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Market rout even has bears screaming

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By Aaron Elstein, Crain's New York Business

October 6, 2008 4:27 pm ET

With the Dow Jones Industrial average crashing though the 10,000 barrier for the first time in four years on its way to a late afternoon plummet of 800 points at one point, even some of Wall Street’s most famous bears are swearing that investors have lost their senses.

“We are clearly in fear-mode,” said Bill Ackman in a press conference on Monday.

The man who runs the Pershing Square hedge fund, which made a fortune last year by selling short bond insurers, went on simply to conclude that “the fundamentals are not applying.”

Oil, pharmaceuticals, and financial institutions led the way down in the afternoon, with Hess Corp. falling 12%, Pfizer Inc. dropping by 5%, and JPMorgan Chase & Co. by 7%.

Much of the selling was driven by hedge fund managers dumping their most readily-saleable holdings to raise cash as their clients demand their money back.

A Fox-Pitt Kelton analyst added fuel to the fire by warning that J.P. Morgan could be forced to write down another $4.3 billion of mortgages and other assets when it reports quarterly results, continuing the dismal trend of massive write-downs that have clobbered banks for a year.

The dismal environment would seem to be right up the alley of people like Mr. Ackman, who in the past year never hesitated to proclaim his bearish views on companies like bond insurers MBIA Inc. and Ambac Financial Group Inc. But at a conference Monday called the Value Investing Congress, he changed his tune and instead emphasized the opportunities he sees.

“I do think many stocks are getting extremely cheap,” he said.

In fact he has already switched gears, snapping up significant stakes in Wachovia Corp. and American International Group Inc. — his first investments in financial institutions in five years.

Mr. Ackman said he began acquiring a 180 million-share, or 9%, stake in Wachovia last Monday, after the North Carolina bank agreed to be acquired by Citigroup Inc. Since then, he’s had the good fortune to see his stake rise significantly after Wells Fargo & Co. trumped Citi’s bid late last week.

While Citi and Wells fight over Wachovia in court, Mr. Ackman argued that Wachovia is worth up to three times more than its current price of about $6 a share.

He also believes that Citigroup could yet team up with Morgan Stanley or Goldman Sachs to acquire Wachovia’s valuable retail brokerage and asset management units.

In recent weeks, Mr. Ackman has quietly become one of AIG’s 12 largest shareholders. He reckons the company, whose stock trades for $3.80 a share, has book value of $6 a share.

He said he was confident the ailing insurer would be able to fetch big prices for selling things like its aircraft leasing and life insurance units.

In the meantime, he urged those who can still afford to it to spent some money on a nice dinner or, even better, buy a friend a book.

That sort of gift-giving would help Mr. Ackman, who is a major investor in Borders Group Inc.

The Dow Jones industrial average hit a low of 9,525.32, down 800 points, before recovering more than half its loss to close at 9,955.50, down 369.88 points, or 3.6%.

Broader indexes also suffered.

The Standard & Poor's 500 index shed 42.34, or 3.9%, to 1,056.89; and the Nasdaq composite index fell 84.43, or 4.3%, to 1,862.96.

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