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Is the bear just playing dead?

TheStar.com - Business - Is the bear just playing dead?

Despite bargain hunting, sudden burst of optimism, the answer really does depend on whom you ask

November 29, 2008 James Daw

Global stock markets shot higher this week, producing the sort of quick gains that most investors would be delighted to see in an entire year.

Toronto S&P/TSX composite index rose nearly 14 per cent, while New York's S&P 500 and Dow Jones industrial average rose roughly 12 per cent and 10 per cent respectively.

These gains barely dented the losses of recent months, but the sudden burst of optimism and bargain hunting may have you asking: Is the bear market over? Has the next bull cycle begun?
The answer will depend on whom you ask, but it's safe to say nobody knows for sure. We've been hit by too many shocks in a matter of weeks to think they will be the last.

Bob Gorman, chief portfolio strategist at TD Waterhouse, thinks major markets are roughly in the range of what could turn out to be the true bottom, even if this week's gains are quickly wiped out over the next few weeks.

"We had lows in October, then we recently revisited those lows a little more than a week ago – and those sorts of levels represent pretty cheap prices," he said yesterday. "We will probably find a bottom around those levels."

But that's not what Robert Prechter Jr. and his acolytes at Elliott Wave International Inc. in Gainesville, Ga., are thinking. Their theory is that if you, dear reader, still care the slightest about stock prices, they still have a long way to fall.

The author of Conquer The Crash, published in 2002, plus a dozen other books and hundreds of newsletter commentaries has persuaded his true followers not to declare this bear market over until we see the "outright death of the equity culture."

Prechter has forecast all manner of sweeping social developments during this latest "supercycle" of extreme pessimism, including the rise of socialism in the U.S., the collapse of America's social security system, lower hem lines, violent race relations and a decline in the popularity of restaurants and Shakespeare.

Hey, I'm not making this stuff up; he is.

But so far in 2008, Prechter and his crew have declared themselves more right than wrong about sharply falling stock prices, the peaks and declines of oil and gold and the depressing economic downturn.

Back in the mainstream, Gorman frankly admits he was wrong to predict last year that 2008 would see North American stock markets rise for the sixth year in row. Even after this week's gains, markets have fallen by a third or more.

It is clearer now that economic hardship lies ahead. Yet he argues stock prices are tantalizingly inexpensive. Even if profits fall by a quarter more than stock analysts expect, current stock prices would be only about 12 times those lower earnings.

"That is not terribly expensive," he argues.

Meanwhile, Gorman points out, U.S. institutions and retail investors are sitting on about $3.7 trillion in money market funds, equal to about a quarter of the value of U.S. equities. Some of that cash could well move into stocks. Already company insiders are buying twice the volume of shares they are selling, he says.

Those and other positive signs considered, Gorm an says that he expects markets to be about 14 per cent higher by the end of next year. With dividends, total investment returns would be somewhat higher.

"When you go through a bear market, it tends to be much shorter than a bull market," Gorman says.

"Of course pessimism can get pretty thick, and my view is that it was somewhat overdone. We do have rough economic times ahead, but the market will always look ahead."

Now, if pessimism is all you are feeling, then Prechter is your man. He has predicted stocks will not hit bottom until share prices are only six times earnings per share, and dividend yields are in the range of 17 per cent.

A lot of people would have to turn their backs on stocks before that happened. Poll your friends to see whom they would rather believe.