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Checking In With the Steadfast Pessimists

Aaron Task

See How They (Don't) Run

SAN FRANCISCO -- Good news! Market prognosticators (a.k.a. "da bears") who've been wrong about the big picture in recent weeks, months and, in some cases, years remain steadfastly pessimistic.

So what? You might ask. Tell me more about bulls, such as Abby Cohen, the Goldman Sachs market strategist who upped earning estimates and price targets on the S&P 500 today. Or Lehman Brothers chief investment strategist Jeffrey Applegate, who upped his S&P 500 EPS target yesterday to far less fanfare than Cohen (contributing to a curious trend).

But don't ignore the bears, for their capitulation would be one sign the end (or at least the top) is nigh. Speaking of nigh, if sentiment polls began showing a sustained reading of 60% bullishness, that would be an indication stocks have reached the "silly season," according to Greg Nie, chief technical analyst at Everen Securities. Bulls were at 44.5% on Aug. 27, according to Investors Intelligence.

One of the most "wrong" forecasters is David Tice, manager of the (BEARX Quote)Prudent Bear fund, which had the second-worst one-year performance (down 40.9%) of any capital appreciation fund as of Sept. 3, according to Lipper Analytical Services.

But to his credit (or shame, depending on your perspective), Tice is unrepentant.

"Obviously we're losing money because we're not timing this well," he said. "The way I reconcile that is when [the market] goes parabolic, it's hard to say how big it will get. [But] the fall is going to be that much worse when it ends."

Tice takes solace in reports that Charles Merrill saw a psychiatrist in 1928 because the Merrill Lynch founder thought stocks were risky and "everyone thought he was crazy."

Maybe Tice is crazy (but that's how it goes).

Meanwhile, "think about return of principal rather than return ON principal," Tice said when asked what investors with concerns should do. "Reduce exposure to high beta names; sell some stocks or hedge, buy puts. Reduce asset allocation from 80% [stocks] to 60%. The time to worry is when everything is wonderful."

Fellow Travelers

Then again, things haven't been "wonderful" for some time, according to Don Hays, director of investment strategy at Wheat First Union, who renounced long-held bullish views in February.

Late last week, Hays acknowledged a recent study by Merrill Lynch's Richard McCabe, which showed only 27% of all New York Stock Exchange stocks and 23% of Nasdaq issues have exceeded their 1997-98 highs this year. The study also reported 57% of the NYSE stocks and 73% of over-the-counter stocks are 20% or more below those prior highs, while 41% and 63%, respectively, are 30% or more below those highs.

"Please read those statistics over again," Hays implored. "It will help you to keep your head on straight as the media gives so much praise to the perpetual bulls of today that relish in their own 'success' in the wake of the Dow's very distorted message."

Moreover, the strategist has observed "breakdowns" in key stocks such as Coca-Cola (KO Quote), International Paper (IP Quote), Dayton Hudson (DH Quote) and AMR (AMR Quote).

Bill Meehan, chief market analyst at Cantor Fitzgerald, who turned negative last November, is similarly unwavering.

This morning, Meehan expressed concern with the lack of "consistent leadership," apart from "red-hot" technology and energy stocks.

"That's just not healthy, and there's little doubt that when the techs go, they'll take the rest of the market with them," he wrote. "What could trigger the event? Nobody knows, but the concentration of activity is a precondition for an eventual stampede. I keep thinking about Mr. [Greenspan's] recent analogy of a dam before it breaks; one minute there's no sign of a problem, and then the next it unleashes its fury."

Then there's Arch Crawford, a newsletter writer who employs, to an extent, astrology. "We remain an unrepentant prophet of doom," he wrote on Aug. 11.

Crawford did not respond to an email seeking an updated outlook.

And Finally

In a conference call this afternoon, Ronny Kraft and Allen Gillespie, CEO and director of research, respectively, at Gotham Capital Management, forecast the Dow and S&P 500 will fall 25% in the next four to eight weeks, with the Nasdaq 100 declining 40%.

"There has been a fundamental shift" in factors contributing to the bull market, Kraft said. Specifically, strong earnings growth, increasing money supply growth, low goods price inflation, collapsed global demand, a strong U.S. dollar style and low interest rates have reversed to engender a "significant change in the continued upside momentum of our equity and credit markets."

The hedge fund manager then listed a string of somewhat rote events that could potentially trigger a mass exodus from equities, including international tensions -- such as between China and Taiwan, Y2K and additional Fed tightening.

"Regardless of the event, it is more important to focus on the presence of multiple conditions that have repeatedly bred market crashes," Kraft said, acknowledging he is "net short" in the roughly $150 million hedge fund.

Now don't you feel better knowing all these sayers of doom are still loud and proud?