My four Bear Food portfolios, from January 2001, December 2001, and June and December 2002 had a bad six months from a Bear point of view, rising more than the market. The question must now be: Is their Bear Food value going to get any better in the next six months?

All three of the Dow Jones industrial average, the S&P 500 Index and the Nasdaq composite index are now up more than 20 percent from their lows of October 2002, and the latter two indexes (but not yet quite the Dow) are up more than 20 percent from their lows of early March. This therefore qualifies as a bull market, by the normal definition, and naturally Bear Food has been pretty indigestible.

Overall, the Bear Food portfolios were up 21.75 percent during the period, compared with a rise of 8.32 percent in the S&P 500 Index. Since January 2001, however, the record is a little better; the Bear Food portfolios are down 28.37 percent, compared with a drop of 28.67 percent in the index. Pretty well random, in other words, but if the market is weak going forward (and I fully expect it to be) then the Bear Food portfolios’ relative downward performance can be expected to improve.

As long-term readers will remember, my definition of Bear Food is a stock that has the potential to be down 80 percent from its initial price over a 3-year period. None of my Bear Food stocks has yet achieved this, though several have at one time or another been down more than 50 percent. Needless to say, the last 6 months has not seen much progress towards the down 80 percent goals, and in the case of the first portfolio, of January 2001, there are now only 7 months to go.

My first portfolio contained 3 stocks, Cisco, Marriott and Goldman Sachs. All 3 were up in the last 6 months, and the portfolio as a whole was up 17.8 percent, compared with a rise of 8.3 percent in the S&P 500 to Friday. Of the three, Cisco, at 16.41, is still down 51 percent from its initial price of 34. I remain of the view that Cisco (which has serious stock options issues in its accounts) Marriott (which will be affected by an uptick in interest rates and a continued downturn in travel) and Goldman Sachs (which has benefited from the run-up in bond prices, but whose corporate finance business has been badly hurt) will all eventually trade at 80 percent less than their initial price, but possibly not before January 2004 unless we get a sharp market downturn.

My second portfolio, Wal-Mart, Home Depot and eBay, has one good winner (from a Bear point of view) one modest winner and one appalling loser. Home Depot recovered during the last six months, but is still down 35 percent from December 2001, compared with a 15 percent drop in the S&P 500. Wal-Mart is up only marginally over the last six months, and now down 7.7 percent since December 2001. However, eBay has rocketed 52 percent in the last six months, and 56 percent overall, to a price of 101.65.

The first indication of what is happening in this market is eBay. As discussed in TheStreet.com Friday, the company issues 4 percent of its capitalization each year in new stock options to management, stock options expense (which is not of course expensed) is around 80 percent of earnings, and around 80 percent of the company’s cash flow is achieved by selling stock at a discount to employees. Very 1990s, and undoubtedly unsustainable.

Of the three stocks in the second portfolio, I remain bearish on Home Depot, and am rampantly bearish on valuation grounds on E-Bay, but am somewhat more cautious on Wal-Mart, which appears to be continuing to gain market share in the U.S. in a difficult retail environment. Wal-Mart’s international operations however must be a concern for bulls of the stock.

The third portfolio has done better than the second, up only 3.5 percent over the last 6 months, and down 16.9 percent since June 2002, compared with a drop of 10 percent in the S&P 500. Best Bear performer here has been DaimlerChrysler, down 37 percent in the last year, while Fannie Mae and Berkshire Hathaway are down only slightly. Here I am less bearish than I was on Berkshire Hathaway, which is now less overvalued than it was a year ago (though there is still a substantial “Buffett risk” in the stock). Fannie Mae is in the same position it was a year ago; once the housing boom peters out, and house prices begin to decline, at least on the East and West coasts, its mortgage loan portfolio is vulnerable, and it is both overleveraged and excessively exposed to the derivatives market through its aggressive interest rate hedging program. I would now be even more bearish on DaimlerChrysler, because the strength in the euro against other currencies must badly affect the profitability of its flagship Mercedes brand, while the Chrysler part of the business is heavily exposed to pension fund liability, and not strong enough internationally to benefit from the weak dollar.

