The Daily Interview: A Bull Calls the Bottom

Even as the major indices hurtle lower, and gloom and doom descend further over the corporate earnings outlook, a couple of pundits have started humming a bullish fight song once again.

TheStreet.com's Jim Cramer says stocks won't hit bottom until these permabulls are all washed out of the market. But they don't seem ready to give up yet. To find out what's got the bulls bullish, we spoke with Phillip Ruffat, global strategist for derivatives trading firm Fuji Futures.

Ruffat wrote in a report early Wednesday that he was "very bullish" on stocks. While admitting it's a dangerous game, Ruffat picks bottoms for all the major indices, and says he expects a slow ascent between now and June. He explains that a few major companies have actually begun to say visibility is clearing up, that fund managers and other long-term investors are sitting on loads of cash and that a pickup in trading volume shows managers have begun to buy quietly.

TSC: Why are you bullish now?

Ruffat: I think more money will be made going long than short now, and the companies are trying to show more visibility. Greenspan has capitulated some of the hot money out of the market. Now you have the long-term investors as well as people awash in cash that need to invest for the long haul -- mutual funds, pension funds, 401(k) pensions and longer-term investors in general. There are plenty of cheap companies around -- good, cheap companies.

TSC: And when you say you're bullish, is that primarily on the S&P 500, or on the Nasdaq?

Ruffat: Primarily the S&P 500, although the lines are getting blurred because many of the components in the S&P 500 are also very large players in the Nasdaq, and some of the tech components of the S&P 500, like Nortel(NT Quote - Cramer on NT - Stock Picks) or Motorola(MOT Quote - Cramer on MOT - Stock Picks), are not in the Nasdaq. But primarily I'm bullish S&P 500.

TSC: What kind of time frame are you talking about?

Ruffat: I'm not day-to-day bullish. I think from now to June you're going to have a general rise in tides. And I think that tide will lift all ships -- that includes S&P 500 and Nasdaq. Of course, some of it will not rise, some of it will keep on going down, but that doesn't mean that the overall market is going to keep on going down. I think in general the market has stabilized -- stabilization is never the fun part -- and the last 10% down is always the real gut-wrenching move. But I think that move is largely over. We might have a little more downside, but I don't really see any disasters.

Technically, we are in a bear market because it's 20% lower than the highs. I don't think we'll go too much further, but I don't think we'll be out of this either. I mean we're not going to be up 40% between now and June -- cause that would put us back in bull-market territory. We're just going to be in that range of down 20% (from the highs of last year) to maybe positive slightly. That is a big move, if you think about it, in itself. And that's the kind of stuff you want to see. You want to see day-to-day increasing. You don't want to see spikes up. You want to see more of a gradual building.

TSC: What do you think is the catalyst, or what has changed in fundamentals to make you bullish?

Ruffat: I think most of the bad news -- not 100%, I'd say 80% -- is out. We could possibly see some more downgrades, some more surprises. But I think most of the larger companies have already come out or have said, look, this quarter has been pretty bad, but we feel comfortable going forward, about something. What we don't want is a Xerox-type surprise.

TSC: What are some of the ones that have come out and said that they are confident with their quarters and that they do have visibility?

Ruffat: General Electric(GE Quote - Cramer on GE - Stock Picks) was a big one. Oracle (ORCL Quote - Cramer on ORCL - Stock Picks) came out and said things are kind of bad, but we're OK -- not going to zero. IBM (IBM Quote - Cramer on IBM - Stock Picks) has been pretty good about guiding their shareholders lower towards more realistic growth expectations year-over-year. I think Dell (DELL Quote - Cramer on DELL - Stock Picks) has been pretty good in saying things are weak, but we're also concentrating on the server market, which is hot. And I think ultimately that will be a positive.

TSC: Several firms have become very bearish on an inventory correction happening anytime this year -- that means earnings could fall even further than people thought. Doesn't that complicate the near-term bull case?

Ruffat: But then again, you're saying, "How much longer can inventory stay idle before someone says, 'That's it, get these computers out of here and get me new ones'??" There is a cycle, but that cycle keeps getting shorter, even in a slowing economy. What are we doing? We're pressuring our suppliers to lower prices. I wouldn't be surprised if later this year we had upside earnings surprises. It just seems a little overdone on the inventory correction. And the general perception among mutual fund managers seems to be that it's a little overdone. They're asking themselves, why don't we start buying stocks at these levels to get our feet wet, cause we're sitting on all this cash, and at some point we're going to have to start investing more and more.

Remember mutual fund companies and big institutional investors always want to be buying when the market is going down. If it's a good company and it's within a range, they buy and they keep on buying. The last thing they want to do is let all of Wall Street know that they're buying something in big quantities. I think the professional investor is in buying. I think they're doing it quietly. You can see it in volume. The volumes are several billion shares a day both on the Nasdaq and the New York Stock Exchange. Somebody's buying. We had this buyer apathy a couple of weeks ago -- their hands were in their pockets, and they weren't buying.

