Market Bears See Problems for Start of 2008
"Prophetic Friday" is how Los Angeles money manager Arnold Silver labels last week's final market session. He sees the Dow's 256-point dive as a flashing sign that Wall Street's predominantly bullish party line, as was drummed home time and again in sunny new year's forecasts, seriously lacks credibility.
That decline was spurred by news of December's jump in the jobless rate to a two-year high of 5%, raising recession fears anew. Significantly, it was the third triple-digit tumble in the past five trading sessions, adding up to a total three-day Dow loss of nearly 600 points.
"I think we're getting a message this could be an awful year for the stock market," Mr. Silver observes. The head of A. Silver Associates tells me he thinks "a down first half for the market is almost as certain as Barack Obama being our next president, and I'm a Republican."
He said he believes Friday's sorry showing casts serious doubt on the bullish argument that all the bad tidings — the mortgage mess, credit concerns, a worsening housing picture, the growing threat of a recession, and an expected sharp earnings slowdown — are already widely known and discounted in the current level of stock prices. The bullish case also presumes housing will rebound in the second half, and that the economic slowdown will evolve into a soft landing, not a recession.
As such, the bulls peg 2008 as a winning year for the market — not, mind you, a humdinger, but rather a respectable gain in the single digits, given the numerous worries.
Mr. Silver says he thinks that could be far too optimistic an assumption. In the 1840s, Abraham Lincoln wrote, "'Tis better to be silent and be thought a fool than to speak and remove all doubt." Some skeptics think the widely publicized bulls — with their exaggerated expectations — might well heed such words.
Some maintain a credit crunch, the subprime mortgage and housing crises, the likelihood of more giant write-offs, a far more cost-conscious consumer, a likely further jump in unemployment, and a sharp slowdown in consumption will make a first-class recession inevitable. They also argue that rising inflation will prompt the Fed to think twice about further relaxing the credit reins. Accordingly, some believe the market could get battered.
A former Goldman Sachs strategist, Fred Dickson, sees "a lousy first half," largely reflecting widespread credit concerns, anxiety over mortgage write-offs, and the uncertainty of whether the magnitude of those write-offs will derail the current global economic expansion. He's also fearful businesses could trim their spending plans to the point where it could throw the economy into a recession.
"Fasten your seatbelts; it's going to be a bumpy ride," he says.
Still, Mr. Dickson is not about to hop aboard the gloom and doom bandwagon, telling me he's not looking for any major bear market. His reasoning is threefold: huge liquidity on the sidelines (namely, roughly $3 trillion in money-market funds); the apparent willingness of global investors to make major investments in cheap and distressed sectors of the American economy, and reasonable stock valuations (about 14 times estimated 2008 earnings). After a dismal first half, Mr. Dickson sees a late 2008 rally, spurred by cumulative action by the Federal Reserve to temper credit risks and the windup of the presidential race, in turn leading to a full year increase in the S&P 500 of about 5% to 7%.
His strategy for making money in 2008: increase exposure to technology, health care, and consumer staples, with Intel, Teva Pharmaceuticals, and PepsiCo. his top picks in these areas.
At the same time, he says he would shun housing, automakers, and the high-profile emerging markets, especially China.
John Harris, a former investment adviser to Chicago's multibillion-dollar Harris banking family (and a member of that family), tells me: "You have to be brain-dead not to realize there are many unanswered questions and unknowns all over the place that represent serious dangers for the market. Does anyone seriously believe that the mortgage writedowns are all done? Sure, real estate will come back, but if you take a realistic look at the housing deterioration that's going on nationally, it may well take another five to six years before that comeback happens."
Florida investment adviser Michael Larson of Weiss Research echoes similar concerns. Citing tightening lending standards and record inventories on the market (2 million existing homes and 150,000 to 200,000 new houses), he expects the turmoil in housing to progressively worsen. "It looks like it will just drag on and on for who knows how long," he says.
Pointing as well to a slowing economy and questioning Wall Street's general assumption that the Federal Reserve will continue to throw money into the market in the face of growing inflationary worries, Mr. Larson says he is convinced "the market could be in for another rough year."
The bottom line from our worry-warts: The 2008 bulls are full of bull.
dandordan@aol.com
