The Daily Interview: When Bad News Is Good News

In the current market psychology, worse is just one step closer to being better.

Bob Rezaee Senior Analyst and Money Manager, Montgomery Funds

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Tech spending is plummeting? That's OK. The economy is veering toward a recession? Good. Consumers are suddenly tightfisted? Bring it on. Profit shortfalls replacing upbeat guidance? Now we're really talking. It's not until everything points down that up becomes the indisputable alternative, says Bob Rezaee, a buy-side analyst and co-manager of the (MNGLX Quote)Montgomery Global Long-Short fund. It's not that Rezaee is a sadist; he just likes to earn his recoveries the hard way.

With fundamentals such as the resumption of demand for networking gear and enterprise software still a year or more away, Rezaee thinks the market is close to seeing its worst days. Soon, he says, people will be willing to call certain stocks bargains. But unlike the market upswing of 1999, Rezaee says we're wiser this time around and will stay more attuned to valuation.

TSC: So Bob, last week [the market] was way down; this week it's started up -- where's the market really headed?

Rezaee: I think we're getting close to a short-term bottom. Prior to the events on Sept. 11, it looked like consumer spending would eventually buckle as more people were laid off over the next few months. But we had a sudden exogenous shock -- sort of a crescendo of bad news -- which caused panic and fear. Monday was just a reflex rally.

TSC: What's next?

Rezaee: I still sense a lot of panic and fear. People who were hoping for a silver lining gave up after the events two weeks ago. But what I like now is that all across the board stocks are looking like tech stocks -- they are all in a free fall. And with more bad news coming in the form of profit warnings and more layoffs, [it's likely] that we'll see yet another selloff next week.

But all these factors -- fear, bad news, lack of confidence -- all contribute to market bottoms. Pessimism rules the day. This is so typical of the late stages of a market when you give up on everything. Equity becomes taboo. We are getting close to that. And that gives me some level of confidence. By my playbook, we are probably no more than a few weeks away from a major bottom.

TSC: Then what? ...