TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/091889/09188900.021

Text File | 1990-09-17 | 9KB | 165 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.