Just A Minute: Did He Say Dow 4,000 Or Dow 400?

"There is no gathering the rose without being pricked by the thorns." - Fables of Budpai

Call yours truly irresponsible, untrustworthy, changeable, erratic, capricious, unreliable, wishy-washy, unpredictable, fickle, vacillating, undisciplined, ditzy, scatterbrained, irregular, wanton, uncontrolled or just plain nuts.

With that little tantrum out of the way, no one needs to telephone or spend wasted moments inscribing angry words in the form of a letter. Plenty of crazy mail already arrives.

The above is a bit of the response one would expect to what is about to follow. To say that the end of the financial world is nigh would be hyperbole. To say that the stock market will fall more than 90 percent would be an accurate reflection of where the market will go, says today's guest.

And when will that happen? The likelihood is the descent will commence before the year is out.

That information, and much, much more, is in "At the Crest of the Tidal Wave," an exhaustive, 469-page book by Robert Prechter ($49 plus $5 shipping, Elliott Wave International, P.O. Box 1618, Gainesville, GA 30503).

Prechter makes Stephen King look like Emily Dickinson. Why bother reading a disaster book reminiscent of the slew of end-of-life-as-we-know-it tomes on every 1980 bookshelf?

1. Readers can see a picture of life at the extreme. Almost no one expects a collapse of the dimensions Prechter predicts, so there is some value in envisioning that. Sort of like knowing what's on the enemy's mind.

2. Some investors may find Prechter's message a wake-up call that routs them out of the more dangerous, high-risk market positions they've allowed greed to get them into.

The guess is hardly anyone will sell all stocks, bonds, real estate, business, gold, silver and, possibly, home, and invest the entire treasure chest in Swiss francs, as Prechter suggests. But not everyone envisions one of the biggest bear markets that ever knee-capped civilization.

That's all right. Crack that mind open an extra inch or so and listen to him anyway.

"The main thing to focus on is you're not guaranteed 17 percent a year in the stock market, but preserving every nickel you can," Prechter said by telephone from Gainesville, Ga. "Bear markets are very tricky in how they can separate you from your money."

Prechter grew up primarily in Georgia and collected a psychology degree from Yale University. In the meantime, he got into rock bands and for some years made a living at clubs. All along, he dabbled in the technical elements of the stock market.

By 1975, he caught on as a technician - someone who uses price and volume history to forecast stock movement - at Merrill Lynch (Pierce, Fenner & Smith won't be with us for this collapse). He worked with technical stars such as Bob Farrell, Bob Nurock and Phil Roth.

By the late 1970s, Prechter was ready to leave. A devotee of the late R.N. Elliott, Prechter co-authored a book on the Elliott Wave principle. In 1979, he broke away to start a newsletter, the Elliott Wave Theorist.

The first ad in Barron's brought one subscriber, at almost the same fee ($233 for a year) as the ad cost ($235). Things have gotten better since. The company employs 65 individuals. Clients around the world get charts and analyses regarding stocks, bonds, commodities and the like. For a sample copy or subscription (12 copies annually, $233) call 800-336-1618.

The organization got so big that Prechter, 46, was able to put someone else in charge and confine himself to analysis. That enabled him to develop "Tidal Wave."

The Elliott Wave theory contends that in nature, certain patterns recur. Sets of subwaves form larger waves. A cycle may last centuries. In fact, Prechter says, we are at the top of a cycle that began in roughly 1784. The start of that upturn ended a harrowing 64-year period that included perhaps the worst bear market of all time, 1720-22, followed by years of upheaval.

That five-cycle pattern has featured three upturns and two downturns. The first downturn, in the mid-1800s, culminated with the Civil War. The second downturn was the 1930s Depression followed by World War II.

Among Prechter's points:

-- The current market could peak in the 5,200-5,500 range. "There is no way that latecoming bulls will enjoy anything close to the 640 percent gain that the bull market has provided so far, and every reason to believe that they will pay for whatever sin they commit in buying stocks at this late date."

-- "A drop to at least Dow 1,000 is certain. A drop to below 400 at one or more times during the bear market is nearly certain." That low may come in the year 2003, but that is "a best guess and should be treated accordingly." That year was picked, eight years down the road, because it offsets the eight-year 1920s boom.

-- Over the next century, the market will experience another sequence of peaks. None may be as high as the current one. The next market top could come about 2024. In fact, though, a long-term bear market is expected to dominate the century, ending about the 2090s, give or take a decade.

-- Optimism is rampant today, building the ledge for a fall. Investors are told not to miss out on the gains (with little or no mention of the risk of loss). One needs to go back nearly three centuries to the South Sea Bubble and Mississippi Scheme for such flagrant optimism.

Prechter has been beaten up from time to time when his analysis was skewed. In his book, he generally avoids or blurs the timeline for when things will happen.

"The only statements I am willing to make categorically are that (1) the stock market is near the end of cycle wave V from 1932, (2) the Dow Jones industrial average will fall at least back to 1,000, and (3) when the stock market falls that far, we will have a depression."

Too bad he's so afraid to put his thoughts on the line.

Here is Prechter's prescription:

"Your first goal should be to get out of debt. Next, liquidate any assets that are likely to suffer in the depression. These include stocks, investment real estate, long-term U.S. bonds and notes, corporate bonds, municipal bonds, `emerging market' debt and equity, overpriced collectibles and even your business, if it suits you."

A real fence sitter, this guy. As for your home, if you treat it as an investment vehicle, dump it, too. Look for gold to lose more than half of its value.

"There is no truly safe place to hide except cash and interest-bearing cash equivalents," Prechter wrote, preferably in a financial institution outside the U.S. Inner turmoil, the result of a depression, could threaten domestic deposits.

Nor are retirement plans and insurance policies necessarily secure. Hence, the encouragement to switch to cash where possible.

Prechter's words are ice-cold sobering. If he proves correct, remember where you read it. If he is wrong, never mind.

Not even a teenager

Tomorrow is this column's 12th birthday. Each should celebrate in his or her own way.

Stocks and bonds

The Dow Jones industrial average of 30 blue-chip stocks last week rose 84.12 points to close at a record 4,825.57. It was the fifth best week of 1995.

The Murphey Favre Northwest 50 of 50 stocks weighted by their regional economic impact gained 85.45 points to finish at 3,047.79.

The U.S. Treasury's 30-year bellwether bond rose $11.25 per $1,000 of face value to close at $1,080, said Pamela Warren, Seattle-Northwest Securities vice president. The market believes a positive budget resolution and an interest-rate ease are on the way sooner or later, Warren said.

Municipal bonds gained $5 per $1,000, reported Judith Cochrane, Seafirst Bank municipal trader. The Seafirst Northwest Muni index improved by 0.05 to 5.7 percent. Economic data and good supply fueled the increase, but longer-term improvement continues to be hampered by investors turning more to stocks than bonds.

Wall Street Recap appears Sunday in the Business section of The Seattle Times.