Down Market

UP AND DOWN WALL STREET
Shock and Awe
By A. ABELSON

A stock-market week that will live in infamy. Next time, you better believe Cassandra.

HOW DO YOU SAY "MASSACRE" IN AT LEAST A DOZEN LANGUAGES?

A little more urgent perhaps: Do you happen to know the best place to view the end of the world?

We watched last week -- and for some reason we suspect we were not alone -- with no little awe and plenty of shock as the stock market all but disappeared into the greatest sinkhole in all of investment history. The Dow Jones Industrials lost 18% over five trading sessions that swelled their loss for the past 12 months to 40%. The S&P 500 also was off 18% for the week, 43% for the 12 months. Not to be left behind, Nasdaq lost 15% for the week and 42% since October 2007.

In this race to the bottom, leading foreign markets were nothing if not competitive, while emerging markets magically became submerging markets. China and Russia are neck and neck for the rusty tin medal, each off by over 60% so far in this memorable market year. A number of far-away bourses decided the best way of stopping the free-fall in prices was to shut down and desperately seek some form of artificial resuscitation.

To try to thaw the stubbornly frozen credit markets, the chiefs of what purport to be the major economic powers, including our own blessed nation, held a quickie powwow and took a cut out of interest rates and hurled hundreds of billions more at needy or dissolute banks and kindred institutions around the world. The effort was herculean; too bad the effect wasn't.

As the tumultuous week drew to a close, hopes that economic shamans from the far corners of the planet -- scheduled to meet in confabs on Saturday and Sunday -- would concoct a cure for the financial ills that have befallen it encouraged a gentler Friday close in our markets. Or, it could be just that the sellers got plumb worn out and badly needed a rest.

It wouldn't knock our socks off if somewhere in here the market actually showed it can go up, at least for more than a session. Stocks tend to rally even in the ugliest bear markets, and this certainly is in that category. But it also, as many a technician has learned to his rue, thinks history is bunk and tramples all over precedent. We'll see.

The truism we fervently hope investors, big and small, amateur and pro, take away from their brush with the still-smoldering inferno that has consumed over $8 trillion of their hard-earned money is there are times when the worst advice you can possibly heed is the admonition, "Don't panic."

WE'VE ALWAYS HAD A THING FOR CASSANDRA, the ancient Trojan princess who was blessed with the gift of prophecy and burdened by the curse that prevented anyone from ever believing her. Just shows you how capricious those old Greek gods were -- prone, just for the sport of it, to handing out favors with their right hand while snatching them away with their left.

Of course, if she was the betting type -- and antiquity is silent on that score -- she might have drawn consolation from wagering on the Olympics and the odd marathon, after a quick peek into the future to catch the winner. But our hunch is that it couldn't but profoundly grieve spunky Cassandra to be right as rain in predicting everything from the weather to the outcome of wars -- and not getting so much as the faintest whiff of respect for her fabulous forecasts.

Still, one admirably tough cookie, she refused to be daunted and kept those terrific prognostications coming. And she did it effortlessly, without crystal balls or any other of the hocus-pocus paraphernalia. What got us ruminating this way was the rude tendency of the low-rent crowd in the Street to dis that relative handful of foresightful folks who saw the bear market coming -- and we don't mean saw it yesterday or the day before.

They may not be in Cassandra's league -- how could they be, after all? She's mythical and they're human and hence fallible. But they deserve a big hurrah, especially since so many of Wall Street's wise guys who've been buried by the market collapse can't forgive them for being right. So, if for no other reason than to please dear old Cassandra, wherever she is, we'd like to tip our hat to a couple of her latter-day spiritual heirs who don't get a heck of a lot of public notice, and when they do it's usually accompanied by a sneer.

One of these stalwart seers is Albert Edwards, of Société Générale. Albert has been predicting an investment "Ice Age" for what seems like an ice age, complete with a brutal recession and a stock market collapse to match. In early September, he sounded the alarm on an imminent "meltdown" of the economy and the equity markets (there's an obvious meterological dissonance in a meltdown occurring in an Ice Age, but this is no time to be picky about incompatible metaphors).

