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July 31, 2004

The Return of the Bear? Bull's Eye Investing Targeting Real Returns in a Smoke and Mirrors Market

By Gregory Bresiger

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  • The Return of the Bear? Bull's Eye Investing Targeting Real Returns in a Smoke and Mirrors Market

by John Mauldin

(John Wiley & Sons, New York, 426 pages) $24.95

Batten down the hatches. Circle the wagons. Prepare for the next set of market

disasters. That's the view of a veteran investment counselor who says that the worst wasn't over with the end of 2002. A secular down market merely took a breather last year. It is now primed to start all over again for several years.

The bears, who wreaked havoc on Nasdaq in the 2000-2002 period, are about to come back. And, unless one is ready to adopt defensive strategies now, it is going to get very ugly over the next five or six years. After that, the stock market will once again make sense. So writes John Mauldin, the president of Millennium Wave Investments in Dallas, Texas.

One doesn't have to agree with the author in all of his destructive and Cassandra detail to find this book compelling. Mauldin's case for a secular bear market is based on history. He constantly cites the historically pricey p/e numbers. Many price earnings ratios remain in the 20s. That's still far too high, he insists. Bull markets usually start with a single digit p/e or maybe one in the low double-digits. For example, in 1983, at the outset of a bull market, the typical p/e was 8.3.

The author also contends - with no apologies to the market "cheerleaders" and their constant refrain of buy and hold - that no bull market in his history has ever begun with p/es at such lofty numbers. The major indexes, despite three years of bloodletting followed by a market recovery last year, still remain far overpriced, he contends.

That means more pain is coming, he predicts, especially for the tech companies. Traders might be disturbed to read that Mauldin believes that the Nasdaq is, by far, the most overpriced of the major markets. It will likely experience many more de-listings over the next bearish five or six years, he predicts.

"The Nasdaq is more vulnerable than any other index," (page 110) Mauldin warns. It doesn't weather storms very well. For example, he notes, at the end of 1996, the Nasdaq listed 5,556 companies. Today, that number is down to about 3,600. And since the Nasdaq has a survivorship bias, Nasdaq's performance has actually been worse than the published numbers.

But then Mauldin cites a number that is horrid no matter how one views it: Some $4 trillion of Nasdaq equity had been recently lost since March 2000. Then comes this augury about the Nasdaq in the coming bear market.

"I think the day could come when the Nasdaq index is lower than the S&P 500," he writes (page 100). Nasdaq stocks, he argues, could drop another 50 percent from current levels.

And more than traders will be hurt by this overpriced market. A generation of retail and institutional investors - buoyed by the outsized returns of equities in the 1980s and 1990s - are potential targets in a coming market slaughter. They will be paralyzed, Mauldin believes, because they are preparing to fight the last war.

Dip and Crash