TIME: Almanac 1993/TIME Almanac 1993.iso/time/082189/08218900.016

Text File | 1992-09-23 | 9.4 KB | 181 lines

                hô                                                            BUSINESS, Page 40

The Bulls of Summer


Stock exchanges around the world are setting new records,
despite fears that another free fall could occur if the U.S.
economy goes into a slump

By Frederick Ungeheuer


    Some Wall Streeters are experiencing acrophobia. Others
talk of vertigo. Whatever the buzz word, the feeling is the
same: stock speculators have suddenly become woozy about the
market's new heights. After a 230-point rise in 1988, the Dow
Jones industrial average has zoomed more than 500 points this
year, 200 just since the beginning of July. "I've been on this
trading floor for 39 years, and I've never seen a market go up
so fast for so long without a major break," said Donald Stone,
a specialist in consumer stocks on the New York Stock Exchange.

    Propelled by good economic news, the Dow pushed ahead an
additional 30 points last week in volatile trading, despite
heavy profit taking in the final hours Friday. The Government
announced that wholesale prices in July fell 0.4%, their biggest
monthly drop in three years, which signaled that inflation is
ebbing. During the same month, retail sales rose 0.9%, a surge
that reassured investors that the economy has not stagnated.
Before closing at 2683.99 for the week, the closely watched
index briefly topped the all-time record of 2722.42 it set on
Aug. 25, 1987. That was the heady peak from which the Dow began
its steepest slide in history, culminating in the 508-point
crash on Oct. 19.

    Now that the Dow has made a nearly 1,000-point recovery in
just under two years, Wall Streeters are asking, Can it happen
again? Is this boom any different from the last one? "Stock
prices have been climbing a wall of worry," says Robert Farrell,
the chief market analyst at Merrill Lynch, who sees "a
significant correction on the horizon."

    In their long stampede, the bulls have managed at least
temporarily to overcome their fears about the U.S. budget and
trade deficits. Despite a dramatic slowdown in growth, they have
been looking on the economy's bright side. "Investors now
believe the Federal Reserve Board can deliver a `soft landing'
of subdued inflation by year-end, without a recession," says
Byron Wien, chief domestic strategist for the investment firm
Morgan Stanley, who since May has been predicting a new all-time
high on the Dow. Elaine Garzarelli, a portfolio manager at
Shearson Lehman Hutton, who was one of the few forecasters to
warn of the crash in 1987, believes the Dow will top 3000 before
the end of the year.

    The Dow, in fact, has been at the back of the thundering
herd of market indexes, partly because it is made up of
blue-chip issues favored by relatively conservative investors.
Broader market indexes including Standard & Poor's 500 and the
Wilshire 5,000 had already reached all-time record levels by
early August. Says Justin Mamis, chief strategist for the
investment firm Cowen & Co.: "All the Dow can do now is put the
lipstick on." The allure of stocks is broadening rapidly as more
and more investors join the stampede, which is demonstrated by
the big increase in the market's volume. The average daily
number of shares traded on the N.Y.S.E. was about 200 million
last week, in contrast to a daily average of less than 170
million so far this year. "In August, when many traders are
away, this is very unusual," notes Shearson technical analyst
Philip Roth.

    True-believing bulls think the market rally is based on
sound fundamentals, not just glamour and giddiness. Says Martin
Zweig, a stock guru who turned bearish just before the 1987
crash: "I'm moderately bullish now. It's a different market."
During the fall of 1987, Wall Street faced a sudden array of
outside threats, ranging from potential war in the Persian Gulf
to congressional attacks on takeover activity. Another catalyst
of 1987's slide was a rise in interest rates, which threatened
economic growth and siphoned money away from stocks and into
interest-paying investments. Two years ago, yields on 30-year
Treasury bonds were heading toward 10%; last week they stood
around 8% after dropping all year.

    Above all, the euphoria of the '87 rally pushed it to
extreme heights in relation to the basic measure of stock value:
corporate profits. Since the crash, the income of stock-issuing
companies has risen 40%, giving them a much larger ratio of
earnings per share. At the Dow's current level, its stocks are
selling at 13 times their annual earnings, vs. 21 two years ago.

