President Reagan continues to have a credibility gap with the nation's financial hub, Wall Street. Even the President's call for additional spending cuts failed to impress investors, who accelerated their move out of the quick-sand-like markets. Immediately after Mr. Reagan's speech last Thursday, for example, the market on Friday dropped even further. Since June, listed and over-the-counter stocks have lost over $200 billion in value.
The President's speech was disappointing, says Larry Wachtel, an analyst with Bache Halsey Stuart Shields Inc. Dick Hoffman, chief investment strategist at Merrill Lynch, agreed: "It was disappointing there weren't more cuts in defense spending. I think there is some question about whether the $43 billion deficit is attainable without more cuts." And Monte Gordon, director of research at the Dreyfus Corporation, commented: "The President did not come through with the bold stroke. His speech was pedestrian. . . . There were no surprises."
Mr. Wachtel says Wall Street has doubts that Congress will approve any more budget cuts anyway unless more cuts come from defense spending. Even if Congress does approve the reductions, he still has doubts, noting, "The whole budget is based on economic assumptions that are invalid." For example, Wall Street is expecting 2 percent real growth, while Washington is expecting 4 percent.
"Washington's assumptions are completely at variance with Wall Street's," Wachtel says, adding, "Where does the President get these numbers from? The economy is soft, interest rates are higher than they have projected, and their revenue projections are too high." At this point, the Bache analyst says, the most pessimistic estimates are for a $100 billion deficit in fiscal year 1982 and the most optimistic are for $75 billion to $80 billion.
With a deficit this size, he says, the credit crunch long predicted by such pessimists as Henry Kaufman, of Salomon Brothers, and Albert Wojnilower, of First Boston, could come true. Mr. Gordon maintains that it's not a matter of whether the deficit is $40 billion or $50 billion, but it's the trend that is important. "The market is saying, 'You've exhausted the easy cuts and if you can't control defense spending at this point, there is an urgency to get to some of the sacred cows."
Dr. Edward Yardeni, of E. F. Hutton, says, "Stock and bond investors aren't waiting for a financial crisis; they are causing one all by themselves." Dr. Yardeni holds that even budget cuts won't bring interest rates down. With strong business demand for funds and a restrictive monetary policy, the only way to bring rates down, he says, is a recession. And even a recession, he says, may not help the stock market.
"A sustainable rally," he explains, "requires that the Fed resist letting short-term interest rates fall too far too fast, as happened last year." Otherwise, inflation will become a problem again. And if the economy drops too sharply, there is still another danger: The Treasury will have a revenue shortfall and be back in the credit markets again.
How will investors know that the bear market has come to an end? Robert Farrell of Merrill Lynch answers, "When it stops reacting negatively to bad news." There is no doubt about it, veteran Wall Street observers note, a bull market climbs a wall of worry.
When Mobil Oil reports its third-quarter profits at the end of next month, investors in the company will have a small surprise. The company will report profits from its attempted takeover of Conoco. According to Mobil, the company made an estimated gross profit of $17.659 million on its Conoco transactions, or 4 cents a share. Although Mobil says it will not break out the final net profit on the Conoco transaction, a spokesman says the cost of the takeover attempt could not have exceeded the gross profit.
Mobil purchased 735,800 shares of Conoco at a cost of $50,796,000, excluding commissions. The prices ranged from roughly $67 to $69 a share. These shares were later tendered to Seagram for $92 a share.
Mobil also reports that it has returned the $6 billion it borrowed from a group of banks, led by Citibank. It will retain the line of credit at least through the quarter, however -- the minimum time period under the agreement.
Despite a reduction in the prime interest rate by half a percent, to 19.5 percent, the stock market continued its slide last week. The Dow Jones industrial average dropped 12.18 points, closing at 824.01, its lowest level since May of 1980. Since June, the Dow has lost nearly 200 points. On Monday, a well-known investment adviser, Joseph Granville, predicted a market plunge.
Grumman stock was actively traded and higher after LTV said it would make a tender offer for 70 percent of Grumman's stock. The Grumman stock backed off some, however, as antitrust issues were raised and the company said it would resist the move by LTV.