Famed 1987 bear grows horns

Paul Jones made a killing in crash, but he's reported to be upbeat now

October 17, 2007|By Landon Thomas Jr. | Landon Thomas Jr.,New York Times News Service

Paul Tudor Jones II leans back in his chair and grins. The stock market is going to crash, and he knows it.

"There will be some type of a decline, without a question, in the next 10, 20 months," he says in his rich Memphis drawl. "And it will be earth-shaking; it will be saber-rattling."

Coming from a financial speculator as prominent as Jones, a man with about $19 billion of short-term trading capital at his disposal, the words might be enough to send ripples through a stock market that, apparently defying logic, has been hitting new highs each day.

Except that the crash to which Jones refers occurred Oct. 19, 1987. His prognostication - brazen, and as impudent as the man himself - was made in a documentary called Trader, which was filmed in the year preceding that day.

Now, 20 years after the 508-point decline, several strategists are anticipating that the earth will shake again. Valuations are stretched beyond historical comparisons. The market, ever more volatile, is reaching new highs, ignoring a buildup of bad news. Most crucially, the strategists say, the sentiment that the market's rise is infinite seems to have taken permanent hold.

"The overvaluation of stocks is more extreme than the 1929 high," said Robert R. Prechter Jr., an independent market forecaster in Gainesville, Ga., and a well-known follower of Elliott Wave theory, which examines the extent to which investor psychology creates stock market patterns. "Which tells me the next bear market will be the biggest in many years, probably since 1929-32."

At the end of the day on Oct. 19, 1987, stocks were down 22 percent - precisely the "Acapulco cliff dive" predicted by Jones in the video. The day ruined the careers of many, but it made the reputations of Jones and Prechter, whose professional relationship dates to the mid-1980s.

In the video, Jones can be seen huddled over a graph, comparing the market's peak in 1987 with a previous high in 1929.

As Elliott Wave theory would have it, the two market tops may have been 60 years apart but the herdlike exuberance of investors pushing stocks ever upward was the same. On Oct. 5, 1987, Prechter, then and now the best-known proponent of the theory, told his subscribers to sell.

While the rest of Wall Street counted its losses, Jones, at age 32, returned 200 percent for his investors that year and drew a payday of an estimated $100 million for the year, an almost unheard-of sum at the time.

No one, including Prechter himself, claims that Jones relied solely on Prechter's call. In the video Jones can be seen as early as 1986 making a case that the market would fall. But the crash did not last long. Prices rebounded the next day, and within two years, the market had regained all that it had lost that day.

Now, Prechter is suggesting that the country is facing not just a market crash, but also a depression. On every measure, he says, the market is more overvalued than it was in 1987 before the reversal.

The price-to-book ratio of the S&P 500-stock index today is 4.04, compared with 1.73 in 1987. And measures of the bullishness of Wall Street traders confirm Prechter's assessment of the overvaluation.

To be sure, the one feature of every long-running bull market is the small clutch of market pessimists whose clamor that the end is nigh seems to rise in pitch with each successive peak.

But Prechter's gloominess may resonate, especially in light of Jones' high regard for him. "Prechter is the best because he is the ultimate market opportunist," Jones said in the book Market Wizards, a collection of interviews with successful traders compiled by Jack D. Schwager.

That is not to say that Prechter has any undue sway over Jones, who since he started Tudor Investment in 1986 has generated a return of 26 percent a year and has seen his assets grow from $125 million to $19 billion. Indeed, Prechter's relentless bearishness has not made him a favorite of bullish hedge-fund managers.

At a time when hedge-fund trading is dominated by computer trading programs and traders with Ph.D.s, Jones, who got his start trading bales of cotton on the New York Cotton Exchange, is of the older style, relying on intuition, market smarts and the force of his personality. A macro trader, he is known for making big sweeping bets on the direction of stock exchange indexes, commodities and currencies.

As for his view on the market, Jones declined to comment for this article. Over the last 17 years, he has rarely publicly expressed an opinion about stocks, bonds or currencies - a reflection of his influence as a trader.

This summer, his funds were hit by the credit crisis and lost 5 percent in August. Through September, Jones is barely ahead, up 2.5 percent and could be having his worst year in over a decade.

"He has had a tough time lately," said Byron R. Wien, a friend of Jones and a strategist at Pequot Capital Management, a rival hedge fund. "But he is a talent. You go through cold periods, but you don't lose it."

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