed at 581/4.

"The high-flying technology stocks, the crazy IPOs, and the money pouring into mutual funds all indicate the stock market is in a mania," says Leo F. Hood of Gainesville, Fla., who publishes Ripples in the Wave, a stock market newsletter, and ProFiles, a fax service for institutional money managers. "And manias always end ugly."

RED FACES. Hood's worst-case scenario is gruesome. He believes the bull market will end in panic-selling so severe that the Big Board will have to temporarily halt trading under a rule enacted after the 1987 crash. For that to happen, the Dow would have to fall more than 250 points from the previous day's close. Says Hood: "If investors start redeeming their mutual funds, and the funds have to sell, who are they going to sell to?" His timetable for the calamity: by the end of this year.

Rest assured, few bears have such dire forecasts. But Jim Schmidt, whose Timer Digest follows the soothsayers, finds Hood's warnings worth consideration because he has shown his mettle in tough times, too, winning the newsletter's 1994 Timer of the Year award.

The runaway bull market left many

veteran gurus red-faced and apologetic. "Even if the market crashes tomorrow, I won't be vindicated," says Dan Sullivan, whose 25-year-old newsletter, The Chartist, based in Seal Beach, Calif., has been bearish since April, 1994.

In retrospect, Sullivan thinks he should have led his readers back to the market in late February, when his monetary indicators--based on 10-year and 30-year interest rates--turned positive. But his long-term-momentum indicator--which measures technical factors, such as the number of stocks making highs and lows and the trading volume--was negative and still is. The technical indicator needs fixing, says Sullivan, but he remains bearish nonetheless because the recent back-up in rates pushed the monetary indicator into the negative zone.

As with bulls, the bears take different paths to arrive at similar conclusions. Here are some of those bears:

-- The acrophobic bear. "Most stocks are priced too high," says Michael Metz, stock market strategist for Oppenheimer & Co., who turned bearish in early June. Metz studies stocks through traditional valuation yardsticks, such as earnings, dividends, and replacement cost. "The only way you're going to make money buying overpriced stocks is if they become more overpriced," says Metz. "And that's not investing." The few remaining values, he says, are in such consumer growth stocks as Merck, Warner-Lambert, H.J. Heinz, and Gillette and industrial commodity producers, such as Alcoa, Inco, and International Paper.

-- The profit bear. "Corporate profits are unsustainably high," argues David G. Shulman, chief investment strategist at Salomon Brothers Inc. Shulman argues that companies have boosted profits by restraining wages, a situation that, absent a recession, cannot last. Of course, if there is a recession, wage pressure will be off--but so will profits.

Don't forget the dollar, adds Shulman, which is "unsustainably low." The cheap dollar helped U.S. companies two ways: by making their exports cheaper and by boosting the earnings of their overseas subsidiaries when translated back into dollars. If the greenback rises--it's already climbing against the yen--it could hurt the U.S. profit picture and thus the stock market.

As a strategist for a major investment house, Shulman is a genus of bear that rarely recommends a drastic bailout. So, compared with newsletter bears, his advice sounds bullish. For balanced accounts, he suggests 45% stocks, 30% bonds, and 25% cash. That's a big cash position coming from a Wall Street firm. Moreover, look at his stock selection: He's recommending natural resource and consumer cyclical companies and real estate investment trusts, sectors that have lagged the market this year.

-- The risk/reward bear. James B. Stack, who publishes two InvesTech market letters in Whitefish, Mont., regrets missing the Dow's 1000-point run but says it's no time to play catch-up. Since 1950, says Stack, 75% of the bull market profits have been made by the midpoint of the economic expansion. And since the current expansion is old, about 53 months, he figures it's too mature to produce much more in market gains. Stack estimates that from current levels, the Dow could reach 5100 within the next 12 months--but it also could plunge to 3700. Says Stack: "That's a bad risk/reward ratio."

-- The technical bear. These seers don't focus on such fundamental factors as earnings or monetary policy but look at myriad measures of stock-price and volume activity. Market-watcher Justin Mamis of Hancock Institutional Equity Services says the diminishing number of stocks making new highs shows that the market is tiring. Perhaps more worrisome, he says, is that investors seem not to have any fear, and in Wall Street's contrary ways, that's a negative. "These money managers go on CNBC and say, `So what if the market has a correction?"' says Mamis.

So what? Mamis, who began drawing stock charts in 1953, shudders at the thought. Many of today's investors--including managers of mutual funds--have lived through only two bear markets, in 1987 and 1990, both a few months' long. Mamis, like many other now-bearish advisers, remembers the bear markets of the 1960s and 1970s, when painful hangovers from wild bull markets lasted for years, not months. Those memories are what keep these bears sober and what may cause other investors to go on the wagon.