TIME: Almanac 1993/TIME Almanac 1993.iso/time/091889/09188900.021

Text File | 1992-09-23 | 9.0 KB | 178 lines

                                                                                BUSINESS, Page 62

Money Angles

The Gloat Factor and Other Market Indicators


By Andrew Tobias


    Some things you can know for sure and some you just can't.
For example, Kellogg knows for sure that there are 17 servings
in a box of its S.W. Graham Brown Sugar Cinnamon cereal, and I
know for sure there are 208 individual bite-size grahams (I
counted them), leading me to know for equally sure that there
are twelve per serving, or nearly enough to completely cover the
bottom of a very small cereal bowl. What one can't know is
whether anyone has actually ever eaten a portion that size,
because such a person would presumably be too faint from hunger
to raise his or her hand.

    So it goes with the stock market. There's a lot we can know
about it -- that the Dow Jones industrial average has more than
tripled in seven years; that, adjusted for inflation, it would
have to hit 3000 before matching its 1987 peak, and 3800 to
match 1966; and that, even so, it ain't cheap. But the one tiny
thing we can't know -- not even the folks at Kellogg know -- is
where it will go from here.

    Morgan Stanley's exceptional strategist Barton Biggs says
we're in for a bear market: perhaps one more spurt as investor
enthusiasm heats to a boil, and then an 18-month, 20% drop.
(Which, however, would be a lot healthier than the six-hour, 20%
drop we had two years ago.) And economist David Bostian, who
recommended maximum investment in stocks in August 1982, now
recommends that conservative clients sell every share.

    Yet Steve Forbes says stocks are undervalued. "Stocks will
be higher a year from now than they are today," says Forbes'
deputy editor in chief, who wins prizes for his predictions with
some regularity. And though I'd sooner drive nails into my knee
than buy a stock after it's tripled, there actually is a lot of
reason to be optimistic. (That, of course, is a good reason to
be pessimistic. The world always looks bright at market tops.)

    The Dow showed real class in timing its surge past the
pre-crash high. It was the day the first non-Communist in more
than 40 years was sworn in to head a "Communist" country -- what
better symbol of the end of the cold war? And it was the day
man's hand reached the farthest planet of the solar system --
what better symbol of technological promise?

    The significance of these two symbols is hard to overstate.
The end of the cold war could mean a redirection of more than
a trillion dollars here and abroad over the next decade from
unproductive military spending. FORTUNE -- no liberal rag --
recently advocated a $100 billion cut in the annual U.S.
defense budget. Axing a single Stealth bomber, of the 132
proposed, frees up as much cash as the Government plans to
invest during the next five years in Sematech, the new U.S.
microchip-technology consortium. Imagine having 50 such ventures
instead of 50 extra bombers. Or "deploying" 200,000 bright,
motivated military personnel (as civilians, of course) to
bolster public school teaching staffs. Long-term national
strength is more the product of education and investment than
of arms.

    Match the end of the cold war with the promise of
technology -- we've begun bouncing telecommunications off meteor
trails! Within a decade or two, we will have mapped out the
entire human genome! -- and there is reason to think the stock
market really should be higher today, adjusted for inflation,
than it was in 1966. Dow Jones 4000! Stir in the global shift
to free-market economics, greater personal incentives and freer
trade -- Dow Jones 4500! Indeed, some market observers have
begun predicting a Dow of 5000 by the mid-'90s.

    Unfortunately, it's just this kind of euphoric talk that
signals market tops. Even if such optimism eventually proves
justified -- as I think it largely will -- short-term, the
stock market could be a lousy place for your money. It's when
everyone is talking calamity, not bright prospects, that you
want to invest. Everybody knows that when market highs make
headlines, it's time to sell.

    On the other hand -- and here's where it gets tricky --
when everybody knows something, the market oft as not fakes them
out. When God created the stock market, he told it, "Now listen.
You can't fool all the people all the time -- but I want you to
try."

