A Veteran Goes Long on Gloom


By Gene Marcial With the Dow Jones industrial average surging about 304 to 8384 points as of the middle of the Aug. 6 trading day, the bulls are back on center stage. After three consecutive sessions of pummeling, stocks rebounded: The Standard & Poor's 500-stock index was up about 4%, to 867, and the Nasdaq composite index had risen 4.5% to 1264. Some of the bulls are suggesting that the market is gaining renewed ground based on the Street's growing belief that the Federal Reserve Board will cut interest rates to boost the faltering economic recovery.

The bears, however, are not buying that idea. Whether or not the Fed cuts rates would be immaterial, some of them assert. They believe the market will continue to head south for some time (see BW Online, 8/6/02, "Dancing to the Street's Limbo Beat"). One unrelenting bear is Nelson Peltz, a savvy investor and a prominent dealmaker, who has witnessed and participated in all the big bull and bear markets.

"It's the impending war with Iraq that's bringing the market down," argues Peltz, who is chairman and CEO of Triarc, a holding company whose major subsidiary is Arby's, the 10th largest quick-service restaurant chain. Peltz turned bearish in mid-2000, when the market was nearing its peak. Investor concern about when President Bush will ultimately launch an attack against Iraq is roiling the markets, says Peltz. He believes that the government will, indeed, wage war on

Baghdad.

LOST FAITH. Uncertainty about how long such a war would last, and how effective or victorious it would be, remains a big worry in the minds of investors, he says. The related question, whether the attack would inspire renewed terrorist attacks on the U.S., is also nagging at investors' minds and affecting the market, Peltz adds. Factor into this picture the continuing turmoil and Palestinian attacks in Israel and you a list of overwhelming negatives with which the market must contend, says Peltz.

And then, to top off the bleak picture, there are the continuing corporate scandals that have been creating havoc with investors' faith in the integrity and credibility of U.S. corporations. Says Peltz: "There isn't enough good news around to overwhelm the bad news that the market is seeing."

Peltz's portfolio is 85% to 95% in cash and bonds. And he doesn't see anything that he thinks will stop the market's decline in the near future. Once the attack on Iraq is launched, he concedes the market could enjoy an upward spurt -- at least for a brief period. "But depending on how the outcome of the war is, the market will continue to be the place not to be," says Peltz.

WAR AND PESTILENCE. He concedes, though, that if the war goes extremely well for the U.S. and is completed within a short period of time, it could restore a bullish tone to the stock market. But that's a far-out scenario, he says, one that's not likely to play out quite so neatly. "A war with Iraq is fraught with danger on all sides for the U.S.," he warns, adding that, at this point, "there is no rush to commit to stocks."

Trading in the big stocks will continue, Peltz says, with shorts covering their positions and providing some intermittent rallies that the bulls will latch on to. "But they will be traps for the bulls," he warns.

Is Peltz tempted to go bargain hunting for companies whose prices have been beaten down? "We have been looking at companies that are immune to the economic swings and somewhat immune to the impact of terrorism or war, but frankly, we are still very wary," says Peltz.

His advice to investors right now: "Sell into the rallies." Marcial is BusinessWeek's Inside Wall Street columnist


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