Cases for Selling Stocks Now

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The New York Sun

Given the way the market has been getting battered in the face of stepped-up hostilities in the Middle East and a new record oil price of $76.70 a barrel, Corporate America at this point looks to have made an atrocious bet when it plowed $116 billion into stocks.

Corporate America made that bet in May and June through stock buybacks and cash acquisitions. In contrast, individual investors — whose actions are usually a super-contrary market indicator, but not this time — unloaded a total of $14 billion worth of equity mutual funds during the same two months.

“We’re a seller,” money manager Tom Postin says, adding, “The signs are all around us that the market is headed south.” He looks for the Dow, which closed yesterday at 10,846.29, to break below 10,500 in just a few weeks, if not sooner. Accordingly, his firm, Los Angeles-based P&W Partners, which manages $112 million in assets, is high in cash reserves — about 16%, and heading to 25%.

In addition to the outbreak of new hostilities in the Middle East, Mr. Postin sees a number of other decidedly negative factors that he feels are not fully reflected in the market combining to produce shrinking stock prices. Among those he cited were a slowing economy, which he says is certain to lead to plenty of disappointing earnings reports; the likelihood of additional interest rate hikes to bury any lingering inflation worries, and the growing number of international trouble spots, such as Bombay, North Korea, Iran, and Gaza. Still, he does like certain stocks, chief among them being Conoco Phillips, General Dynamics, Boeing, and McDonald’s.

James Melcher also takes a dim view of the market. The president of Balestra Capital, a $200 million New York hedge fund, says he’s particularly concerned about the economic slowdown; the tightening of liquidity and rising interest rates around the world; a topping out of housing, which has driven the American economy the past three years, and high energy costs, which will have an impact on the entire system.

Mr. Melcher also sees a rising number of overseas social and political events as a threat, pointing in particular to the Bombay bombings, the spread of Islamic terrorism, new fighting in the Middle East, and the spread of anti-American, leftist governments in South America. “Wall Street,” he says, “just doesn’t seem to care.”

The money manager also argues that stocks are by no means cheap, based on historical standards. He notes that in 1982, a year of great buying opportunities, the big Dow stocks were selling at six to eight times earnings, dividend yields were around 5%, and profit margins had been destroyed. Today, on the other hand, P/E ratios are in the mid to upper teens, the dividend yield on the S&P 500 is 1.87%, and profit margins are very high, he points out. “The name of the game in the stock market is to buy low and sell high, not the other way around,” he says.

“It’s a dangerous situation and we’re probably headed into tougher times,” Mr. Melcher says. He figures it’s reasonable to assume that stock prices by year end will probably be 5% or maybe even 15% to 20% lower, says. Because of the inverse yield curve (a reference to a situation where short-term rates are higher than long-term rates) he says he believes corporate high-yield or junk bonds are most vulnerable, as well as financial stocks. Much vulnerability is also seen in housing. “Analysts are saying there’ll be a soft landing, but we see a hard landing,” he says.

Given his bleak outlook, the fund is heavily hedged, Mr. Melcher says, with the portfolio about 35% long and 35% short. “We’re positioned for a downturn,” he says. As for the average investor, he thinks the strategy is clear: “It’s time to sell and most certainly to cut back,” he says.

One Los Angeles day trader, Arnold Silver, says he doesn’t see any near-term solution to the worsening Middle East situation, which he believes will continue to plague the market. “Things may quiet down a bit at some point, but Hezbollah and Hamas, supported by Syria and Iran, will just stir the pot again, and there goes stocks once more,” he says.

The New York Sun

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