Albert's own forebodings so unnerved him that he chose to surrender contented bachelorhood for marital bliss. When he isn't spreading gloom and doom or becoming a groom, he writes a sprightly and incisive global market and economic commentary.

In his latest epistle, he confesses to having been tempted to recommend a bit of buying in expectation of a bounce, but then wisely resisted the temptation because of the increasingly grim economic and profits data.

He doesn't rule out the possibility of a sharp bear-market rally of perhaps as much as 22%, but that would be merely an interruption of the inexorable downtrend that he believes will carry stocks down 70% from their peaks. That means, if he's right, we're not all that much more than halfway through the misery.

Like Albert, Fred Hickey, feisty proprietor of the High-Tech Strategist and valued member of Barron's Roundtable, has been resolutely bearish for quite a spell on the economy, on his special investment turf -- the techs -- and on the market as a whole. Fred's a tough hombre, and he has shrugged off his share of ragging by the abundant population of loud louts during that late and unlamented stretch when euphoria gripped Wall Street and spilled over into Main Street.

Rather than brood, Fred turned his unyielding negative stance to good use by buying puts and selling them, for the most part propitiously, all the while adding to his gold stake. Inevitably, Fred was much too early in his downbeat assessment of stocks like Research in Motion and Apple, and it cost him; but he doughtily kept both in his cross-hairs and has reaped the handsome rewards when the two erstwhile highfliers went down like a stone in this year's cataclysmic crash.

We chatted with Fred late last week, and he was resolute that we were on a collision course with a classic capitulation that might see a four-digit drop in the Dow -- which came perilously close on Thursday -- that would likely create a short-term market bottom that could hold at least for a few months.

As we spoke, and before the market turned tail and went completely over the edge, he admitted drawing a measure of comfort from his puts on, among other stocks, Amazon.com (ticker: AMZN), which he had described in his recent letter as "a retailer with a 50 P/E heading into the worst economic slowdown in decades," and whose two biggest markets are the U.S. and the U.K., with heavy exposure to Europe, all of which are struggling to cope with dangerously foundering economies. The weakness in the euro and the pound, moreover, could take a painful bite out of Amazon's earnings.

He's also down on Qualcomm (QCOM), whose customers are suppliers to the big wireless outfits, which, heavily laden with inventories, reportedly are asking for a slowdown in shipments. He suspects the company's guidance on operating results are at risk. An institutional favorite, Qualcomm shares could be ripe to become a target for a spate of aggressive selling.

Fred remains skeptical about the outlook for techs generally. He sees the sector as immediately vulnerable to a blizzard of lowered earnings estimates in the weeks ahead. And what impressed him most about IBM 's (IBM) third-quarter report, released last week and somehow overlooked by investors starved for a scrap of bullish fare, was that the company missed its revenue target by a bunch, not the most favorable of omens.

An old Boy Scout, Fred staunchly believes in being prepared. So he has drawn up a list of what to buy comes the post-capitulation rally. Since he's convinced we're heading into a deep and extended recession, his picks are restricted pretty much to companies boasting high cash flows, clean balance sheets and hefty gross margins.

Microsoft (MSFT) is at the top of his list if it can be snared in the low 20s (he bought a little last week). He considers EMC (EMC) attractive in the single digits, reckoning that demand for storage equipment will hold up even in a recession; its software business has been growing rapidly, and it owns most of VMware , No. 1 in virtualization. For that matter, he likes VMware (VMW) itself, plus a bunch of other software companies from Adobe Systems (ADBE), Sybase (SY) and Oracle (ORCL) to Lawson Software (LWSN) and JDA Software (JDAS).

He thinks Nokia (NOK) might be worth a look, thanks to its status as the leading mobile phone maker and the stock's 5% dividend.

And if you can buy Cisco Systems (CSCO) in the teens, you probably won't be sorry. Why, perhaps a tad giddy, Fred even suggested Apple (AAPL) in the 70s or low 80s might be worth a fling.

But mind, he's proposing these as stocks strictly for a rebound, if and when, but not to fall in love with.