My fourth portfolio, from last December, contains not one but two disasters, from a Bear point of view, Capital One Financial, up 60 percent, and Amazon.com, up 62 percent. With Boeing down a modest 2 percent the overall portfolio is up 40 percent compared with the market’s 8 percent. A terrible result! I would remain bearish on Amazon.com, on valuation grounds (the company still does not seem likely to turn a profit for its full fiscal year in 2003-4) but would now be somewhat less bearish on Boeing, since the sharp drop in the dollar should increase its competitiveness against Airbus, while continuing military activity will help the defense side of its business. On Capital One, I would remain very bearish. The company has benefited in the last six months from the continued decline in interest rates, and the credit problems that threaten it have not yet surfaced. However its earnings have been boosted by tricks like not paying the top two officers in cash at all, simply giving them stock options, and then not expensing the cost of the options. With accounting of this quality, and very high leverage, it must be highly likely that the ship will spring a major leak at some point in the near future.

The above discussion has perhaps indicated my overall view of the stock market at present. It has risen a long way from the lows of October or March, without any significant economic or earnings news propelling it upward. It is now at approximately double its appropriate level, based on traditional valuation metrics. Stocks that have done particularly well in the last six months include some highly speculative names, several with serious accounting issues, or total lack of any positive profits record.

Sound familiar? Aren’t we talking a repeat of 1999, in which the overall level of stock prices is somewhat lower than in 1999, but the economic outlook is also markedly worse? The emphasis in the market on speculation rather than solid quality suggests that we are, and that, probably in the fairly near term, market psychology will once more sour, and prices will move rapidly and inexorably towards their long term equilibrium. Which is not to say it might not take some time — Alan Greenspan spotted the market’s “irrational exuberance” in December 1996, at least a year late, in my view, yet the market did not turn until March 2000. However this time around, since the memory of investor pain is so recent, I would bet that the market turnaround will be much quicker than that, perhaps in 3-4 months rather than 3-4 years.

Turning now to this fifth, currently unappetizing, meal of Bear Food, I would nominate three stocks, Genentech (DNA), Hovnanian Enterprises (HOV) and Sirius Satellite Radio (SIRI).

Genentech is our first biotech stock, a sector Bear Food had previously avoided, because I am more convinced of biotech’s potential than I am of the growth possibilities in the conventional tech sector. However, at Monday’s closing price of $66.73 the stock is on a price-earnings ratio of 267 times, has a market capitalization of $34 billion, and has doubled in price in the last month. While there have been promising results from its new breast cancer drugs, and positive news from Monday’s American Society of Clinical Oncology convention, the fact remains that a market capitalization of 12 times revenues is rich even by tech standards. The history of this stock, both in the 1980s and after its 1999 re-flotation, has been highly cyclical, with periods of euphoria mixed with periods of sober realization that profits in pharmaceutical companies come only slowly, and margins are likely to be squeezed by political factors. Expect an outburst of sobriety to make the stock Bear Food at some time going forward.

I had resisted including homebuilders in Bear Food, since the industry is highly fragmented, has relatively limited market capitalizations, and the larger companies tend to take market share from the smaller ones in both bull and bear housing markets. However, the continuance of the housing bubble into 2003, with the further decline in interest rates and rise in homebuilder stock valuations, makes the sector irresistible. Of the major homebuilders, I have chosen Hovnanian for two reasons: they are largely concentrated on the two coasts, where house prices have become most inflated (though they have recently invested substantially in the Houston and Ohio markets) and they are the most highly leveraged of the major groups, with $747 million of short- and long-term debt to only $562 million of equity at October 31, 2002 (this leverage would be modest in a stable business, but is horrendous in the highly cyclical homebuilding business.) Also, they have grown very rapidly recently, partly by acquisition, with 2002 sales being more than double 2000’s. The stock is at $57.81, on a P/E ratio of 9.9, and at about 260 percent of book value — both very high for the top of a cycle.

Finally, I can’t resist the latest tech mini-frenzy, satellite radio. Sirius, the larger of the two competitors in this field (XM Satellite Radio is the other) recently raised $175 million through a convertible note offering, which is said to provide it with enough cash to operate through the middle of 2004. Since the company had a net loss of $422 million on sales of only $805,000 in 2002, it’s going to need every penny of it. The company offers 100-channel satellite radio services, and has signed up Mercedes Benz and Ford to offer its products in their high-end 2004 products (XM has done a similar deal with General Motors.) The convertible was the result of a $636 million debt re-capitalization, in which 545 million Sirius shares were issued, bringing the total outstanding to 912 million shares, plus the 130 million issuable at $1.38 through the convertible. The stock closed Monday at $1.95, up 35 cents or 22 percent on the day. Forgive me, but satellite radio looks like a barely profitable niche market to me, and it has already been around for a decade (Sirius stock was above $60 at the top of the boom.) Count me an unbeliever.

As I am in the stock market as a whole. See you in 6 months!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.