Kraft Is Stickin' to His Prediction for a Major Drop in the Markets

Some people never get enough bad news. And of the recent star-studded IPOs, can you smell what Task is cooking? Yeah, we can, too.
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The Sunshine Boy(s)

SAN FRANCISCO -- On

Sept. 8, Ronny Kraft, CEO of

Gotham Capital Management

, forecast the

Dow

and

S&P 500

would fall 25% four to eight weeks thereafter, with the

Nasdaq 100

declining 40%.

After today, the averages are down 7.5%, 6.2% and 3.9%, respectively, from their Sept. 8 closes. Yet Kraft is far from conceding anything, much less defeat.

"We still stand pat on the prediction we called for on Sept. 8, and still feel comfortable with the call and fundamentals that underlie it," he said in an interview today. "We're astonished at the resistance of the

Nasdaq 100 but that's typical for speculative" areas of the market.

Those "fundamentals" Kraft sees include (all together now): rebounding commodity prices + the falling dollar = rising inflation. To that sum, then add (1) a belief the U.S. economy is in the last phase of its growth cycle, multiplied by (2) his conviction that the "speculative nature of this market is spread throughout", and divide that by (3) the square root of Internet stock valuations, and you get a better understanding of the formula behind Kraft's draconian call.

In addition, "the reason the

Federal Reserve

was able to step in during the Russia and

Long Term Capital Management

crisis

last year is because there wasn't inflation and they had the leisure to lower rates three times," the hedge fund manager said. "The reality is, if the Fed finds itself in a situation the same as last year, they can't react the same way," because Japan "bottomed" in February. The rebound of the world's second-largest economy "brought a significant amount of demand on line," resulting in the upturn in several commodities, he said. Additionally, it's brought pressure on the dollar, which was quoted at 105.40 yen late today vs. 105.51 yesterday.

The falling dollar has resulted in an expanding trade deficit, which the hedge fund manager expects will prove unsettling when August figures are reported Wednesday.

"The reality is the trade deficit is getting bigger, the dollar is not looking pretty and you've got a situation where there are still significant excesses in the market," he said. "Tomorrow can be a very challenging day for the market, and has the potential to set off an accelerated move to the downside."

Surprisingly (not!), Kraft expressed skepticism about

today's blue-chip advance, calling it a case of "people wanting to be a little less short" vs. being aggressive buyers. "They're smacking the bond," he noted. Indeed, the price of the 30-year Treasury fell 16/32, its yield rising to 6.36%.

Is Kraft the hedge fund manager who cried wolf? Maybe so (although I'll point out he's really only been defensive since April, and is not, like some, a "career" bear). The good news is it's already been about six weeks since he went public with an extremely negative forecast. The bad news? There are still two weeks left in his time frame.

Rest of the Best, Part 2

In

last night's rundown of top strategists' recent thoughts, I foolishly, unforgivably (OK, maybe it was just an oversight) omitted Jeffery Applegate, chief investment strategist at

Lehman Brothers

.

In a report published yesterday, Applegate lowered his year-end price target for the S&P 500 to 1400 from 1500, and to 1550 from 1650 for next year. However, the strategist left unchanged his asset-allocation recommendation of 80% stocks, 20% bonds and zero cash.

"While the stock market's been struggling mightily ... the classic preconditions for a cyclical bear market are not only absent, they're going in reverse," Applegate wrote. "Nor do we buy the bear argument variant that since most stocks are in a bear market, the 'true' bear market is being masked by the popular indices. If that's right, how do you explain $52 billion worth of IPOs this year, a quarter of which are dot-com companies? Rather, we think that the major market indices are in an old-fashioned cyclical correction occasioned mainly by higher interest rates. Once the Fed goes on hold, the bull market should resume."

Finally, yesterday's piece included comments attributed to

Cantor Fitzgerald

chief market analyst Bill Meehan. Although said comments were culled from the daily "Meehan Notes," I failed to notice that John Babyak and Howard Barlow of Stamford, Conn.-based

WHB/Wolverine Asset Management

filled in for the traveling Meehan.

Apologies to all.

Can't Resist

I know

Martha Stewart Living

(MSO)

fared better in its debut today, but can you smell what the

World Wrestling Federation

(WWFE)

is cooking?

I remember the days when pro wrestling was only on at midnight on Saturdays. Now it's on basic cable seemingly every other hour and on network TV (

UPN

) from time to time, too (not to mention the monthly pay-per-view "extravaganzas").

Sure, the outcome of the matches is predetermined. But who cares? Seeing a guy like the

Big Show

do a standing dropkick

is

entertaining (and an impressive display of athleticism, to boot). We can discuss the social and moral wherewithal of this "sport" another time (and offline).

Meanwhile, this company is profitable and has a long history as a staple of the American television watcher's diet (for more on the company's numbers see

John Rubino's

recent

column). Additionally, the WWF folks are really working the merchandise game into the corner of the ring where they can do some serious (financial) damage while the referee's back is (inevitably) turned.

Does that mean the stock is a good investment? Hard to say after today's 48.5% appreciation from its $17 a share offering price (itself higher than expected). I just hope

George "the Animal" Steele

,

"The Polish Power" Ivan Putski

, and even

Captain Lou Albano

(who

Gorilla Monsoon

used to call "a walking advertisement for birth control") and some other old-timers got "friends and family" stock.

And finally, it is my imagination or has the quality of commercials on

CNBC

suddenly become very spotty? If that is what happens after a mere correction, imagine what'll happen if we actually do have a prolonged decline.

Aaron L. Task writes his column Monday through Thursday on TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.