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Falling dollar may help back-to-basics movement in '88

The way 1987 ended, Wall Street's first week of 1988 is not so much a celebration of the new year, but a relief that the old one is over. For the first nine months of 1987, the only direction the stock markets around the world seemed to know was straight up. Oct. 19 changed all that, but the reversal did put the market on a level that most analysts think will hold for a while.

The Dow Jones industrial average ended the year at 1,938.83, down 60.84 points for the week. For the entire year, the index managed to gain 42.88 points.

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``We have January '87 prices in December '87. That's no big deal,'' says John D. Connolly, with a laugh. Mr. Connolly is senior vice-president and co-chairman of the investment policy committee at Dean Witter Reynolds Inc.

Partly as a result of a year that saw the Dow soar some 900 points by August and land almost where it began, analysts say 1988 will be a time of basics and fundamentals: investing in basic industries, and companies with fundamentally sound balance sheets.

The big 1.7 percent decline in the Commerce Department's index of leading economic indicators in November, for example, is not seen as a harbinger of gloom for the year to come. The fall in stock prices in October, after all, contributed almost two-thirds of the index's decline, so the remainder, analysts say, would indicate a slower, but not dead, economic year.

``Our view is that the Oct. 19 stock market crash hurt but did not kill the economy,'' says Donald H. Straszheim, chief economist at Merrill Lynch & Co. ``We do think the first quarter of '88 is going to be one of a negative growth rate. But no recession.''

The larger question, Mr. Straszheim says, is ``how much did Oct. 19 contaminate the consumer sector? And as a consequence, how much will that percolate through and contaminate the industrial sector, and employment, and so forth?''

Straszheim sees two key areas where weakness is likely: ``The first is the consumer sector. Spending by households is going to be restricted again in the first quarter as it has been in the fourth quarter. There's only fragmentary data on the holiday selling season, but it wasn't any good.

``Secondly, that has already led to inventories which have piled up excessively. As a consequence, business will respond by reducing production schedules and employment.''

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The most uncertain ingredient in the '88 investment recipe is the falling dollar. Right now, it looks good for American exporters who have watched their products gradually get cheaper overseas.

However, ``you never permanently solve your problems by debasing your currency,'' says William D. Corneliuson, president of Strong/Corneliuson Capital Management Inc. in Milwaukee. ``Ultimately, you have to ask yourself who your customers are going to be. To the extent the dollar weakens and we begin exporting more, it's significantly more deleterious on their economies.''

``The dollar decline, of course, cuts both ways,'' Straszheim agrees. ``It does help our competitiveness in terms of being able to export, but it does that by hurting the foreign economies which become a poorer market for our exports.''

The expected slowdown in consumer spending and the positive outlook - in the near term, anyhow - for companies dependent on a cheaper dollar have set market watchers looking for companies with the best chance to capitalize on a better export market.

``The only theme I see right now is to play the declining dollar,'' Connolly at Dean Witter says. ``I'd want to add on to industrial cyclicals and shed as much consumer cyclicals as I can. That means no auto or retailing stocks for now.''

It does mean chemicals and tractors, he says. ``If you had to name a dollar-sensitive stock, it would be Caterpillar. Every time the dollar goes down a little bit, Komatsu [a Japanese tractor manufacturer] loses market share and Caterpillar gains.''

``We think the dollar is going to help very substantially,'' says John B. Hoffmann, manager of fundamental equity research at Smith Barney, Harris Upham & Co. ``We see a tug-of-war in the decline of the consumer sector and the strength of the industrial sector,'' particularly companies that export. The winners in this battle will be primarily in industries like paper, chemicals, metals, and technology stocks, he believes.

The improved outlook for exporters hasn't impressed Corneliuson that much, or inspired him to move heavily into the market. The Strong Total Return Fund invests in stocks, bonds, and cash equivalents, adding more of one or less of another as market and interest rate conditions warrant. For now and the near near future, 23 percent of the fund's assets are in bonds, 44 percent is in cash, and only 33 percent is in stocks, he reports.

``We're making the assumption that we're late in the market cycle,'' he says. ``The cycle has gone 60 months or more and the average post-World War II cycle lasted 33 or 34 months. The market is exhibiting all the characteristics of a late cycle: lots of volatility, a lagging advance-decline line, and typical late-cycle securities, primarily cyclicals, doing relatively well.

Stocks the fund is buying include aluminum companies like Alcoa, Alcan, and Reynolds Metals; and manufacturers like Deere & Co. and Caterpillar. Whatever consumer stocks remain in the portfolio, such as the Gillette Company, are there because they have a large overseas market, Corneliuson says.

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