A high-powered investor looks at the '80s outlook
Perspective is one of the hardest traits to come by on Wall Street when traders are yelling, stocks are flying, and everyone is making money. But Roy Neuberger, one of the most successful and savvy stock traders of all times, has perspective. He has been trading stocks without a losing year since 1929, and he sees a lot of parallels between the current state of the market and the 1960-61 period.
In 1961, says Mr. Neuberger, the principal in the brokerage firm of Neuberger & Berman, the Dow Jones industrial average was at its highest price-to-earnings multiple ever, selling at 20 times earnings. At the same time, glamour stocks were selling at 70 times earnings. International Business Machines was selling at over $600 per share, with a market valuation of the company's net worth of $ 40 billion.
Then, in May and June of 1962, the market turned down with a vengeance. The Dow fell 29 percent. Although this was far short of the 1929-32 debacle and not as bad as 1973-74 would be, it still was a major move. Today, Mr. Neuberger says, this would be the Equivalent of the Dow's falling 300 points. IBM still hasn't regained the market valuation of that time; it is now valued at about $37 billion.
Today, Mr. Neuberger believes there are some parallel comparisons, since some of Wall Street's favorites are also selling at high valuations. For example, he points out that Schlumberger Ltd., an oil service company, is selling at $108 per share and 26 times earnings, a valuation of $21 billion. Even if the earnings go up over the next five years, which he expects them to do, the company still is not worth that much, he contends. Its current tangible book value is $30 a share. Schlumberger's business, he agrees, is growing, but its product is not essential: "We will not eat their product," he states.
Just so that no one gets the wrong impression, it's worth noting that Mr. Neuberger is also in the process of developing a "short position" in Schlumberger. As of Friday, he was over 14,000 shares, or $1.5 million, short. A short position means that an individual borrows the shares of a company, then sells them in the hopes of buying them back later a lower price and returning them. Mr. Neuberger is also developing a short position in Fluor Corporation, the large engineering firm, which is selling at 23 times earnings.
During other periods of speculation on Wall Street, Mr. Neuberger has profited handsomely from his perspective and short- selling tactics. In 1929, for example, he shorted RCA stock at $100 per share and later bought it back at per share and later bought it back at $40 per share. In Fact, Mr. Neuberger believes he has shorted enough stocks so that he could earn the tittle of "the great short seller," a crown that has been bestowed on the late Jesse Livermore.
Mr. Neuberger is not entirely pessimistic. He maintains that many companies are "soberly" valued, including Texaco, the big oil company. Texaco, he notes, is selling at only five times its current earnings and is still a good buy, even if the company has overvalued its gas reserves. Texaco has recently been extremely active, trading over 1 million shares last Thursday.
Despite many of the modest stock valuations around, Mr. Neuberger also has some hesitation about considering the 1980s a boom period for the stock market. His concerns are (1) the failure to decrease the inflation rate; (2) the seriousness of the Mideast war, even though it is localized at present; (3) some concern about the election next month, since a large portion of the population is going to be unhappy no matter who wins; and (4) the continued erosion of the purchasing power and net worth of the middle class as a result of the inflation rate. Otherwise, he concludes on a philosophical note, "I'm ultimately an optimist."
"Where are the customer's yachts?" asked Eddie Kantor, the late comedian.
Judging from the earnings reports from the brokerage community, we will have no trouble finding the broker's yachts: Just look for the biggest ones. Many of the major houses reported earnings increases that made even the oil companies look like pikers. Shearson Loeb Rhoades Inc., for example, reported third-quarter profits of $2.24 a share, compared with $1.10 a share in 1979, and a pretax operating margin of 24 percent, compared with 15 percent in 1979. At E. F. Hutton Group Inc., earnings rose by 64 percent, and at First Boston Inc., earnings doubled. First Boston also had a spectacular second quarter, with earnings rising by 655 percent, as the company's bond portfolio surged in value. Merrill Lynch, the dominant force on Wall Street, also rang up substantial earnings gains, reporting profits up 34 percent. Although both Goldman Sachs and Salomon Brothers are privately held, rumors at the institutional investors bond conference last week indicated that both those brokers had spectacular quarters, too. If the gains keep up, Christmas bonuses could be hefty.
Behind the big gains were heavy trading volumes, favorable bond markets, and profitable diversification moves.
Henry Kaufman, the senior economist and partner at a Salomon Brothers, is developing a kanck for "party pooping." Mr. Kaufman, speaking at the institutional investors conference, said double-digit rates on long-term corporate bonds should be around for the foreseeable future, since inflation will likewise be around. No matter who is elected president, he told the traders, the same problems will persist, and neither party will make a dent in solving them. With the Dow up 20 points for the week as he spoke, edging closer to the 1,000 mark, investors reading Mr. KAufman's remarks on the broad tape decided to take their profits. As a result, the market and the Dow both tumbled , losing most of their gains. At the end of the week, the Dow Jones industrial average had gained 5.38 points, closing at 956.06. Volume was extremely heavy.