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Monday Morning Market Musings  01/02/2001

2001: A Bear's Odyssey

Welcome to 2001, the year of HAL. We think it will also be another year of the Bear.

Before you know where you’re going, you’ve got to know where you’ve been, so we’ll begin with a review of the year 2000.

To say that 2000 was a year of the Bear is stating the undeniable:

• More than 20% of all Nasdaq stocks crashed by 80% or more.
    

• More that two-thirds of all Nasdaq stocks fell by 30% or more.
    

• The Nasdaq’s 39.3% loss was its worst annual performance ever. The Nasdaq ended the year down 52% from its March 10^th bubble peak of 5,133. The bisection of the Nasdaq in just under eight months marked one of the fastest 50% drops of any average in world stock market history. 
    

• The Nasdaq has been unable to put together more than two winning days in a row since August.
    

• 54 stocks IPOed in February 2000. 51 of them ended 2000 below the issue price. The Bloomberg IPO Index fell 50% over the year.
    

• The S&P 500’s 10% haircut was its worst year in 23 years, since 1977.
    

• The DJIA held up better than its brethren, slipping only 6.2%, which was still its worst year since 1981.
    

• According to the good folks at Elliott Wave International, the Nasdaq sell-off was the worst for any of the three major indexes since the S&P dropped 47% in 1931, in the depths of the Great Depression.

In all, the Bear consumed an estimated $2.7 trillion in shareholder value in 2000. He was very hungry. 

Here’s what was on the menu in 2000:

• For starters, the Bear whetted his appetite on dozens of hot dot coms. Some of the tastiest morsels included:

• The main course consisted of filleted New Economy blue chips, garnished with sautéed silicon.

• For dessert, the Bear devoured some old-time favorites, including ATT, which fell 71% and cut its dividend for the first time in 113 years, and Xerox, which faded 84%.

Quite a meal! If you managed to be short any of the above stocks, congratulations, you had a great year. No Alka-Seltzer required for you.

The one thing the Bear is still hungry for is that elusive historic one-day crash. The year 2000 saw everything that is to be expected in a bear market EXCEPT that crash, at least so far. Stay tuned; we believe the potential for a crash will remain high throughout 2001. 

The 2000 sell-off was extensive but rather orderly, with really no signs of the panic or capitulation that typically mark solid bottoms. It was all too painless and bloodless.

• 2000 left most individual investors bruised and battered, but still not bloodied or bearish. For example, market sentiment (a contrary indicator) remains massively bullish. Investor’s Intelligence’s latest survey of independent stock market newsletters reveals a 54.1% to 30.3% lead for the bulls. Such excessive bullish sentiment is most often seen near market tops, not bottoms. The bear market will bottom when pessimism peaks.
    

• Even after the Nasdaq’s 52% free-fall from its all-time high, the price-to-earnings (P/E) ratio on the Comp is still in the stratosphere, at an estimated 100. Bringing the index back to a more comfortable P/E of say 40 (or about twice the DJIA’s current P/E) would mean an additional drop of about 60% from year-end levels - or about another $2 trillion of nominal wealth. 
    

• Market expectations for the next few months have once again crystallized around Sir Alan of Greenspan. Will our hero once again ride in on his white horse and save the day with interest rate cuts? It may not matter. History provides at least two examples where rate cuts were too little too late to stop a bear market: 1929-1931 in the US and 1990-1991 in Japan.
    

• Wall Street anal-ysts are still "wishing and hoping" for a strong seasonal inflow of funds in January into 401(k)s and IRAs. When they start praying, you know we’re close to the bottom.
    

• The news from the bond markets is not encouraging for the Bulls. The yield curve has never been more inverted than it is now. "There should be no denying that we are in the midst of an historic and systemic collapse in credit quality," reported Doug Noland of the Prudent Bear Funds recently.
    

• The personal savings rate of Americans is virtually zero.
    

• The Index of Leading Economic Indicators fell 0.2% in November, after a 0.3% decline in October. It has fallen in six of the past eleven months.
    

• A hard rather than soft landing is starting to be muttered under the breaths of the talking heads. The “R” word (recession) is prevalent.
    

• And finally, from the “they still don’t get it" department (USA Today 12/29/00):

Street experts see better days in 2001
NEW YORK — After the market's dismal performance this year, you'd think Wall Street seers would have soured on stocks. They haven't. Strategists from 10 of the top brokerages expect battered stocks to bounce back and post double-digit gains in 2001. On average, 10 investment pros interviewed by USA TODAY think the Standard & Poor's 500 index will rise 18% by the end of next year. 

So what’s an investor to do?

First, we think the Great Bear isn’t done feasting. You’ll know he’s had his fill when the consensus of Wall Street “experts” is for 18 percent losses. Now is not the time to abandon the mainstay of our diet, contrarianism.

Nowhere is it written that you must be invested in the equity markets all of the time, or at all. Six percent in a money market account looks pretty good compared to the Nasdaq’s -39%, plus you get to sleep nights.

In the short-term, the Bear may need a breather to sit back and digest what he has consumed so far. Or, he may continue indulging himself right now on the remaining stocks on the table. We'll just have to see how he's feeling, but in the meantime:

US STOCKS REMAIN ON FULL CRASH ALERT!

For more aggressive investors, the 19 Great Bear mutual funds we have identified out of an industry of 4,300 funds were well-positioned in 2000, and they should do well again in 2001. Here’s a sampling of how some of our favorite Bear Funds did in 2000:

Please see our Great Bear Funds Page for more information on these and other bear funds.

For speculators, any short-term strength in the markets hold excellent low-risk entry points to the short side.

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Stay tuned for 2001: A Bear’s Odyssey. It should be quite a ride!

“The future ain’t what it used to be.”  - W.C.Fields

grizzly@bearmarketcentral.com

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