Could the market fall for a 4th year?

That hasn't happened since the Great Depression, but it's possible By DANIELLE DIMARTINO Dallas Morning News 1/5/2003

Last year, market prognosticators declared that 2002 would be an up year. After all, the market hadn't seen three down years in a row since World War II.

Now, for 2003, most market gurus are saying the markets can't possibly fall for a fourth straight year. But their optimism seems subdued from a year ago.

If 2003 is another down year, it would be the first four-year losing streak since 1929-33, the throes of the Great Depression.

By all economic measures, the United States is not in a depression. But some analysts say excesses still must be eliminated from the economy after the go-go 1990s.

And more say the future seems harder to read today than it did at this time last year, when the country was emerging from what seemed like an old- fashioned recession.

On the plus side, experts say the nastiest of the corporate scandals are behind us. Two of the Bush administration's goals - a quick end to the conflict in Iraq and an expedited tax cut package - could take some pressure off the markets.

For its part, Wall Street at least appears appropriately sheepish after being fined $1.4 billion for letting stock analysts play both hands of a game that left investors out in the cold.

Now, experts say, if the economy could begin turning in measurable growth in business spending and hiring, the recovery could break out of its funk.

"The outlook was better at the same time last year," said Chuck Hill, Thomson First Call's director of research. "A delay in capital spending was an easy call at the beginning of last year, but now the question is, how much of a delay is enough? Pushing it back one year may not be enough."

Hill's company compiles Wall Street analysts' estimates of earnings growth. Their 2003 forecast is for 14 percent growth among Standard & Poor's 500 companies, although that number usually falls through the year. Hill says normal revisions will bring the number down to about 10 percent.

Tobias Levkovich of Salomon Smith Barney is one of the Wall Street analysts who contributes to the consensus estimates. He is coming off his second year as chief equity strategist at the brokerage. Several of his peers have fallen in 2002, unable to repair images tarnished by their permanently bullish calls.

Levkovich is predicting that corporate profits will chalk up about 7 percent growth in 2003.

If 2002 had any take-aways, it was that the market does not react well to reduced estimates.

"Fourteen percent for the year is not too bad a number," Hill said. "The problem is it's very back-end-loaded to the third and fourth quarters, and companies don't have any visibility for the second half. They just won't say."

Revised earnings estimates may make for yet another bumpy ride in trading in 2003, regardless of the final outcome.

"We are in a trading market," Levkovich said, pointing to the 1974-82 bear market, when six major trading rallies averaged gains of 32 percent.

He calls himself a "rational bull," emphasizing that his expectations for the market's recovery are muted but positive. Although he forecasts stocks to be up as much as 20 percent in the next 12 months, he sees three major hurdles.

"Greed will overcome fear at some point in the future," Levkovich said. "But it will take time."

Cleaning up the excesses:

He cited regional real estate bubbles and unregulated hedge funds that may yet burn unsuspecting investors.

Capitalist disincentives:

The example he gave was "paying an executive $30 million, regardless of performance."

"Every man with a plan could raise $30 million," he said of the ease with which capital could be raised in the late 1990s. Wringing out these excesses is the key, he says, to reaching a new starting point for the next major bull run. "Everything has to be flushed out to clean the system."

One way Levkovich sees companies wooing investors back is with dividends. 2002 marked the second time since 1963 that dividend yields outpaced money market returns. Add to this the attention that President Bush has given to reducing the double taxation of dividends, Levkovich says, and investors have a good formula to count on positive returns.

"After 21/2 years of bruising losses, investors are demanding some income up front," he said. "For the first time in 30 years, companies are increasing dividends ahead of earnings growth."

One bear argues that earnings have to get much lower before a true rally can take hold. David Tice, portfolio manager of the Dallas-based Prudent Bear Fund, has been on a tear for two years. Investors in his funds have profited from the bets he's placed on the market's fall.

As he sees it, the main drag that will keep markets down for yet another year is the excess credit that has been extended to corporations and consumers.

"It's like a squirrel before winter - you want it to be saving nuts, not throwing a party by adding on to the kitchen or buying a new car," Tice said, blaming Federal Reserve Chairman Alan Greenspan for encouraging consumers to spend rather than save.

"There's definitely a housing bubble," he added. "Greenspan's notion that there is not one is preposterous."

When Tice puts pencil to paper, he figures that $1.6 trillion has been pumped into stocks since 1990. Estimates show that $100 billion was pulled out in the last year.

"Nobody's sold yet. If we revisit historic lows, it will be very ugly," he said.

The market nearly touched historic averages of price-to-earnings ratios in October, before the market rallied. But Tice predicts that the Dow may have to trade at half of where it is today before it can turn the corner.

"As an individual, if you think you are going to lose your job, save some money, pay off your debts and sell some stock," Tice advised.

Layoff announcements surged in the last quarter of 2002, according to Challenger, Gray & Christmas, a job placement firm.

"October and November were the second- and third-heaviest layoff months of the year - that is certainly cause for alarm. It is very similar to what we saw in 2001. And it's not what we should be seeing if we're in the midst of a recovery," said John Challenger, the firm's chief executive.

For 17 years the firm has offered a free holiday job-search advice hotline. This year, of the 1,600 callers, more than 1,000 told counselors they thought it would be harder to get a job in 2003, Challenger said. Counselors do not remember callers ever being more discouraged, even during the jobless recovery of the early 1990s.

Challenger said companies are unable to comfortably increase their global market share, given the looming probability of war.

"It's more than the Iraq situation; now it's North Korea," he said.

Hill's concerns lie closer to home. "I'm less concerned about North Korea and Iraq than I am about Venezuela. If that turns into a civil war, if the army splits in supporting Chavez, energy prices would become a real problem."

Levkovich downplays such gloom-and-doom notions. "Fear mongers give educated investors opportunities," he said, although he did acknowledge the risks of a sustained rise in oil prices in 2003.

"Energy prices can bite sharply into the estimated $37,000 of after-tax median income," Levkovich said. But he stressed that oil prices usually have to double or triple before a falloff in consumer spending is detected.

And, as he predicted, OPEC announced Monday that it would step in and relieve the supply shortages created by the Venezuela standoff.

Still, he's worried about the ability of consumer spending to continue driving the economy. He noted that last year's recession was the first in which consumers didn't stop consuming.

Like many analysts, Levkovich places his hopes in the new Congress to give consumers a nudge.

"2003 could end up being known as "The Year of the Government' if the federal government solves some economic problems. The American people have said to the Republicans - "OK, this is your shot.'"