Portfolio managers asked: What next?
With the stock market growing as much as 40 percent this year and then falling about 6 percent in the last few weeks, many people are snapping to attention. Given the nature of markets, it is hardly surprising that traders, brokers, managers, analysts, and investors cannot agree on what the markets will do next week, let alone five years from now.
A portfolio managers' round table, recently sponsored by the New York institutional brokerage Monness, Crespi, Hardt & Co., brought together six managers who attempted to answer the question ``What's Next?''
On Aug. 12, 1982, the Dow Jones industrial average stood at 776.92, while five years later, on Aug. 26, 1987, it had reached 2,701.85. Last week the Dow closed up 47.36 points to finish at 2,608.74. In those five years, there has been more emphasis on shareholder value, which has resulted from merger-and-acquisition activity, leveraged buyouts, takeovers, and corporate restructurings.
The managers had differing answers to the ``what next'' question. Harvey Eisen, president of Integrated Resources Asset Management, in New York, said his company does not try to predict what the market will do or to time it. ``We try to find the outstanding investment ideas. We try to find what is of value to business.''
If nothing else, the consolidations and takeovers have shown that ``the people who run American corporations don't run them,'' Mr. Eisen said. ``They're management, and they work for the shareholders. The value of a business is greater than the shares outstanding.''
Michael Kassen, a vice-president at Fidelity Management & Research, Boston, said that while many people see the market becoming overvalued, ``I think this view is simplistic, because you see corporate buybacks, tremendous restructuring, insider buying.
``There's also the capacity to do $1 billion leveraged buyouts. Merchant banking is becoming a big activity,'' he added.
One executive told Mr. Kassen that merchant banking will outstrip his firm's merger-and-acquisition activity in three to five years. ``Any size deal is possible,'' Kassen noted.
The market is correcting itself, said Joseph McNay, president of Essex Investment Management Company in New York. ``With the market rising 800 points in eight months, we're ahead of the perceived fundamental values,'' he noted.
He also said that the M-1 money supply, which measures cash and checking accounts, has been declining. ``The Federal Reserve Board chairman may be speaking softly and carrying a big stick,'' Mr. McNay observed. ``The Fed needs to slow down business; it can tighten the money supply.'' On Sept. 4, the Fed took a step in that direction by raising the discount rate, the rate at which member banks borrow from it, from 5.5 to 6 percent.
Money will be back in the system next year, he predicted; ``1988 will be a sensational year, but you can't tighten the dollar too much,'' or ``rust belt'' states will be hurt and foreign investment will dry up.
Another factor that should help the market next year results from the 1986 tax law. ``In 1988 you'll pay the same tax rate whether you hold a stock a minute, an hour, a month, or a year,'' McNay said. Foreign investors, pension funds, and the public will come in.
He does not believe a long-term bear market is on the horizon, because, for one reason, his clients do not know what to tell him about investing. ``This isn't the way you start a bear market,'' he said. Leveraged buyouts are coming more frequently, as are cash acquisitions. Companies are going private. ``When companies go public, you might see a bear market,'' he noted.
Steven Kroll, chief investment officer of E.F. Hutton Asset Management, said earnings per share are ``exploding,'' and the market has incredible liquidity, mainly because of Japanese investors.
About 75 percent of the market is invested in fixed-income instruments, with the remaining 25 percent in equities. ``Until you have a 50-50 split you are not near a correction,'' he said.
Mr. Kroll said he is concerned about possible Democratic proposals to raise taxes, which could hurt business.
Two themes characterize this market, said Louis Shorenstein, managing director of Furman Selz Capital Management in New York. They are insularity and liquidity.
He said Americans think that the market is ``very reasonably priced'' and that the country is awash with liquidity here and elsewhere.
Takeover activity and leveraged buyouts have focused companies' attention on managing, Mr. Shorenstein says, and corporate profits have started to improve.
The country has also had to face the ``vast pattern of recession,'' he says. Energy states were hurting, although their economies have started to turn, Shorenstein said. The rust belt has benefited from the dollar's improvement and has increased hope for exports. Finally, the farm sector is looking up as prices for land stabilize.
``I'm optimistic,'' he said, though recent weeks have given him pause.
Andrew Bischel, director of research at the Bank of California, in San Francisco, noted that stocks and bonds have become delinked, while the bond markets have experienced a 200-plus basis-point (2 percent) rise. ``There's been no total return in the bond market, while the Dow has increased 40 percent,'' he said.
Mr. Bischel does not think the bull market has run its course. ``You could take the Dow to 2,300 without damaging the longer-term bull market.'' Next year the economy should be booming, he said.