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The Case for the Bear: Howard Rosencrans of HD Brous

'Periods of outperformance are followed by substantial, sustained periods of underperformance.'

TSC: Do you think the market's bottomed?

Howard Rosencrans, director of research of trading firm HD Brous:

I do believe there could be a rally or continuing rally on top of the modest one in the

Nasdaq per se. You're now seeing a rotation out of tech into defensive, safe quality, etc. I'm not in the position where I want to fight the

Fed.

The Case for the Bull: J.P. Morgan Chase's Jim Glassman

The Case for the Bear: Howard Rosencrans of HD Brous

But over the next 24 months, I believe we will be substantially lower in the

Dow in particular. That will be the beneficiary of myriad companies perceived to be "safe" in a recessionary environment. They may in fact prove to be, but

that doesn't mean they're not comically overpriced or won't suffer substantive multiple contraction.

TSC: So you think stocks even outside of tech are vastly overpriced?

Rosencrans:

I think they may be even more overpriced.

As for tech, it is suffering from deteriorating fundamentals, heightened competition and reduced demand almost across the board. It remains comically overvalued. These stocks may be OK generally for the ensuing 12 months, but they remain comically overpriced. Fundamentals are not going to improve enough to drive the stocks meaningfully higher. The weakening fundamentals may modestly improve in the back half of the year.

But the economic outlook in the context of heightening competition and the still-deteriorating fundamental backdrop will mitigate any modest stabilization.

I think that companies in general have benefited from the ruse of stock prices going up ad infinitum and by aggressive accounting where companies have acquired companies for stock and with options being paid out. There's no option windfall you can garner anymore. You can't pay your employees in options, which has very inflationary ramifications in a seemingly tight workforce.

Another factor that makes me so negative is

the possibility that dramatic amounts of money flow out of the market, maybe permanently. We have begun to see reductions in inflows. And if you look at European money, there were huge inflows from Europe

in recent years. Now they will largely abate, both with the underperformance of the U.S. market and the appreciation of the euro. That was a critical, critical support mechanism to the U.S. equity markets, which will diminish rapidly.

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TSC: You're not taking much comfort in the potential for more rate cuts?

Rosencrans:

They may induce stability to the economy, they may create some semblance of stabilization. But that will largely be mitigated by heightened competition and eroding demand levels for tech in particular.

TSC: If rate cuts do stabilize the economy, wouldn't they stabilize the demand for tech as well?

Rosencrans:

But given the magnitude of competition

among tech companies, I think the supply

of technology exceeds the demand.

TSC: If you're talking about competition among tech companies and high valuations, those factors have been around for a couple of years. Were you bearish back then?

Rosencrans:

We've been bearish the whole time.

If you look historically at periods of outperformance, they're followed by substantial, sustained periods of underperformance. Given the magnitude of the up we've had, I think the magnitude of underperformance could be virtually unparalleled. People say the U.S. is healthier than Japan in 1990. I would say the jury is out.

We will see if the banking system holds together. Yes, these guys have been more conservative than their Japanese banking counterparts, but the reality is banks are, by their nature, comically highly leveraged entities. Where you take in $5 of equity and lend $100, and when you're lending that money to New York City or California, the most hyperextended real estate markets in the world, if you take a 25% or 30% haircut, it's only taking you back to the levels of '97, '98. Which were stupid. You would end up very conceivably with a significant number of bank failures and a domino effect.

TSC: So what would make you more bullish?

Rosencrans:

That's the definitive question. What I think you need from the technical perspective is capitulation; you need investors to really give up. There may have been some semblance of give-up in the Nazz and in tech of late that helped created a temporary bottom. But not on the long-term prospects; there hasn't been a recognition of the magnitude of risk.

People still think if you buy good companies, over time they'll do OK. That's a crock.

Be sure to read the opposing bull case from Jim Glassman of J.P. Morgan Chase.