Prechter- Interview by Newsweek (english)

verfasst von drooy, 03.10.2002, 14:24

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OVER THE PREVIOUS three months, both the Dow and the S&P 500 index had fallen 18 percent, while the Nasdaq Composite index lost one fifth of its value. By Wednesday, stocks were zigzagging again. How will we know when the market has hit bottom? Robert R. Prechter Jr., founder and president of the forecasting firm Elliott Wave International, says there are a few telltale signs to look out for—none of which he sees yet. In fact, Prechter is convinced that stocks still have a lot further to fall before the market turns around. He’s been bearish for more than three years, but people are starting to pay more attention to him now. His book, “Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression,” (John Wiley & Sons) which hit shelves in mid-July, has become a best seller. NEWSWEEK’s Jennifer Barrett spoke with Prechter on why a bear market is not necessarily bad news for investors. Excerpts:

NEWSWEEK: Your book came out in the midst of the market’s worst quarter in 15 years. How much worse could it possibly get before things improve?

Robert R. Prechter Jr.
Robert R. Prechter Jr.: I think the bear market is about halfway through in time, but less than halfway through in terms of price.

That’s a pretty pessimistic forecast.
I have a pretty radical opinion.

So what you were you thinking when the Dow topped 10,000?
I was bearish for a long time on the way up actually. By the time it hit 10,000, we were begging people to get out. We said: “Please take your profits—you won’t have a chance like this in your lifetime. Get out! Get out!” But, at that time, anyone expressing caution was of no interest.

What do you say now to those who didn’t take your advice?
Advertisement



Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression
by Robert R. Prechter Jr.





I find it’s better not to be a talking head. So what I usually try to focus on instead is to say to people, you may or may not agree with how bearish I am or how far prices will go down, but what I want to do is throw a life preserver out. If you want to grab it, then fine.

I’d imagine there are quite a few people right now who are looking for a life preserver.
I wouldn’t be speaking to you now about this if I thought people wanted to hear it now. Then I’d say we are too close to a bottom. But people are not really negative yet.

You mean people don’t want to hear about alternatives to the stock market?
They still need to hear that they can go into cash and not be a pariah. Then maybe they can brag at the next cocktail party that they are not in the market.

When will we know that we’ve reached the bottom?
There are a few things required for a major bottom to indicate it is time to buy. Number one is a reasonable valuation for stock prices. I measure those three ways: dividend yields, PE ratio [share price per earnings] and price[-to-]book [ratio].

That’s pretty technical—can you give some examples?



Let’s take dividend yields. When people think stock prices are going to go lower they demand high dividends to make up for their perception of risk. Dividends can pay 6 to 7 percent at a moderate bear-market bottom. In 1966 and 1929, stocks yielded just under 3 percent dividends. That is a normal top. That’s when people say they don’t care about dividends as much because the price will rise and make them money. The Dow passed that point at 6,000. By the time it topped, the Dow had an average 1.5 percent dividend yield. And forget the Nasdaq—it didn’t have any. Now, that is amazing. That’s when people were so convinced they would make 20 percent on the upside forever that they didn’t care about the dividend. That’s called a valuation measure. The market has now fallen enough to bring the dividend yield back to just over 2 percent now. But that’s still pretty low.
Still, if that was the only indicator that seemed really extreme, I would entertain an argument to the contrary. But when the other valuation measures are also stuck at historic overvaluation levels, you can’t excuse them. You have to take them at face value. Stock valuations are still outrageous.

What else do you look for in determining whether the market has hit bottom?
You need some indication of pessimism, worry, concern—every synonym you can think of. We’re not just talking about magazine covers or something anecdotal, but hard indicators that measure investors’ outlooks. Take, for example, the percentage of advisers who are bullish. Often, at a bear-market bottom, professional money managers hold about 15 percent of their portfolio in cash. Today, they hold 4.5 percent of it in cash. In other words, they’ve been buying stocks on the way down.
Finally, you need a completed price pattern according to the Elliott model of price behavior, which was developed by R. N. Elliott through close observation of the market. He cataloged the forms the market takes as investors move from extreme optimism to extreme pessimism. And we are in the middle of that—we are not at the end.
In fact, none of these indicators are in place right now. They’re not even close. That’s why I don’t mind saying these things publicly.

How did we get into this mess?
Several things have been the classic precursors of similar junctures in the past. No. 1 is an extreme buildup in extent of credit—and debt, the flipside—expanded throughout the economy. Currently the amount of dollar-denominated debt is three times the value of annual GDP [gross domestic product]—the highest it’s ever been.
No. 2: we are in a bear market because we had such a manic bull market. It drew in vast numbers from the public, spreading vertically and horizontally throughout the population. Every age, every place, every stratum. It was speculative lunacy.

What advice would you give to those who are a little wary of putting their money into the market right now?
I wish there were people like that among the public to talk to, but 99 percent of the professionals told them to stay in the market, so there aren’t many people sitting there wondering what to buy. They are already invested. Most of them are facing the question: what do I do now. The time to buy is not here yet.

So what should investors do now?
No. 1 is to get out of traditional investments that are in a bear market or are likely to be in one: stocks in general; real estate, which I think topped this summer, and any bonds issued by questionable debtors. Those are three places to avoid.
You should move your money into the safest cash-equivalents you can find in the safest depositories you can find. For millionaires, you should be looking at private Swiss banks and Swiss government bonds. If you’re an average person in the United States, the safest place is a Treasury-only money-market fund. You can’t get more conservative than that in the United States. It wouldn’t hurt for someone to have 10 percent of his assets in silver and gold either.

Can the average investor still make money in the stock market now?
In our modern financial society, we have some alternatives that are attractive. For most people, the easiest ones to talk about are the bear index funds like the Rydex Ursa Fund [which basically shorts the S&P 500 index]. If you want to profit from the move down, then this is a great way to do it. They reset the value of the fund every day so there is not a limited downside anymore. Of course, if the S&P goes up, you’re losing money. But unlike a short, you can’t lose more than you invested. There’s another fund I like called ProFunds. Or you can do a market-neutral strategy where you split your money between bearish and bullish strategies.

A lot of economists are talking about the end of the recession, but you’re talking about the economy getting worse before it gets better. Why?
The economy follows the market. And when economists tell you that things are OK, they are looking at numbers that reflect the rally from late last year. But the stock market is now telling us that the economic numbers will still get worse.

How much worse?



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The market has made new lows in the third quarter so the economic numbers we are going to see in the third and fourth quarter are going to show a return to recession, or at least the beginning of it. When the stock market finally bottoms and takes off on the upside, it will tell you that the economy is not far behind. In almost every case you can cite in the past hundred years, the stock market has turned up before the economy did.

How depressing.
The only thing that should be depressing is being caught in it. It’s the bulls who made people “doom and gloomy” by telling them to stay in the market. People seem to have a bias that optimists are good guys and pessimists are bad guys. But I think your best friend is a realist, who knows how to be each one.

© 2002 Newsweek, Inc.

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• Prechter- Interview by Newsweek (english) - drooy, 03.10.2002, 14:24