Los Angeles money manager Arnold Silver called "a brutal
three days," the question is: What now for the market?
Wall Street superstar this year who runs
Balestra Capital Partners, Jim Melcher, says he's "worried
about a recession. Not a normal one, but a very bad one. The
worst since the 1930s. I expect we'll see clear signs of it in
six months with a dramatic slowdown in the gross domestic
Capital, a $350 million New York hedge fund, was up 3% for the
past three market sessions, when the
Dow Jones Industrials, spearheaded by widespread declines in
financial stocks and fears of more billion-dollar-plus asset
write-downs, tumbled more than 677 points, or about 4.5%. The
Nasdaq fared worse, skidding about 7%, triggered by
across-the-board declines in those fast-stepping technology
increased in value by 175% so far this year, Mr. Melcher tells
me. A 9-year-old fund, it has posted compounded annual growth of
about 30% since its inception.
Mr. Melcher, a
market bear, had some pretty discouraging words. "What I think
is not good for the country, but good for me." he says. His
basic advice to the country's roughly 80 million stock players:
Run for the hills — the worst is far from over. An investor's
stock portfolio now, he believes, should be only about half of
what it might normally be.
With the housing
market in a state of collapse — and he says he believes it is
far from over — Mr. Melcher argues that average homeowners will
not be able to withstand the kind of recession he sees, given
the added burdens of rising energy and food costs, and continued
deterioration in the credit markets.
consumption is already slowing, Mr. Melcher figures sharply
rising unemployment is inevitable. Another of his worries is
that central banks around the globe,
America's included, are debasing their currencies, which
is setting the stage for a new round of higher inflation.
Our bear figures the next six to 12 months will be awful for
investors as the market goes down "pretty substantially."
His frightening outlook calls for an additional 20% to 30%
decline from current levels. A drop of that magnitude would
put the Dow down in a range of roughly 9,100 to 10,400.
Asked how he
could conceivably give credibility to such an ominous forecast,
Mr. Melcher observes: "I've never seen a market with more risk
and what's significant is that risk is not yet priced in."
Given his grim
expectations, he says there is no equity market in the world he
would play right now. "When the American market goes down, other
equity markets around the world should follow," he says.
As of now, his
portfolio is pretty much devoid of stocks, save for an
exchange-traded fund focused on leading companies in oil
services, which he regards as an ongoing growth industry. The
ETF, the Oil Services Holders Trust, trades on the American
Stock Exchange under the symbol OIH. Although enthusiastic about
the industry's growth prospects, Mr. Melcher says he would be
reluctant to recommend oil services stock because he believes
the price of oil could easily drop 50% in the recession he
he sees for the market is the prospect of huge withdrawals of
funds from America by foreign investors due to the falling
dollar, the credit crisis, and a slowing economy.
At the moment,
Mr. Melcher's chief investment strategy is shorting stocks and
certain bonds, notably mortgage-backed and junk bonds, through
the use of derivatives, put options, and credit default swaps.
He is also short ABEX, an index of residential mortgage-backed
strategy is largely responsible for his super performance this
year, as are his holdings in gold. The fact he's sticking to
this strategy is evidence that he firmly believes the chaos in
the financial markets is far from over. Mr. Melcher is also
gung-ho on several currencies, particularly the Swiss franc and
the Japanese yen.
investor, he believes, should seek to protect his assets by
raising cash, putting money to work in short-term treasuries,
and buying some gold (notably through StreetTRACKS Gold Trust,
an ETF that tracks the price of the precious metal and trades on
the Big Board under the symbol GLD).
Is the world
coming to an end? I asked our bear. "I don't think so," he
replied, "but as I mentioned, the ingredients are in place for
the worst kind of a recession, which means it's the wrong time
to own stocks."