    One bullish sign is the return of Doug Casey. "After ten
years of relative silence," trumpets a recent junk mailing,
"Doug Casey speaks out." His "best-selling financial book of all
time," Crisis Investing, predicted complete economic collapse
by 1983. Now he's bearish again, and offering a newsletter
called Investing in Crisis. (His publisher crows that Crisis
Investing was written in 1978 and predicted an explosion in gold
prices. Yet whenever it may have been written, Crisis Investing
was published in July 1980, months after gold had peaked and
begun its long slide.) But the point is, Casey's back, telling
us things will collapse. This is no guarantee they won't -- the
problems he cites are real -- but his shrill predictions are
reason to sleep better, nonetheless.

    A bearish sign, on the other hand, is that the far more
entertaining but no less gloomy Paul Erdman (The Crash of '79,
The Panic of '89) has become a bull! "We're bound to have a bump
in the road next year as the business cycle finally winds down,"
he writes in August's Manhattan,inc. "But after that, blue sky
as far as my eyes can see." Uh oh.

    There are even theoretical underpinnings to today's high
stock prices, one of which lies in the relationship between
stocks and bonds. For most big investors, this relationship is
crucial, because they constantly look to see whether the
uncertain rewards of stocks justify passing up the known if
unspectacular returns from bonds.

    Right now, with long-term Treasury bonds yielding better
than 8% and stocks yielding less than 3.5% in dividends, the
spread is very wide. (In 1966 Treasuries yielded just 5%, vs.
the same 3% or so for stocks.) Why take the risk of owning
stocks when you can own bonds?

    But Smith Barney market strategist John Manley argues that
the world has changed. In the old days, he says, the primary
threat was depression, not inflation. Sharp recessions occurred
regularly, sending stocks into a tailspin. Bonds were a lot
safer because the major threat to bonds is inflation, and there
wasn't a lot of that when America was on the gold standard.
Pegging the dollar to gold may or may not have been the best way
to run things, but it kept inflation in check. So bonds were
safe, and stocks were risky.

    Now, argues Manley, inflation is the far greater risk. (If
you are a politician today, which are you likely to tolerate:
inflation or a depression?) So stocks may have become relatively
more attractive than they were in the old days. Manley doesn't
think stocks are cheap at this level; but he says that, absent
a credit-tightening move by the Federal Reserve, the market's
path of least resistance is apt to be up.

    But then there's my Gloat Indicator. Simply stated, when I
find myself gloating about someone else having been wrong, that
generally means his prediction, embarrassingly premature though
it may have been, is about to come true.

    In the current instance, I came across FORTUNE's fall 1988
Investor's Guide. The article that caught my eye: "And Now,
Where NOT to Invest in '89." It singled out eight stocks to
avoid -- perhaps even to sell short -- dogs it "nominated for
the Canine Club of 1989." Today all eight are higher, including
AT&T, then 29, now 39; TCBY Enterprises, then 12, now 23; L.A.
Gear, then 19, now 64; and Turner Broadcasting, then 14, now 54.
As I scanned this list of dogs with the benefit of hindsight,
I found myself grinning broadly . . . no, gloating -- which
makes me think these stocks, and perhaps the whole market, may
now be poised to fall.

    No offense to FORTUNE, it's just nice to be reassured from
time to time that I am not the only one who has no idea where
stocks are headed. Which is precisely why any prudent investor
must have a four-pronged strategy: some liquid money (every so
often, cash is king); an inflation hedge (a house or two); a
deflation hedge (long-term bonds, which would do well in a
recession); and -- yes -- stocks (best purchased through no-load
mutual funds).

    It's wise not to buy stocks aggressively when they're
fairly valued, as they probably are now, because when they're
"fairly" valued, they're "fully" valued. Better to buy them when
they're under-valued. And it may also not be wise to jump in
when some sellers are delaying sales in hope of a cut in the
capital-gains tax. But over the long run, stocks always
outperform "safer" investments. If you're one who steadily
invests in stocks, this is no time to stop. (One stock that
looks a trifle plump, though, up more than fivefold in the past
seven years and yielding a slim 2.3%: Kellogg, maker of
100-calories-to-the-serving S.W. Graham.