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Bear and bull fence
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October 28, 1998: 10:44 p.m. ET
Strategists debate whether recent rally is start of new climb or trap for the unwary
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NEW YORK (CNNfn) - Call it Wall Street's version of the Rorschach test: Some investors over the past week have looked at those upwardly mobile Dow Jones performance charts and seen the tentative beginning of the end of the bear market. Others have glimpsed those same squiggly lines and seen hidden signposts warning of more trouble ahead.
So which one is it? Are the bulls finally poised to lift markets out of their trough? Or is the currently rally a mere bump on a broader bear horizon? Two market watchers -- Joe McAlinden, the chief investment officer at Morgan Stanley Dean Witter, and Charles White, the president of Avatar Associates -- squared off on the issue Wednesday on CNN's "Moneyline News Hour with Lou Dobbs".
As the transcript below suggests, in today's topsy-turvy markets, bulls can easily pass for bears, and vice versa:
JAN HOPKINS, ANCHOR, "MONEYLINE NEWS HOUR WITH LOU DOBBS": Let me get your views, first, about what's gone on in this rally. Joe, what do you think it is?
JOSEPH MCALINDEN, MORGAN STANLEY DEAN WITTER: I think the market made a bottom on Aug. 31, and it's going to have a laborious climb back. The slower it goes back, the longer the recovery's going to last, and I think we've got a fairly good outlook for 1999.
HOPKINS: But it's a rally to believe in?
MCALINDEN: I do think it's a rally to believe in. There could be some further dips along the way, but I don't think we'll make new lows.
HOPKINS: Charles, you disagree?
CHARLES WHITE, AVATAR ASSOCIATES: Somewhat here. The rally has not proven to be a beginning of a new bull market; in fact, it looks a little bit more like a rally in a bear market.
We've see tremendous damage done to the average stock from the highs in the marketplace to the lows made recently, and what we've seen is the typical bounce-back.
What would convince us that this was not merely a rally in a bear market was if we saw breadth continue to widen out in the marketplace, and that's faltered in the last couple of days.
And one overriding concern is that we may be in a different type of environment: one that's different than we've experienced in the post-war period, and that's one of deflation, which has us very concerned about the outlook for stocks right now.
HOPKINS: You don't agree with that.
MCALINDEN: No, I think there was some potential for deflation, and clearly we had deflationary trends in commodity prices. But two things have happened, I think, that could assure us that we're going to be going in the other direction.
One is the Fed has begun to move -- is lowering interest rates, and that that has triggered the second thing, which is a substantial decline in the value of the dollar.
And that fall on the dollar has begun to boost commodity prices, and has ignited a turnaround in those places that many people never heard of a few years ago, but we're at the root of these problems in the market.
Those Pacific Rim countries where this started out have begun to show big rallies in their markets, and big improvements in their currencies.
HOPKINS: How do you respond to that Charles? It's: "Don't fight the Fed."
WHITE: "Don't fight the Fed" is the classic rule, but the question is: has that the Fed done enough?
If you go back and take a look in 1990, when our own banking system was teetering as a result of bad loans and questionable practices, the Fed eased credit very, very aggressively, and steepened the yield curve, and allowed banks a free lunch as it were; they could borrow at fed funds, invest in five-year Treasuries, and make a free 2 percent.
That game is not around today, because with fed funds at 5 percent and the five-year at 4 percent, there's no positive carry there. What the Fed does need to do is ease aggressively to let these countries out of the trap, and let the banks out of the trap, and that's not going to come from a man who is known as "Greenspan the Gradualist." So...
HOPKINS: But some more easing, don't you think?
MCALINDEN: I think there will be more easings and -- but I think you've also -- you've already seen a very powerful response in the foreign exchange markets, as I said earlier.
The other thing is that it's true, you don't want to fight the Fed, you also don't want to fight the calendar. We're about to move into what has historically been the strongest three or four months of every rolling 12-month period: the November through January/February period, and I think that we're going to see a repeat of history.
HOPKINS: So what do investors do at this point? Charles, you say, you know, "Be careful," or what do you say?
WHITE: Just revisit the -- your portfolio. Take a good, hard look at it. Look at the damage that was done to it during the decline. Think back to how you were reacting at the height of the decline -- or the depth of that decline, and ask yourself: Can you go through that again?
Adjust your portfolio to a level that you can deal with the risk and you can deal with the volatility. People have -- in this bull market, have let themselves and their portfolios move over toward excessive risk, and I think risk is one thing that people aren't really willing to take in the market.
You know, we mentioned the calendar. We haven't seen that many new IPOs coming to market, or any debt deals being able to come to market, when, in the summer -- in June, we saw Russia who couldn't borrow money for 90 days, borrowed $2.5 billion for 30 years, and we know how that ended up. So revisit risk that you're taking in the portfolio, and think about it.
HOPKINS: What would you say to investors, Joe?
MCALINDEN: Well, I think that just on the financing point what you say was true, but we did the Conoco deal last week. Yesterday we did the second biggest bond deal in history, and I think that the risk premiums are starting to come in the marketplace, and the situation is stabilizing.
If you like the market at 9,000, you got to love it at 8,400, in my view, and what really matters is the longer run. We've got a market that's probably going to go to 20,000 before the end of the next decade.
The same kind of gloom and doom that's around now was around in the fall of '87 after the crash, and we didn't have that big depression -- the big recession. The market turned around and went up, and if you were too cautious, too risk-averse in that environment, you missed out on the move to 9,000.
HOPKINS: What about the economy? A lot of your bets are based on what you think's going on in the economy. Recession or no recession?
WHITE: Certainly, you can make a case for the probability of a recession rising. I'm not an economist; we don't try to make that play. We have to be right more than once every four or five years. But, you know, it doesn't appear as though the strength in the economy is there to continue to generate the earnings that the market is so dependent on.
HOPKINS: And Joe, what do you think?
MCALINDEN: We're seeing mixed data, currently, but, as you reported earlier, durable goods look very strong. I think that consumer spending is going to remain fairly strong -- not as strong as it was just a few months ago. In 1999, it's going to be an OK year for the economy, slower growth than we had in 1998, but, curiously, an acceleration in profits growth due to the weaker dollar.
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