Morgan
Stanley's Barton Biggs Warns
It's Much
Too Soon to
Bet on a New Bull Market
The first bear market in a decade came as no surprise
to global strategist Barton Biggs. He had been saying for years
that stocks were overvalued and a sharp sell-off was inevitable.
What Biggs is
saying now..
Market Outlook
Cuts in interest rates by the Federal Reserve triggered
an impressive spring rally on Wall Street. But we're not out
of the woods yet.
Background: Market
averages never head straight down in a bear market. We always
get several sharp rallies of 30% or more. Each bubble rally
fadesand the bear market resumes.
When stock averages
hit bottom last March, the bear market was only 80% complete.
There is still one more leg to come. Not until that leg is over
late this year or early in 2002 will the bear market end. The
Dow Jones Industrial Average (DJIA) will fall to below 9,000
from 10,600 todaythe S&P 500 to around 1,000 from 1,200 todayand
the Nasdaq will nearly halve in value to around 1,200 from 2,100
today.
Economic Outlook
Investors want to believe that Fed rate cuts are
all we need to keep the economy out of recession.
Reality check: We're
already in a recession. The rate of economic growth during the
first quarter of 2001 will be revised down close to zero from
1.2% The second-quarter economic growth rate will be negative.
The Fed's moves
may lessen the severity of the recession. But no matter what
the Fed does, the recovery will be very slow.
We could see
modest economic growth by year-end. We won't however, return
to our "normal" growth rate about 3% after inflation
until the second half of 2002.
Economic Negatives
Out technology-obsessed capital-spending boom left
us swamped with excess capacity.
Example: Telecommunications
companies spent the past few years rewiring the country with
fiber-optic cable. Yet only 3% of it is actually in use. Rate
cuts by the Fed can't solve the overcapacity problem. It takes
time for the economy to grow into the excess capacity.
More trouble ahead:
The next hit to the economy will come from a collapse in consumer
spending. Consumers can't dip into savings because the savings
rate is virtually zero. They're loaded with debt, so they can't
borrow more. And the bear market has wiped out wealth the consumers
otherwise might have spent.
Asset Allocation
My suggested asset allocation still emphasizes
stocks. But my firm recently shifted five percentage points of
its allocation out of stocks and into bonds.
Example: If
your normal allocation had been 70% stocks and 30% bonds, make
it 65% stocks and 35% bonds. Only 40% of that stock allocation
should be in the U.S. equities. The other 60% should be in foreign
markets, which should outperform the U.S. over the next few years.
My Favorites
For bond allocation, stick with long-term U.S.
Treasuries and high grade corporate bonds or bond funds.
For the stock
allocation, consider these attractively valued sectors.
Consumer products:
Two stocks in particular are defensive plays in a bear market
The Coca-Cola Co. (NYSE KO. $47.13). CVS Corp. (NYSE
CVS $40.17).
Energy: Demand
is strong, and energy prices are holding up. Oil-service company
I likeSchlumberger Ltd. (NYSE SLB $48.95).
Natural gas
stocks I likeAnadarko Petroleum Corp. (NYSE APC $48.88).
Burlington Resources Inc. (NYSE BR $38.29).
Oil production
companies I like.Exxon Mobil Corp. (NYSE XOM $85.30).
Phillips Petroleum Co. (NYSE P $53.67).
Pharmaceuticals:
You can invest in drug companies that have 12% annual earnings
growth at attractive valuations. I likeAbbott Laboratories
(NYSE ABT $50.15). American Home Products Corp. (NYSE
AHP $59.87). Bristol-Myers Squibb Co. (NYSE BMY $53.02).
Johnson & Johnson (NYSE JNJ $54.91). Schering-Plough
Corp. (NYSE SGP $38.14).
International stocks:
The market I am watching most closely is Japan, which may
be the most attractive market in the world over the next five
years. Its new government is promising reform, and Japanese stocks
are truly cheap.
I like most
of Japan's blue-chip export companies. Two that trade in the
U.S. as American Depositary Receipts (ADRs)Hitachi Ltd. (NYSE
HIT $84.36). Matsushita Electric Industrial Co., Ltd.
(NYSE MC $15.43).
Where to be Wary
Technology stocks may be cheap compared with a
year ago. But I expect technology to be weak for the next four
or five years. The bursting of the bubble in telecommunications
mayor may notgenerate losses greater than the S&L crisis
of a decade ago. Either way, I see no reason to rush back into
telecom stocksno matter how cheap they get.
Editor's Note: Barton
Biggs, chairman of Morgan Stanley Asset Management and director
of global strategy for Morgan Stanley Dean Witter & Co. was
recently interviewed by Bottom Line/Personal, Box 58446,
Boulder, CO 80322, 1 year, 24 issues, $59. Visit the Web site
at www.BottomLineSecrets.com.
