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Market bears’ gloomy growl being echoed by big players
Chicago Tribune
December 2, 2007
Henry Van der Eb has run a mutual fund designed to weather financial disaster since the 1970s, continually preparing for the worst even as stock prices mostly soared.
Now he senses the times turning in his favor, and while he isn’t wishing hardship on anybody, some of Wall Street’s biggest and most respected players are echoing his gloomy cry.
Merrill Lynch last week issued a series of research reports warning of “pre-recession” conditions, even as stock prices first plunged, then soared. Goldman Sachs predicted housing woes would be “considerably worse than we originally anticipated.” And giant European bank Societe Generale warned risks are “growing rather than receding.”
For the first time in years, Van der Eb and his fellow “bears,” as the market’s perpetual doomsayers are known, were enjoying high-powered company.
By the end of the week, however, the bleak forecasts had been offset by the promise of U.S. central bankers riding to the rescue with a series of interest-rate cuts aimed at bringing about a soft landing for the sagging economy. In a speech Thursday evening, Federal Reserve Chairman Ben Bernanke promised to be “exceptionally alert and flexible.” Relieved investors bid the market higher in the expectation of further rate cuts beginning when Fed policymakers meet Dec. 11.
Van der Eb, manager of the Gamco Mathers Fund in north suburban Bannockburn, was unmoved. Fed action is no cure for the “reckless lending” that’s weighing on the markets today, he declared. “At some point, the rhetoric can’t keep overriding the fundamentals. You can’t create perpetual prosperity on debt.”
Waiting for stocks to plunge is a lonely business, and while last week’s volatile ups and downs clearly reflect unsettled times, they also illustrate the near-impossible task of predicting the market’s direction. For every Cassandra convinced the retreat of credit markets will take down the broader economy, an optimist points to the boom in U.S. exports brought about by the falling dollar, or to a Fed chairman eagerly resisting any sudden downturns.
As Morgan Stanley analyst Gerard Minack noted, “Most investors still expect the U.S. to land softly. Notwithstanding the jitters of the past few weeks, equity markets do not appear to me to be pricing in anything worse.”
While many analysts are forecasting just such a soft landing, the typical bear is betting against it, more visibly than at any time in years.
Anyone curious about the worst-case-scenario for the economy can find it at their local bookstore, where sky-is-falling analyses have been writ large in 2007 titles such as “Financial Armageddon” and “Crash Proof.”
Stock-market pessimists such as David Tice, manager of the Prudent Bear mutual fund, have become familiar voices to anyone paying attention to the financial media. “We’re as confident as we’ve ever been that the wheels have come off,” said Tice, expressing a sentiment reflecting his views for some time now. “We’re sad for the country.”
‘Revolution’ on horizon?
Ravi Batra, among the most bearish of bears, expects nothing less than a popular uprising against “moneyed interests preventing reform” and, eventually, “a revolution.”
The polite, soft-spoken economics professor from Southern Methodist University is no stranger to such alarmist ideas, and Batra says he’s “logging a lot of interviews” these days. He also has a new book, “The New Golden Age,” its optimistic title referring to the period that supposedly will follow the bedlam he foresees over the next five years.
Batra achieved fleeting glory when his book, “The Great Depression of 1990,” became a best seller in the aftermath of the 1987 stock market crash. And while the Dow Jones industrial average has gained more than 10,000 points in the years since, Batra has seen calamity lurking around the corner pretty much all along.
The only reason his predictions weren’t spot on, he said, is because he underestimated America’s capacity for debt. But he has no doubt the end is near: “American consumers can’t borrow any more,” he said. “That game is over.”
Perhaps chastened by the economic staying power that has defied their expectations in the past, neither Van der Eb, Tice nor even the far-out Batra predicts an imminent crash. Tice comes closest: “It may rally short-term. But we’ve started the bear market, and it’s going to go a lot lower.”
Predictably, Tice emphasizes the falling housing market and mortgage crisis. He expects Fannie Mae and Freddie Mac, the government-backed mortgage companies, to fall into disarray. And he sees an enormous hangover from the boom in structured finance. “We’re in the first inning of this thing,” he warned.
Van der Eb considers it premature to declare a full-blown bust in the making. “It’s probably too soon to say it’s going to be the big one,” he said. But trouble looms in bad-credit problems that “really dwarf” the dot-com bubble of 2000, he noted. “We’re headed toward the open water here, and we’ll just have to see how bad the waves get.”
Of course, those negative vibes belie the fact stock prices recovered sharply last week. On Monday, all looked bleak as the Dow Jones industrial average fell 237 points, bringing its decline from mid-October past the 10 percent threshold that signifies a correction. Though benchmarks differ, a “bear market” typically becomes official after a 20 percent decline, and the drop can be far sharper: During the dot-com collapse earlier this decade, large-capitalization stocks lost roughly half their value from the peak in 2000 before bouncing back.
If another drubbing is due, it was difficult to tell from the way the market shook off its Monday blues to post its biggest weekly gain in two months.
Not only did Bernanke signal a willingness to cut interest rates, but the Treasury moved closer to a plan to help Americans avert mortgage foreclosures.
JPMorgan Chase & Co. and Wells Fargo & Co. led financial shares to their best weekly gain in four years. Home builders rallied the most in seven years on Treasury Secretary Henry Paulson’s plan to buoy their market. For the week, the Dow rose 3 percent, the Nasdaq 2.5 percent and the Standard & Poor’s 500 2.8 percent.
Even bad news, such as a government report Friday showing that incomes and spending rose less in October than economists had forecast, merely boosted the confidence of investors that Fed policymakers would be cutting rates sharply for months to come.
The long-distance stock-market bear takes such rosy appraisals in stride.
Tice, for one, scoffs at “everybody who says it is time to buy every time the Fed cuts rates.” The bear market won’t unfold by moving straight down, he predicted. “You’ll have one-day rallies that give hope this is the time to buy.”
But don’t fall into the trap, Tice asserted: “People just ought to get out.”
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