Let's see if he makes it two for two. Pace professor has been right before, now advises selling stocks By JAY LOOMIS THE JOURNAL NEWS Frank Becerra Jr./The Journal News Robert H. Parks Job: Finance professor, Pace University Residence: Ossining Joined Pace: 1978 Education: Ph.D., economics and finance, University of Pennsylvania, 1958 Research interests: Economic and investment analysis and strategy (Original publication: March 18, 2007) http://www.thejournalnews.com/apps/pbcs.dll/article?AID=/20070318/BUSINESS01/703180350/1066 Seven years ago at the peak of the Internet mania, Robert H. Parks warned that a dangerously overvalued stock market could plunge by 20 percent. "This is the biggest financial bubble in U.S. history," Parks told The Journal News in January 2000. "You have to worry about these Internet stocks. I call them butterfly stocks. They are blindingly beautiful, but without substance. By that, I mean I can't see earnings on 98 percent of them." Parks, a finance professor at Pace University for 29 years, was right then about his predictions of a crash - and the shakiness of the dot-com companies. Two months after he made those statements, the tech-heavy Nasdaq Stock Market peaked at 5,048 and began a painful collapse that wiped out more than 70 percent of its value by the fall of 2002. Since then, the market has rallied significantly and pushed the Dow Jones industrial average to record highs, as the excesses of the tech bubble diminished and investor optimism returned. Despite the recovery, Parks sounds as bearish about stocks as he was seven years ago. The Ossining resident is still warning about economic excesses and overinflated bubbles. Only this time, he said, it is a bursting housing bubble that could lead to mounting stresses in the financial system, double-digit declines in stock prices and a recession. He also is worried about the costs of the war in Iraq and rising budget deficits. While few market pros are as pessimistic as Parks, there's no question that investors have become more nervous during the volatility of the past three weeks. After seven months of sustained rallies and relative calm, the Dow recently had its two worst days in four years - a 416-point decline on Feb. 27 and a 242-point slide on Tuesday - on mounting anxieties about subprime loans, inflation pressures and a weakening economy. Parks recently discussed his outlook and expectations for increasing volatility with The Journal News. Q:What impact will the Iraq war have on the economy and the markets? A:The war is a giant economic meat grinder that sucks in capital, labor and materials, and spits out tanks, guns and bullets. That is a huge opportunity cost that we may pay a huge price for. That's because the money spent on the war is siphoned off from other needs and other parts of the economy. Q:What impact will the housing slowdown have on the economy? A:The housing bubble is a giant bubble, and all big bubbles burst. ... The United States is still the largest country in the world in terms of GDP. If we have a bursting of the housing bubble, and a companion bursting of hedge funds, banks, insurance companies and mortgage companies that have funded this bubble, and this leads to financial problems and a recession ... then other nations will go off the track, too. Q:Some observers say that it is still a good time to invest in stocks. A:The mood can change very quickly from generalized optimism about the economy to generalized pessimism. And once that pessimism takes hold, we could face a rough ride in the markets. Q:How rough? A:I would say a recession and a meltdown in the mortgage market could easily give you a 25 to 30 percent plunge in the major indices - the S&P 500, the Nasdaq composite, the Dow. Birds of a feather who have been shot fall together. Q:How likely is this scenario? A:I would say the probabilities are 3 out of 4. The timing of a downturn is not something that you can identify with any precision. Q:One of your worries is about the fiscal policy of the U.S. government. A:Bad fiscal policy is recklessly cutting taxes and spending like a madman. Q:What should investors do in the current climate? A:In this type of climate, the most beautiful advice that I can give is to cut back on your holdings of equities. Instead of being to 50 to 60 percent invested in equities, make it 20 percent. Split the rest in TIPS (Treasury Inflation-Protected Securities) with an average 10-year duration, and money-market funds. Then you are protected. At least you will get your money back. I myself have cut my equity holdings to 15 to 20 percent at most. Q:Many economists aren't this pessimistic. A:We have had 10 recessions since World War II. The consensus never sees a recession until it is past tense. It is too late then. Q:Why has there been so much volatility in the stock market recently? A:It is evidence of fear in the marketplace.