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Bianco: Beware of Bears
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October 9, 1998: 8:28 p.m. ET
A hedge fund expert sees a dramatic market slump ahead
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NEW YORK (CNNfn) - Despite fledgling attempts to reach higher ground, U.S. markets will be hard-pressed in the near term to fend off an aggressive bear attack as speculators struggle to shore up their damaged positions amid heightened risks of volatility, a prominent market watcher said Friday.
"I don't think that any rally that we mount in stocks or in credit markets can approach the old highs that we saw back in June or July, so we probably have a bear market coming," Jim Bianco, the president of Bianco Research, told CNN's "Moneyline News Hour with Lou Dobbs" Friday.
Bianco said the slump could be significant - "as much as 1,000 points". He also predicted that that the fallout from the near-collapse of a troubled U.S. hedge fund last month threatens to weigh heavily on the behavior of investors - even those formerly accustomed to taking risks.
"Unless we find a new buyer, the old buyer of hedge funds will never be able to get as aggressive as they were back three months ago," Bianco said.
In recent weeks, the buzzword around world markets has been "deleveraging" as funds burdened with heavy exposure to hard-hit markets from Russia to Latin America have scrambled to unwind their positions.
The roster of big banks and brokerages reporting quarterly losses due to hedge fund losses has steadily lengthened in the aftermath of the $3.6 billion bailout of Long Term Capital Management.
Many of the largest losers have contended they have the collateral to cover their losses. Bianco suggested, however, that a large number of institutions may remain vulnerable as they find themselves unable to liquidate all their rickety positions.
"It's a much bigger problem than we've been led to believe," he said. "If you just look at the markets and you see the wild gyrations in the yen, and the wild gyrations in bonds, not to mention stocks, you have to conclude that the problem is much bigger than everyone thinks."
On the upside, however, Bianco said that, for the most part, the leverage and speculative problems that are leading to forced selling and margin calls are occurring outside the equity market.
"The ray of hope," Bianco said, "is that the stock market may have found a bottom yesterday or today as it started to rally because it doesn't have the forced liquidation that, say, the emerging markets have or some of the other markets that have been pummeled in recent weeks."
Bianco added that rising interest rates on Treasury bonds may be seen as a "positive" since most hedge funds invested in short-term paper, which has been rallying.
Nonetheless, he added, "over the long term, higher rates are not going to be that good for stocks…but right now, we're just taking it one day at a time."
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