USE NEW THREAD!! TA: Technical Analysis & Charting (3150+)

This archived discussion is "read only".
For the corresponding "live" discussions, post in the active topic forum here.

Top 173. Apr 3, 2001 12:25 AM

» JenL_2 - Bear Bottoms

In response to message posted by Ronjamm:

Excellent article in Barrons, 4/2/01, re this market vs previous bear market bottoms by Abelson, quoting Barton Biggs.

Here ya go Ron...

Drawn and Quartered

By Alan Abelson

A quarter that gave no quarter.

That was, as anyone who owns a share of stock knows, graphically, painfully true in Wall Street.

Poor old Nasdaq, the nearest thing this country has to a national lottery, came up all losing tickets, dropping a cool 25% in the January-March stretch, atop last year's 39%-plus. And is now down a modest 65% from that ever more distant peak reached a year ago.

Nor were the Dow and the S&P spared. The grand old average was off more than 8%, its rival index, down more than 12%.

The faith of investors in the perennial bull market was harshly tried. And, indeed, there were stray signs that the mighty flock of true believers was starting to experience a distressing tremor of doubt. Thus, for the first time since the dark days of August '98, when the world seemed to teeter on the brink, investors in February redeemed more shares -- some $3 billion worth -- of their trusty equity mutual funds than they bought.

But trouble and worry brewed in the first quarter of 2001 not only in the famous fantasyland bound by a graveyard on one end and a river on the other but, more importantly, in the great beyond inhabited by ordinary people engaged in pursuing their daily tasks and pleasures.

For the mighty economic revival that began back in the wintry days of '91 and blossomed into the longest peacetime expansion in our history, engendering jobs and profits in copious abundance, wilted in rather alarming fashion. Growth, which had slowed to a halting 1% annual rate in the final quarter of last year, likely failed to match even that sleepwalking pace in the March quarter of this year.

A blizzard of layoffs blanketed the economic landscape and its chilling impact, although evident just about everywhere, was most conspicuous in erstwhile lush employment terrain like Silicon Valley and Silicon Alley. Corporations, in one industry after another, found themselves heavy on capacity and light on profits, which explains both those layoffs and the end of another great boom -- capital spending.

Oddly, despite a grisly bear market and the onset of recession, the quarter wasn't racked by panic among either investors or the population at large. People were still kind to their brokers, although fewer and fewer took them to lunch (they couldn't afford to). There was no rash of kidnappings of corporate bigwigs by their idled former employees (just as well, since a survey shows the corporations, after a cost-benefit analysis, would refuse to pay even a modest ransom).

Obviously, the afterglow of nine years of fun and fortune has not yet dissipated. But the year's still young and both bad market and sick economy appear inclined to stick around.

In Washington, the quarter witnessed a rather disturbing outbreak of ethics. Disturbing because the complaint is so rare among politicians, it has no ready remedy. We're thinking specifically of the decision by Treasury Secretary Paul O'Neill to sell his stake in Alcoa after resisting calls to do so, and the decision by Sen. Jon Corzine to liquidate his holdings in Goldman Sachs, which he, too, did grudgingly.

But, you can relax: This seemingly aberrant behavior on the part of men holding high public office is, it emerges, quite reasonable. Mr. O'Neill stepped back a moment and sized up Alcoa: a cyclical company with the cycle turning down, whose stock sports a 20 P/E and is selling near its high. His qualms about parting with the stock were miraculously resolved.

For his part, Mr. Corzine, crafty old Street hand that he is, took time out from trimming his beard (the Senate has strict rules on the permissible length of face hair) to weigh his moral obligations as senator. In the course of such deliberation it occurred to him that investment- banking business is drying up, underwritings ditto and trading profits not what they used to be, all of which makes Goldman's outlook less than golden. So he looked in the mirror and saw not his image but huge red letters that spelled "SELL."

This vastly reassured our confidence in Mr. O'Neill and Mr. Corzine. Any day in the week we'll take as public servants not silly dreamers but practical men, who prefer principal to principle.

This mean quarter was even so nasty as to diss the President. Mr. Bush had been energetically bad-mouthing the economy when the house historian pointed out to him the only other President to sound a similarly gloomy note was Jimmy Carter, who not long after lost his lease on the White House. It probably also made an impression on Mr. Bush that polls showed his popularity dropping rather sharply, with the sore point his handling of the economy.

So he quietly changed his tune, in accordance with the counsel of his trusty advisers, who celebrated with a glass of the new bubbly concoction they've come to favor of arsenic water and carbon dioxide (the latter for fizz).

We can't wait to see what the second-quarter brings.

Wall Street is obsessed with bottoms. What it demonstrates is the inherent optimism of investors, especially so-called professionals (they're the ones who get paid for losing other people's money). It's rather a touching fetish, since it bespeaks an irrepressible optimism. For in contrast to such preoccupation with bottoms, interest in identifying a top when the market was in the clouds a scant year ago was not only minute but considered bad form.

But in view of the mania for spotting a bottom currently in full rage in the Street, we feel it incumbent upon us to offer up the table that adorns the page you've just turned. For even the most fevered bottom-searcher might profit from a little historical perspective, which is precisely what those informative numbers in the table provide.

Bear Bottoms
In almost every instance in which the Arms Index moved above 1.5, a market bottom occurred not long after.