TSC: You may not be calling a bottom, but you are predicting a turnaround, something that people have been trying to do since last April. Is there anything different this time around?

Ruffat: I think that as the index gets smaller, a 100-point move in the Nasdaq is a bigger move than when it was at 5000. So as it relates to that, you have less to fall, and at the same time it's a bigger move. The thing is, a year ago, when the Nasdaq was at 5000, no one blinked at a 100-point move down -- that was nothing. The volatility stayed the same, everybody did OK. You were talking about a 2% move back then. Now the Nasdaq is at 1842, and 100 points down is a 5% move. So, ultimately the market has to adjust to these kinds of things, and it has a lot.

But the volatility is still there. And, actually, we are at abnormally high volatility levels in the Nasdaq, and equity volatility in the S&P 500 is skyrocketing high. The CBOE's volatility index for the S&P 500 -- the VIX -- that's up 35.31; the average this year is about 27. Last year, even in the crash of the bubble, the volatility average was only 25. Every time the VIX gets above 35, it has a tough time staying there. A lot of mutual fund managers are forbidden from making any purchases if volatility levels are over 25 to 27. But it's way too volatile to start making bets at this point. As it comes down, you'll see more players in the market.

TSC: Were you also bullish as the market unraveled last year?

Ruffat: I was very bullish for the most of the year when it came to certain companies. It got to a point where the Nasdaq was all the way at 5000, and the spread relationship with the S&P was an interesting one to look at from a point of view of relative value. We looked at what is cheaper to buy -- volatility on this index or volatility on a foreign index. Our direction or mandate for some of the customers that we handle is trying to do volatility plays. Let me give you an example -- S&P 500 and Nasdaq have very different volatilities. Nasdaq volatility is much higher. You're long one volatility and short the other. We try to find the top on volatility. From a different point of view, we also try to pick bottoms and pick highs on the equity market. But that is increasingly not what Wall Street is really -- that's not where money is made for mutual funds. Especially because their performance benchmark is pegged to an index. So really, you're not going to fire a mutual fund manager that's down 20% if the market is down 25%. That's how they're judged -- on a spread scenario over a risk-free assets.

TSC: But at the time when people were trying to pick bottoms, were you also thinking there was a bottom?

Ruffat: Well, no, I'm not going to say I was smarter than anyone else. I thought there was a bottom. Previously, I thought before the election, I thought we showed great opportunity for things to recover and for things to move forward, or to catch the upswing with the year-end rally or whatever. However, once again, the thing that messed things up was this horrible election last year, where uncertainty ruled. Who was it -- Bush, or Gore, Bush or Gore? And this uncertainty went on for days, for weeks. And volatility every day kept inching up, up, up. And people threw in the towel -- not, like, sell everything, but like, don't call me until volatility comes down. I thought Bush was going to win, and that the market was then going to take off, because he's very corporate-friendly and all that. But it didn't happen like that. And so we had all this indecision and volatility went through the roof and it wasn't that people started selling, but that people stopped buying. And we needed that flow of money going into the market to keep it alive, so that's where we messed it up. And I think you'll see that echoing through a lot of other Wall Street firms.

If I were to pick a bottom, say, from now, with the Dow at 9622, S&P at 1135, and the Nasdaq at 1850, I'd say you have another 100, 150 points in the Dow, further down -- actually maybe down to 9200 or something like that. And the S&P would probably go down another 30 to 1100, the Nasdaq maybe another 100 points. But, again, if you try to pick the bottom, you could just miss it, and it would never come back.

Back in the early '80s, people would go to the bank to invest -- and everybody would ask, "What's your CD paying?" Nobody does that anymore. I mean, you've locked it up at 5% for five years. It doesn't happen anymore. People just choose mutual funds, and that money is not going to leave the mutual funds and go back to the checking accounts. It's basically going to stay in there. And people basically have faith in the U.S. in general.

TSC: Do you think Tuesday's 50 basis-point interest rate cut is enough to jump-start business and consumer confidence?

Ruffat: No, I don't think it is. But at the same time I don't think it was meant to be by Greenspan. I think it was just to address a specific need when it came to a slowing down in certain sectors of the economy -- manufacturing. Greenspan is a very intelligent central banker, he doesn't want another Japan -- where we have to go to zero-rate policy and still nothing happens. Americans like to consume. Interest rates are a good way to make them go out and spend.

He's not crazy -- he didn't do 75 basis points because he would have had no outs after that. Every analyst on the Street thinks there's another rate cut in the works. I don't think even Greenspan knows what he's doing for the rest of the year, to be honest. But from now till June he'll probably do one more cut. The thing about consumer confidence is that it's a lagging indicator. I don't think the Fed is behind the eight ball. You cut too much, and we're back to March 2000 with the Nasdaq all the way up there, and people buying for no reason. And stocks being priced for perfection. It needs to have a slow ascent.