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Bear Market Could Drag on Good While Longer


NEW ORLEANS - High-net-worth, accredited investors hunting for substitutes to the buy-and-hold mantra of mutual funds gathered here for a conference on alternative investments, ranging from gold to private placements to covered calls. The aim of the group, more than 1,000 strong, was to unearth ways to make money now - not when the market finally turns around.

To hear the high-profile speakers, many renowned publishers of popular investment and stock newsletters, speak at the New Orleans Investment Conference, one might conclude the recovery is decades away.

Super-bear Robert J. Prechter, Jr., publisher of The Elliott Wave Theorist, out of Gainesville, Ga., told investors that not only is it too late to make any worthwhile gains in value, real estate or bond funds, but many corporate and municipal bonds could be in danger of default. Prechter's final admonition? "Safe cash equivalents are hard to find, including money market funds. Your best answer is cash," said Prechter, whose latest book is Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (John Wiley & Sons).

Richard Russell, publisher of The Dow Theory Letters since 1958, speaking via a live video link from La Jolla, Calif., insisted that the market is grossly overvalued. The market has years to go, possibly another eight to 20, Russell said, before it can work the excesses of high price-to-equity ratios, or P/Es, off.

"I don't think the average person should be in the market unless they get great advice," Russell added.

Bill Bonner, president and CEO of Agora Publishing of Baltimore and author of The Daily Reckoning, concurred that a market correction could take another 20 years. He maintained that the S&P 500 is trading at 48 times core earnings, making it, still, "a very expensive market."

"We've had an epic boom and could now be in for an epic bust. In 1975, people paid $8 for $1 in earnings, and today they pay $48. We have not seen a regression to the mean," Bonner said. The market's downturn could "still take another 20 years" to reverse itself, he continued, noting that the bull market itself lasted 25 years.

Sour Puss'

Known for his pessimistic wit and dubbed "sour puss" by Money magazine, Bonner joked that he is no sour puss, that he always finds bright spots in his pessimistic way of thinking.

"The nice thing about a bear market and a correction is that it corrects so many bad ideas. In a bear market, humility rises and genius goes down. We like humility. Ashes to ashes. Boom to bust. Bull market to bear market. . . . This is as old as Greek tragedy," Bonner said.

Steve Sjuggerud, investment director of The Oxford Club, a network of investors based out of Baltimore, said that if Warren Buffet of Berkshire Hathaway and Bill Gross of Pimco are correct that stocks will only return 6% over the next decade, it does not make sense for a mutual fund investor's scant earnings to be wiped out by a 4% load and 2% annual fees. "Earnings will have to increase 100% or the market will have to contract another 50%" for P/Es to contract to a realistic level, Sjuggerud said.

Bonner predicted that stocks will fall yet precipitously further, more companies will go bankrupt, additional people will be out of jobs, and deflation is a grim but real specter on the horizon.

A number of other speakers also made note of the "D" word, in some cases the word denoting an out-and-out depression, in others, deflation. Bonner's rationale for deflation is continuing depressants on the market coupled with the fact that aging Baby Boomers, facing the sudden reality that they will not have enough money for their retirement, will begin hoarding cash. He noted that the savings rate has recently risen to 4.5%. The resulting cutback on spending will cascade down the earnings line to a weaker economy, Bonner reasoned.

Gold, unsurprisingly, was one of the bright spots highlighted at the conference. While all who spoke of gold's potential rewards were also quick to bring up its volatility in the same breath, the so-called "gold bugs" pointed to this and other hard assets as one of the few ways to beat the a bear market that could drag on for years.

REITS, LEAPS, PIPES

Other esoteric suggestions included shorting the market, specialized options such as covered call options or LEAPS, real asset income equities such as pipelines or REITS (see related story, page 3), closely held value stocks, junk bonds or privately placed equity investments, otherwise known as PIPES.

Frank Holmes, chief investment officer of U.S. Global Investors, a family of 12 mutual funds based in San Antonio, Texas, said he expected a weaker dollar and a steep drop in gold exploration between 1997 and 2001 to lead to markedly higher gold prices.

The U.S. Global Investors Gold Shares fund has risen markedly since 9/11, Holmes noted, primarily due to investors' belief that deficit spending to wage the war on terrorism will continue to restrain the value of the dollar. The fund, which has an expense ratio of 5.79%, is up 50.3% year-to-date through Nov. 11, according to Morningstar of Chicago.

Another interesting theme of the conference was the belief held by many that major banks around the world are artificially holding down the value of gold to about $325 an ounce. The reason, speakers said, was this so-called "gold cartel" wants to safeguard 13 tons worth of derivatives they write against the gold in their vaults.

Gold should actually be valued at $700 to $800 an ounce and could hit that level overnight, should this "gold scandal of derivatives and gold loans" ever erupt, said Bill Murphy, chairman of the Gold Anti-Trust Action Committee of Dallas.

Karim Rahemtulla, who runs The Instant Profit System, said that as far as he could tell, the New Orleans Investment Conference was a gold conference in disguise. "Gold is not the end-all and be-all," he warned. "Gold has its moments, but gold and energy are not the necessary answer."