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Citibank's trust chief sees the bull market as long-term

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Ahoy, investors! Meet the captain of Citibank's investment ship, Peter Vermilye.

Mr. Vermilye, a seasoned salt, guides one of the largest ships on Wall Street , the Citibank trust and pension department, which manages $20 billion in assets. When the stock market jibed sharply in August, suddenly taking off, Mr. Vermilye was among the managers who helped push the markets up. He was also a steady buyer of stocks in the spring, however, when no one else was. At that point, he told Business Week, ''You buy straw hats in January when no one else wants them.''

Last week, in an interview, he talked about his outlook for the markets and what he believes will be the ''winds and currents'' affecting them over the next few years.

To begin with, Vermilye believes this is the start of a long-term bull market , perhaps lasting as long as two years. To back up his words, Citibank's common stock funds are now 85 percent invested in the stock market. (Fully invested for him is 90 percent.) ''We are still buying,'' he states, ''but at a reduced rate.'' Most of his buying has been in consumer durable stocks. But unlike many managers, he has purchased some cyclical stocks, which he thinks will improve. These include the aluminums, forest product stocks, autos, and housing.

The stock market, he maintains, will benefit from some major wind shifts in the investing environment. First, the rate of inflation will stay low for some time. He expects that inflation this year and next will stay in the 5 percent area. With low inflation, he points out, earnings increases are more meaningful.

For example, if a company has an annual growth rate of 15 percent, but inflation is running at 12 percent, the earnings gains don't mean much. But if the growth rate remains the same and inflation comes down, the growth rate becomes important. He believes this is what is happening in the stock market: that investors like him now feel corporate earnings will be more significant and will give stocks a higher valuation. Thus, price-to-earnings multiples will expand even though corporate earnings will not be hyped by inflation.


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