Safety gains market following. Insider probe, US turmoil playing up quality
``Attention, Wall Street passengers. We are now boarding the Flight to Safety. There will be stopovers at Blue Chiptown, Dividend Heights, and Quality City. Please have your boarding pass ready.'' The political turmoil in Washington, an approaching ``triple witching hour,'' and the most expansive insider trading probe ever are making ``Safety'' a rather popular destination among money managers nowadays.
``The Boesky and Iran situations are clarifying and emphasizing the need to be in quality stocks with assured dividends,'' says Eugene Peroni, chief technical analyst at Janney Montgomery Scott Inc., a Philadelphia brokerage.
Information reduces risk. In the absence of good data, money managers turn conservative. The insider trading investigation - kept in the news by congressional hearings last week - is having a chilling effect on the exchange of information. Wall Streeters wonder which tips are legal and which are tainted. Any given conversation may be secretly taped.
``It's amazing how the chatter has been subdued,'' notes Ted G. Webb Jr., portfolio manager at the Bull & Bear Group, a New York mutual fund.
The Iran scandal worries investment pros, also. ``If the Iran situation gets to a point where it damages the President's credibility - if we have a confidence crisis - that could impair the administration's ability to head off protectionism,'' says Thom R. Brown, head market strategist at Butcher & Singer, another Philadelphia brokerage.
Once the Democratic-controlled Congress goes into session next year, many expect a push for trade bills sheltering American industries from export competition. Such moves generally spark international trade wars. ``The market doesn't respond well to that,'' notes Mr. Brown.
These uncertainties support the case for buying quality stocks, Brown contends. Even if protectionism is avoided, he thinks institutions will be ``chasing a name-brand list of stocks in '87.''
Mr. Peroni concurs. His charts show a dozen Dow stocks now breaking out of trading ranges established back in April. He says Eastman Kodak, International Paper, McDonald's, Minnesota Mining, and International Business Machines are poised to power the Dow to 2,100 or 2,200 by late February or early March. After that, caveat emptor. Peroni forecasts a 15 percent correction or more.
Brown's optimism is less restrained. ``The Dow's got a clear shot at getting into the 2,500 to 2,700 area.'' As the market goes higher, the downside risk grows. That feeds the flight to quality, and ``more institutions are likely to put funds in the safest parking spots possible,'' Brown says.
On balance last week, investors weren't parking much money in the market - blue chips or otherwise. The Dow Jones industrial average slipped 12.80 points in five days, closing at 1,912.26 on Friday. Year-end tax selling and a weak bond market were blamed. Bond traders worried that higher oil prices might rekindle inflation. Indeed, oil futures rose last week as OPEC's petroleum potentates parlayed in Geneva.
Also on the Street's jitters list: Next Friday, the ``triple witching'' expiration date for several options and futures contracts. In the past, abrupt market swings have resulted from the last-minute unwinding of positions by program traders.
Comments by New York Stock Exchange chairman John Phelan in Washington last week did nothing to soothe investor concern. ``The Boeskys of this world can help undermine the credibility of the market,'' Mr. Phelan said, but futures-related program trading ``can destroy the market.''
Noting that the 85-point plummet on Sept. 11 ended when an equilibrium was reached between the futures index and the underlying stocks, he asked, ``What happens if the market falls 400, 500, 600 points'' before equilibrium is reached?
Yes, says Peroni, ``once the market takes on a decidedly downward direction, the rate of decline could be exacerbated by program selling.
``But I don't believe program trading affects the basic trends. I don't think programs themselves will be singularly responsible for the inauguration of a bear market. If program trading sparks a 200- to 300-point drop, I think it would have to be the result of a news-related event or a technical aspect that would have caused the drop anyway,'' he contends.
Some analysts say a 75-point upturn or downdraft could occur on Friday.
``As we go toward the year end, we'll see more unwinding; year-end window dressing,'' says one portfolio manager.
While this laundry list of concerns seems to favor a flight to high-quality stocks, contrarians might look elsewhere. Mr. Webb at Bull & Bear notes that ``we've all been beat over the head with the small stocks. So we're hesitant to go back. But I do think there are great values in some of these small companies.''
He has bought a few small technology issues. And he points out that the price/earnings ratio of stocks in the widely followed T.Rowe Price New Horizons growth fund is near a 26-year low.
So is Webb recommending the purchase of any secondary stocks at this time? ``I'm too beat up or too old to be that brash.''