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  1. Bear Market Has `Long Way to Go,' Some Say: Taking Stock
    By Robert Dieterich


    New York, Sept. 18 (Bloomberg) -- Richard Russell was a boy the last time U.S. stocks fell for four consecutive years. The 78- year-old publisher of an investment newsletter says it may be time for a repeat performance.

    ``This bear market's got a long way to go,'' said Russell, who runs Dow Theory Letter in La Jolla, California. U.S. stocks, already headed to losses this year, are likely to keep falling in 2003, he said. That would be the first four-year losing streak for the Dow Jones Industrial Average and Standard & Poor's 500 Index since they fell from 1929 through 1932.

    Russell represents a core of persistent pessimists who say stocks remain too expensive, even after a 30 percent decline in the Dow and a 43 percent drop in the S&P 500 from their peaks in 2000.

    Douglas Cliggott, who helps manage about $2 billion at Brummer & Partners, a hedge-fund group, reckons the S&P 500 trades for about 26 times this year's estimated earnings of $34 a share. The historical average is 17 times, according to Standard & Poor's.

    ``Looking back over the past 40, 50, 60 years, you very rarely, if ever, make money buying the equity market at so high a multiple,'' said Cliggott, who quit this year as chief strategist at J.P. Morgan & Co.

    Reversing Course

    The ranks of the bears have thinned this year as stocks' declines have deepened. James Paulsen, who oversees more than $100 billion as chief investment officer at Wells Capital Management in Minneapolis, has reversed course in recent months and recommended buying more stocks, for example.

    Not so fast, says Russell. While stocks get too expensive in bull markets, they tend to fall too far when momentum turns, he said. ``When bear markets start, they go to conclusions -- meaning great values in stocks.''

    The ``classic test'' of market valuation is dividend yields, Russell said in a recent issue of his newsletter, which has a circulation of 7,500 at $250 a year.

    The S&P 500 traded for 94 times its dividends at the peak in 2000, he calculated. It now sells for 55 times yield. He predicted it will sell for 14 times dividends when the bear market is over, mostly through declines in stock prices.

    Russell's record as a forecaster is mixed.

    His newsletter on Oct. 6, 1999, said a new bear market had begun. While the S&P 500 rose another 17 percent to its all-time high over the next six months, it has plunged since then, reaching its lowest in five years in July.

    In 1990, at the start of a 10-year bull market, Russell wrote in Barron's that stocks were entering a bear market that would undo the gains of the prior 15 years.

    `La-La-Land'

    Cliggott, who in May 2000 said the Nasdaq Composite Index was in ``la-la land,'' still expects further declines for U.S. stocks. Like Russell, he argues that stocks will fall below average historical valuations before the bear market ends.

    Amid scandals over corporate finances, investors are moving toward the more ``conservative'' measures of corporate profits, Cliggott said in a recent interview on Bloomberg Television.

    Another prominent bearish voice is that of a bond investor. Bill Gross, manager of the $61 billion Pimco Total Return Fund, said this month that ``stocks stink and will continue to do so until they're priced appropriately.'' He predicted the Dow would be fairly valued at 5000, about 40 percent below yesterday's close.

    James Grant, editor of Grant's Interest Rate Observer, is another stock bear from the bond market. Stocks are ``anything but cheap,'' he said in an interview. ``It would be a very strange bear market that ends at these levels, after the gaudiest boom ever.''

    Fewer Bears

    Still, the July 2002 selloff, the biggest two-week slide for the S&P 500 and the Dow since the 1987 stock-market crash, convinced some money managers that stocks had bottomed.

    Among them was Paulsen. He favored bonds from the end of 1999 through June. In early July, his investment policy committee boosted stocks to 70 percent of its model portfolio from 60 percent, while cutting bonds. In August the committee went to 75 percent stocks. The firm considers 65 percent stocks and 35 percent bonds a neutral mix.

    Stocks underwent a ``major revaluation'' in June and July, Paulsen said. Interest rates, with current yields on the 10-year Treasury note below 4 percent, also makes stocks a relatively more attractive investment, Paulsen said.

    Not to David Webb, who manages more than $1 billion in hedge- fund assets at Shaker Investments Inc. in Cleveland.

    While he doesn't expect stocks to have a fourth down year in 2003, he predicts they will slide further and then rebound. Stocks will be ``meaningfully lower we are here'' before bottoming, Webb said.

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