Slaughter on Tech Avenue - Investing: Canada

Bear or Bear Market Trap?

Dateline: 04/03/00

Three weeks of tech market weakness has brought the bears out from hibernation. On Tuesday March 28th, stock market guru Abby Joseph Cohen, chief strategist at Goldman Sachs & Company, shifted the weighting in her model portfolio from 70% stocks to 65%. She has predicted 2000 will be the weakest market year for the S&P 500 since 1994.

Now calling for a weighting of 65% stocks is hardly bearish, but it is a significant downplaying of stocks for Cohen who has been among the most prominent bulls on Wall Street. And she is still more bullish than most other analysts. But she carries considerable more clout than the others. "When she speaks," says Richard Sichel of Philadelphia Trust, "markets move, and rightly so."

Hot on the heels of Cohen was Mark Mobius, well respected head of the Templeton Emerging Markets Group. Mobius, speaking in Paris on the 29th, told the press that recent volatility in the Internet sector could lead to a complete sector meltdown.

"I think we're nearing the time, that's my guess," he said. "And it will be big...some stocks will be 90% or 50% down". Indeed, many high flying Internet issues are already down 50% or more from their highs. And as one columnist noted, a 50% drop in price requires a 100% gain to break even again.

But is this really the advent of a bear market in tech stocks? Or is it a bear trap? Stock picking ace Pat McKeough believes the latter. In August he wrote that there are a great many holes in the so-called "bubble" theory, a theory that he says is "a triumph of imagery over substance".

McKeough spends three pages debunking the bubble theory so I can't do it justice in a paragraph or two. Suffice to say that he argues today's stock market must be viewed in context. And that context is low interest rates, low inflation, global economic liberalization, and falling tax rates. He explains the reasons behind the low average dividend yield (companies are buying back shares, converting dividends into capital gains), high p/e ratios (due to corporate downsizing and other one time write-offs), and the key differences between Japan's economy in the late 80's and early 90's and the North American economy of today - notably Japan's failure to de-regulate its economy and open it to competition.

McKeough acknowledges the very real possibility of a short term setback. And he argues for a possible rotation of leadership in a two tier market. But he believes we are still in the expansion phase of the economic cycle (The Successful Investor, February 2000), never mind the boom phase or the tailing-off phase. He has argued in recent Hotline Updates that we are witnessing, not the beginnings of a bear market, but a classic bear trap, "a falling trend that takes prices down just enough to spur nervous investors to sell at the bottom".

Bear market or bear market trap? What do you think?

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