Commentary: When Bulls Get the Hook, It May Be Time to Buy

Near the end of 1997, Charles I. Clough Jr., Merrill Lynch & Co.'s (MER ) then-chief investment strategist, forecast that the bull market would soon run out of steam. The 13-year Merrill veteran stuck to his guns as the market kept on rising. Two years later, Clough had left. And within two months, the market came a-tumblin' down. The boom was over.

Clough, who went on to form Boston's Clough Capital Partners LP, was one of a cohort of unheeded bearish strategists and economists on Wall Street who left their jobs in the months before the bull market tanked. Other departing prophets of doom included Salomon Brothers (C ) market strategist David Shulman, Oppenheimer chief strategist Michael Metz, and J.P. Morgan Chase (JPM ) chief strategist Douglas R. Cliggott.

Is this the Pink Slip Indicator? If so, there could be good news for investors, because now the indicator is flashing a signal that the stock market may be on the mend: These days, Wall Street is sending its bulls out to pasture. Big Picture strategists who failed to foresee that it would take at least three years to unwind the speculative excesses of the late 1990s are getting the boot.

Among the casualties are Credit Suisse First Boston's (CSR ) chief investment strategist, Thomas M. Galvin; Merrill Lynch's chief economist, Bruce Steinberg; and Lehman Brothers' (LEH ) chief market strategist, Jeffrey M. Applegate--respected strategists all. None has yet resurfaced in new posts. All said the bear market would be over by now. Applegate's targets for the Dow Jones industrial average have been off the mark since 2001, when he predicted the index would hit 13,000 that year. Despite his expectations for a 10,000-plus Dow since then, the index has traded mostly below that mark.

The firms say the sackings are just the luck of the draw. The official line from Merrill and CSFB is that the strategists lost their jobs in companywide downsizings that had nothing to do with off-target predictions. "We're making small adjustments across all divisions," echoes a Lehman spokeswoman. But at Merrill, bearish forecasts now abound. On Dec. 5, Richard Bernstein--a renowned bear and the former director of quantitative research--cut his equities allocation to 45% from 50%, saying the market was overheated. His 12-month forecast calls for a 7% fall in the Standard & Poor's 500-stock index. Bernstein replaced Christine A. Callies, a bullish strategist, a year ago. Merrill also promoted the bearish David Rosenberg to replace Steinberg, Merrill's chief economist since 1997. CSFB's new chief investment officer, Paddy Jilek, who replaced Galvin, won't issue targets in the near future.

Eminent bulls who have hung on to their jobs clearly have been shushed. True to form, Goldman Sachs & Co.'s (GS ) Abby Joseph Cohen, a star strategist during the 1990s boom, reiterated on Nov. 25 that equity prices would rise 20% over the next 12 months. She says institutional investors should put 75% of their assets in equities. Bullish, to be sure, but a lot more subdued than on Oct. 9, when she predicted a 50% rise in stocks. Cohen's calls used to make the prime-time news; no longer. "Everybody is your friend when you make a forecast and the market moves your way," says Joseph V. Battipaglia, chief market strategist at Ryan Beck & Co., another veteran bull who expects stocks to double in 12 months. "Obviously we have not seen results in the last three years [by predicting a recovery]. But the market is reacting more to psychological and short-term factors than to structural issues."

According to Street lore, pessimism is deepest at the end of a bear market--just as unquenchable optimism marked the end of the bull run. With the new crew of strategists pushing unremitting gloom, things may indeed be looking up.

By Mara Der Hovanesian

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