    The Dow is getting another boost from the strengthening
dollar, which has made U.S. stocks attractive to foreigners.
Reason: overseas investors are getting a double dose of
appreciation, since both the rally and the rising dollar are
driving up the value of their holdings. At the beginning of
summer, major Japanese brokerage houses including Nomura and
Daiwa stopped shunning U.S. stocks and began buying in earnest.
"During the past three months, Japanese investors have bought
$7 billion worth," estimates Seiyun Nakao, co-director of Nomura
Research in Manhattan. Almost every day last week Nomura alone
bought 1.5 million shares of U.S. blue chips.

    The prices of U.S. stocks now seem quite reasonable
compared with issues on the inflated Tokyo exchange, where
shares are selling at six times the Dow's ratio of price to
earnings. Even so, Japan can well afford its buying binge at
home and abroad. The country is awash in more than $1 billion
of fresh savings every day, which keeps the Tokyo market index
near the all-time high it achieved late last month. "In this
kind of liquidity, I think it's crazy to be scared of another
crash," said Noboru Terashima, a senior analyst for Shearson in
Tokyo.

    London, the world's third largest stock market, is still
lagging behind Tokyo and New York, despite a 28% gain for the
year on the 100-stock Financial Times index, better known as
Footsie. Closing last week at 2354, the London index remains
well below the record of 2443 it reached three months before the
October crash. Since the crash, says Charles Larkum, a senior
strategist at the James Capel investment house, "every morning
London looks at where Wall Street closed before it decides what
it's doing. Both markets waited through much of '88 to see when
Armageddon was coming, and when it wasn't, they decided they had
a bit of catching up to do." One reason London is taking its
lead from Wall Street is that, because of British corporate
acquisitions, more than 20% of the profits of London's 100
bellwether companies are earned in North America.

    But even as investors take comfort in sound fundamentals,
they look with alarm at the return of the greedy speculation
and electronic sorcery that are blamed for the crash. The market
has reacted with near hysteria to the possibility of takeovers,
first in the communications industry in response to the
Time-Warner deal and now in the airline business in the wake of
bids for the companies that own Northwest and United Airlines.
The takeover-stock mania has coincided with the return of
program trading, a system in which brokerage houses use
computers to buy and sell giant blocks of stock to reap quick
profits from disparities in price between the equities and
futures markets. Restrictions on program trading were imposed
after the crash to limit the market's volatility, but have since
been removed.

    Another reason for nervousness right now is the
too-good-to-last superstition. "This could be the eighth up
year in a row," says Morgan Stanley's Byron Wien. "That's never
happened in this century." During this bull cycle, U.S. stocks
have produced a compounded 17% annual return, almost twice their
historic 9% average. Even during the crash year of 1987, the Dow
managed to rise 3%.

    Some analysts are encouraged that investors have been going
back into the market slowly and cautiously, in comparison with
the mob scene in mid-1987, which made everyone skittish and
panic-prone. That is not the mood this time around -- at least,
not yet -- and markets rarely hit their peak until all types of
stocks are overbought, professionals become exuberant, and even
small investors are snapping up stocks with abandon. Peter
Lynch, manager of Fidelity's $11.5 billion Magellan mutual fund,
recalls that "in the summer of 1987, torrents of cash were
coming at us out of money-market funds." There is only a dribble
this year.

    So far, most of the stock buying has been done by
corporations through stock-repurchase programs, mergers,
leveraged buyouts or employee-stock-ownership plans. All told,
such buybacks have reduced the supply of shares on the market
by a record $94 billion during the first half of the year, or
nearly 4% of all outstanding stock. The buyout of RJR Nabisco
alone took $25 billion worth of stock off the market, while the
acquisition of Warner Communications by Time Inc. will reduce
supply by another $14 billion.

    The shrinkage of available stock has helped increase the
value of all shares, since equities are becoming a little bit
like land, which Will Rogers once said was his favorite
investment "because they ain't making it anymore." But at
current stock prices, a whiff of recession or a flare-up of
inflation and interest rates could make stocks about as popular
as beachfront property in hurricane season.