Confident voice of pessimism Newsletter publisher bases bearish outlook on deflation scenario

November 23, 1997|By Bill Atkinson | Bill Atkinson,SUN STAFF

Charles Allmon is the ultimate bear in the ultimate bull market.

That's cost Allmon about 30 percent of his clients over the last two to three years, as Wall Street has soared to record highs.

But Allmon, a money manager and founder and publisher of the Growth Stock Outlook, a Bethesda-based financial newsletter, has not lost faith. He insists the market will fall -- hard and fast.

"I have been wrong so far, but I am going to have the last laugh," said the 76-year-old Allmon. "I can guarantee you, you are going to see some of these guys [bullish money managers] driving taxicabs."

The outspoken Allmon manages $150 million for pension plans, retirement funds and individuals who are generally over the age of 60. He is well regarded in the industry and has a reputation as a keen picker of stocks.

But he stubbornly clings to the belief that history's longest running bull market is about to die. Indeed, he predicts that the Dow Jones industrial average will dive 40 percent to 60 percent by the year 2,000 -- "give or take a year" -- from its high in August of 8,259 points.

"I am willing to make a wager with anybody whether its five figures, six figures or seven figures, that my forecast is going to prove to be valid," Allmon said. "Let them [stock market prognosticators] put up the money, these windbags."

It might be a bet worth making.

Since the Oct. 19, 1987, stock market crash, when the Dow Jones industrial average fell nearly 23 percent in one day, the index has more than quadrupled to its current 7,700 range. While investors reaped the rewards, Allmon squirreled away most of the money he manages in cash, preparing for the day when the sky would fall.

"I have great respect for the guy," said Joseph V. Battipaglia, the bullish chief of investment policy of New York-based Gruntal & Co. "I have read his stuff for years, and I have watched him just sit there for years."

Said Michael Metz, a sworn bear and the chief portfolio strategist with New York-based Oppenheimer & Co.: "Even I haven't been a bear that long."

Allmon's doomsday prediction is based on this scenario: Asian countries, struggling under poor economies, will blitz the United States with cheap goods causing prices on everything from cars to toys to clothing to plunge. U.S. exports and sales will shrink, but at the same time the nation will buy more goods from Japan, Thailand, Singapore and Malaysia. As prices fall, U.S. companies will make less money and lay off workers. Consumers, meanwhile, will have saved too little and spent too much. The stock market will crumble under the pressure and begin a long slide downward. Mutual fund managers, many of whom have never experienced a bear market, will panic and unload shares of stock to meet redemptions.

"We are looking at something big here," Allmon said. "We are looking at a global deflation. This Asian problem might have as profound effect on this country as the oil embargo of the 1970s.

"I don't think the real panic will come until the Dow is off 20 percent," he continued. "All of these baby boomers who think they are going to retire rich better have a contingency plan to work another 10 or 15 years."

When the market hits bottom, Allmon will be waiting with buckets of money to buy stocks. He plans to borrow heavily from banks so he can scoop up as much as possible.

Richard Russell, publisher of the La Jolla, Calif.-based Dow Theory Letters, said the scenario is "possible."

Gruntal's Battipaglia considers Allmon's outcome far-fetched.

"I don't buy it," he said. "This is not a new scenario. The Japanese should have buried us by now with autos, Sony Walkmans and new strategies. That didn't happen. I don't see this big wave of product coming in here and deflating the hell out of the U.S."

Still, Allmon has been right before.

Shortly before the end of a 20-month bear market that started in January 1973, Allmon's newsletter trumpeted: "Boom and Bull Market Ahead." Stocks soared. From October 1974 to June 1975, stocks climbed 55 percent.

And on Aug. 23, 1987, he predicted that the market could fall by as much as 160 points in one day, and drop 35 percent to 50 percent. On Oct. 19, 1987, the Dow plunged 508 points, or 22 percent. Allmon made money that day because he invested heavily in cash.

He has been nervous ever since, and he has paid a price as clients have taken their business to more aggressive money managers.

"Sure I missed a lot of run up," Allmon said. "On the other hand, I have had pretty decent returns, sometimes 10 percent, sometimes 15 percent. Everybody says that this guy Allmon missed the boat. They don't realize it's not how much money you make in a bull market, but how much you avoid losing in a bear market. That is what really counts."

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