TCS Daily

Perish the Bearish Thought

By James K. Glassman - October 16, 2000 12:00 AM

The famous bears have been let out of their cages again. They're all over television and in print. Why? Well, the stock market - especially the tech sector - has dropped, and these guys are gloating.

There's Barton Biggs of Morgan Stanley on CNN. He says that high tech will continue to drop. He's positively gleeful for the first time in eons. A year ago, I debated him at a conference in Idaho, and he graciously admitted that he "got slaughtered" - not necessarily intellectually, but in terms of the audience's reaction. The Silicon Valley types loved my message that the market would continue to rise. Of course, to Biggs that was a sign that it would fall.

In fact, in the past year, it has risen. But you would never know it from the grins on the bears. Look at the numbers: for the 12 months ending Oct. 16, the Nasdaq is up 23 percent and the S&P 500 is up 11 percent. Not great for the broader market but close to the 75-year average (12 percent), and consider the negatives - the Fed has raised interest rates six times since June 1999; the euro has collapsed, damaging international profits; the price of oil has tripled; there's a war on in the Middle East; and there's an increased likelihood since Labor Day of a sweep of the White House and Congress by one party (something the market definitely does not like).

Oh, and yes, earnings have been disappointing for some tech companies that investors thought would be big winners ( springs to mind). But that was inevitable. Other companies continue to shine (Cisco, Oracle, etc.). Still, on the front page of the Wall Street Journal on Monday (the lead story, as if it were big news), we read of the "Six Myths That Drove the Boom in Technology Stocks"). Most of these so-called myths are simply nonsense - straw men erected so that the writers of the piece can clever knock them down.

For example, Myth No. 2: "Tech Companies aren't subject to ordinary economic forces, such as a slower economy or rising interest rates." I am not sure who believed that one. Not me, at any rate. But I continue to believe Myth No. 5: "Prospects are more important than immediate earnings." Absolutely. They are more important for tech firms - and for all firms. The value of any stock is determined by its future profits, not by what it made last year. Take a drug company that earns $1 billion this year thanks to a patent that will soon expire. Everyone knows that its earnings will fall by half in 2001 and continue to drop in the future. Lousy prospects, lousy stock price.

The problem with tech stocks is that no one can know the future, and brief histories make predictions more difficult. Immediate earnings give us clues about the future, but often those clues are false - as, I believe, they have been recently, for the reasons cited above.

But, again, that doesn't stop the bears. One particular gloater is David Tice of Dallas. He says the tech slide will continue. He would. He runs a mutual fund called the Prudent Bear (an oxymoron in my opinion since bearishness has been a huge loser in the past). Mr. Tice's portfolio goes up when stock prices go down. So far this year, his fund is up 15 percent. Very nice. Still, over the past three years, his investors have lost about half their money in P.B.

And that is the point, isn't it? No one but thrillseekers and numbskulls is in the stock market for the short term. Over one-month or one-year periods (even longer, sometimes), the market can and does fall. But over longer periods, history shows that it provides a fantastic money machine for those with patience.

No one ever accused the financial press of having a surfeit of that commodity.

I like this market, especially with stocks down so much in the past month. Remember, however, that this is a game only for those with a horizon that stretches over five years or more. But what a game it is!

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