 
              10-Year  Trailing   Bull/Bear  
Date     P/E  Yield    Yield Gap  Ratio*  
6/26/62  13.8  3.9%    0.0%     
10/7/66  12.7  4.7     3.1        33%  
5/26/70  12.4  6.9     1.1        34  
10/3/74  7.1   7.2     6.9        36  
3/27/80  6.7  12.9     2.0        29  
8/12/82  6.8  13.5     1.1        43  
7/24/84  9.7  13.3    -3.0        45  
10/11/90 13.8  8.9    -1.7        37  
12/8/94  16.3  7.8    -1.7        36  
10/8/98  24.5  4.6    -0.5        47  
3/23/01  24.2  4.8    -0.7        63
*Among investment advisors

Full disclosure -- to say nothing of decent practice -- mandates a confession that we have lifted the chart (and mildly amended it) from Barton Biggs' latest commentary, fetchingly entitled "Dead Cats Can Bounce." You might quarrel a little with calling '94 and '98 or, for that matter, '84, bear markets -- and we'd agree with you -- but in this instance we're primarily a transmission vehicle, so direct your complaints to Barton (number on request).

In any case, what the table plainly shows is that measured by investment yardsticks -- P/Es, yields, advisory sentiment and the like -- we're a long way from where most bear markets -- and all the truly vicious ones -- have ended in the past. Or, to put it rudely, what we're viewing today bears as much resemblance to a traditional bear-market bottom as a bad bruise does to a blast wound.

That doesn't mean, as the title on Barton's piece suggests, that the market can't rally fast and furiously at any time. The only surprise is that it hasn't done so already. We view advances like last week's, particularly Friday's gains, as primarily illustrations of the venerable Street art of tape painting.

What's more, we're kind of inclined to agree with Barton that the techs particularly are overdue for a bounce, even a big one. Our feeling stems not only from the fact they're so beaten up, but also the fact that, because in the furious repositioning of the past few weeks in anticipation of the end of the quarter, mutual funds and their ilk have dumped techs wholesale just to cleanse their portfolios of the hated names.

Our caveat is one we've sounded more than once lately. The big risk is not missing a temporary bottom. Man, if it's worth of being called such, you'll have plenty of chance to throw money at it. The big risk is thinking it's the final bottom, the end of this bear market.

Let's change the imagery a bit: True bear markets like the one we're in don't end with stocks still greatly overpriced and everyone on the alert for the turn. They end with valuations almost as depressed as those relatively few investors still standing.

David Wilson is an old friend, but please don't hold that against him. He also happens to be a very bright and very nice fellow and one heck of a good investor.

Professionally, David runs a hedge fund called Wilson Capital Management. He was up last year some 26% and that's after the not inconsiderable bite that hedge funds take. If we had to characterize his investment style, it'd be as risk-conscious, quality-oriented, with an eye for the off-beat and a passion for the undervalued.

David started out life as a housing analyst (no one's perfect) and he's always well-informed on that field. We checked in with him, frankly, in hope of getting some factual confirmation of our hunch that the pins are out for the housing bubble. But, darn it, he still likes the homebuilders, although not insensitive to the risk inherent in a rapidly softening economy.

So far this year he's off around 2%. And while he's something over 60% net long, he has been -- and continues to be -- an aggressive short seller. He thinks, for example, the auto companies are headed for a fall (so do we, if only because, as a shrewd friend points out, the weakness in the yen means good things for Toyota and Honda and bad things for GM and Ford). So he's short suppliers like Dana, since when Detroit sneezes, the suppliers become candidates for the intensive-care ward.

David tossed out a number of intriguing ideas, but we were really captivated by two small airlines, one to short, one to buy. The short is an Irish airline called Ryanair Holdings, whose shares are traded on Nasdaq.

Ryanair is a low-fare carrier that operates between the Emerald Isle and Great Britain and Europeland. All told, it flies to 45 destinations in 11 countries and has been prospering. But David sees it as a potential casualty of the spreading scourge of foot-and-mouth disease. His informants in Ireland tell him the disease has had an inhibiting effect on the citizenry -- and this is hard to believe -- the pubs are virtually empty!

He thinks the reduction in travel and mobility and the negative impact on tourism both in Ireland and the places served by Ryanair will take their toll on the company's operating results and its stock.

The long is a short-haul, low-fare airline, AirTran Holdings, headquartered in Orlando with a hub in Atlanta, serving mostly Eastern and Midwestern cities. It competes with Delta and its fares are quite a cut below that carrier's. The thing that might turn you off -- it did us, for sure, until we succumbed to David's arguments -- is that this is the son of ValueJet, formed via merger of that ill-fated line with the smaller Airtran Airways.

AirTran Holdings, David notes, has been profitable for eight quarters in a row through the end of 2000 and is well on its way to extending that winning streak. It has been busily modernizing its fleet with Boeing 717s, adding one a month, and the Boeing connection is enabling AirTran to stretch out its debt, making its hefty leverage manageable. The slowing economy, he notes, helps steer business passengers to cheapie carriers like AirTran.

To his mind, it's a nifty little play, that can earn 95 cents, partially taxed, this year and $1.15-1.20 next.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

Everyone's looking for a bottom, but the bear's just shaking it's tush at us!

.....Jen

-- posted by JenL_2

Permalink

Print Discussion

Join the latest discussions