Bears have a picnic in current market

By MARK FRYER

Forget that sentimental stuff about always looking on the bright side - the dark side is where the action is, according to one group of sharemarket observers.

They're the bears, the people who believe the only way is down and that we'd all be better off if we just looked on the gloomy side of life.

Although most of us are more comfortable with the idea that sharemarkets go up - eventually - a contingent of investment strategists is devoted to proving that, for the forseeable future, the only way is down.

Given the carnage on world sharemarkets over the past three years, it's no surprise that the bears are having a picnic.

While the species can be found in many habitats, it's most prolific in the United States, where a small industry has developed around the books, newsletters, websites and managed funds based on the notion that financial armageddon is just around the corner.

Only time will reveal whether the bears are any more credible than Robert Zuccaro, the author whose 2001 book argued that the Dow-Jones index was headed for 30,000 points by 2008 (last sighting: 8240 points).

Nevertheless, the bears' claims have a certain gruesome fascination. Among the arguments they use to make their case:

* One is obvious: what goes up must come down. The Prudentbear.com website reckons the 1980s and 90s produced the best returns US share investors have seen in two centuries. Which, if you believe gravity applies to share prices too, means we're now caught in a storm that will make 1929-32 look like a gentle shower.

* Despite three down years, US shares still aren't cheap. There are many ways of valuing shares, but whichever you choose, there's a bear willing to argue that prices are high compared with historical norms.

* The "new economy" was a fraud. Computers and the internet didn't really make companies more efficient and create a whole new way of doing business.

* What drove shares up in the first place wasn't higher profits, it was money. Mostly borrowed money. Companies could raise cash for even the most dubious business proposition, and low interest rates encouraged consumers to go on a borrowing spree, remortgaging their homes to buy bigger and better toys and to put money into the market. Now the party's over, the debt hangover will keep everyone subdued for years.

* Company profits were exaggerated anyway, by devious executives, compliant auditors and misleading accounting rules, all encouraged by sharemarket analysts and a financial media more interested in boosting the market than getting to the truth.

* History repeats. Some bears spend their time producing graphs showing the uncanny resemblance between 1929 and 2000, or the 17th-century Dutch Tulip mania and the internet boom. Some follow the Elliott Wave theory, which argues that there's a predictable pattern to the behaviour of crowds, investors included.

* There's not much Government can do. The US has already cut interest rates in an attempt to reinvigorate the economy. What if they cut them to zero and no one takes any notice, ask the bears.

* Other pieces of evidence include surveys of investor confidence (still too high for the market to have really hit bottom, say some bears) and data on the money flowing in and out of managed funds (only a fraction of what went in has been pulled out, say the bears, warning that mass withdrawals will further depress share prices).

* If all other arguments fail, there's always Japan, where the sharemarket has been falling since 1989 despite repeated resuscitation attempts. Could the US go the same way? You bet, say the bears.

What does it all mean? Not just a few rough years on the sharemarket, says one of the chief bears, author and sharemarket analyst Robert Prechter.

He predicts "a vast economic disaster ... and an economic depression as bad or worse than the one suffered in the early 1930s".

Given that he's been selling the bear message since 1987, thus missing out on the greatest bull market of all time, you could argue that he had to be right eventually.

Some bears do offer practical solutions. Get out of debt is the most obvious. Some invest in gold and other precious metals.

More adventurous bears are big on "selling short" - selling shares they don't own, in the hope that they can buy them back more cheaply as the market falls.

"Bear funds" in the US use short-selling and other strategies to profit from a falling market, some making handsome returns.

If you're still an incurable optimist, there is a bright side to all this.

After all, when gloom prevails and the you're surrounded by bears, it just has to be the time to buy. Doesn't it?

Brudentbear.com

Contrary Investor

Bearmarketcentral.com

Fiend's Superbear Page

Elliott Wave International


* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email: mark_fryer@nzherald.co.nz. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.