Three market pros talk about strategy as Wall Street struggles for direction
The last time Philip Carret had a margin account was in 1924. ``Three words should be pounded into people's heads at childhood: Never borrow money,'' says Mr. Carret, founder and president of Carret & Co., New York. He does make exceptions for such sound cases as mortgages. ``You're sticking your head in a noose, otherwise.''
People who could not cover their margin accounts by putting up additional collateral have been squeezed with the stock market's 508-point plummet Oct. 19 and the subsequent volatile trading sessions. By the end of September, margin debt had reached a record $44.17 billion, which was four times the $10.95 billion level in 1982, according to the New York Stock Exchange.
In its own small way, increased borrowing in margin accounts might be considered a direct offshoot of America's borrowing behavior, which many government officials, investors, and economists deplore.
America became a debtor nation in 1985, for the first time in 71 years. At the end of 1986 the United States owed other countries $263.6 billion; today it is the world's largest debtor nation. James Grant, publisher of the newsletter Grant's Interest Rate Observer, says the US is capitalized as ``if prosperity would be eternal.''
America's personal savings rate for 1987's second quarter was 3.2 percent, down from 4.3 percent last year and 8 percent in the 1970s, according to the Department of Commerce. The Japanese, meanwhile, are said to save about 25 percent of their yearly income. The US government is running a $148 billion federal budget deficit and a projected $171 billion annual trade deficit.
There was bright news on the trade figures Thursday, however, when September's number of $14.08 billion turned out to be the lowest since May. The stock market considered this good news, soaring 61.01 points. For the week ended Friday, the Dow Jones industrial average closed at 1,935.01, down 24.04 points.
Yet Carret believes it may not be possible for the country to avert a recession, or even a depression. To him borrowing, deficits, and the stock market's performance are tied together. ``There isn't much difference between a depression or recession,'' he asserts. ``We'll have a period of prosperity in two to three years, but it's going to be tough in the meantime.''
The stock exchanges are experiencing a bear market, a creature hidden behind the shadow of the five-year bull market that ended abruptly Oct. 19 with the 22 percent plunge, according to Carret. Other analysts and managers share this gloomy view.
``I don't know what else you would call the activity between August and October 1987,'' with a correction of roughly 30 percent, says Robert Prechter, editor of the Elliott Wave Theorist, a Gainesville, Ga., newsletter that analyzes market cycles. ``Dramatic changes of trend rarely reverse on a dime.''
``If this isn't a bear market,'' Carret emphasizes, ``I don't know what is. So far it's a carbon copy of 1929.'' Just how far the comparison to 1929 holds true, he says, will depend on the wisdom displayed by Congress and the administration in how they handle the trade and budget deficits.
But some managers do not think the country is experiencing a bear market. ``A bear market predicts something in the future that's terrible. I don't think that's what the market was saying,'' says Stanley Egener, president of Neuberger & Berman Management Inc., New York. ``Many factors accounted for the market's drop.''
These factors include that at 2,700 the Dow was too high, when one considers stocks' price-earnings ratios and stock yields in relation to long-term government bonds. Stocks were also selling at 20 times their earnings on average.
``Stocks are fairly valued now,'' says Mr. Egener. ``We see extraordinary values in some stocks that have been cut by 50 percent and those that yield between 5 percent and 6 percent,'' he observes. Before the market plunged, yields were 2.5 percent on average.
``Excluding the people who were on margin or speculating when the market fell, most people are where they were in January, so their gains of the first nine months are lost,'' Egener says. ``But in January a lot of people were well off.''
Today's stocks are selling at 12 times their earnings on average. This earnings ratio used to be a signal of recession, Egener says, but he does not know if the country is heading toward that.
``The market is looking for its base. Market action is good now,'' he notes. ``I don't know if the market has reached its bottom, and I don't think you'll see anything next year that we haven't seen this year. But I'm not so sure we're in a big bear market.''
Egener says positive factors in the market include the fact that volume has not dried up, and the Dow has not hit its old low of 1,738.4 reached on ``Black Monday.''
``Remember that the market has gone through a catharsis, and you will continue to see volatility, like you saw Thursday, when the market was up 61 points because of the trade figures,'' he says.
The three money managers and market observers have chosen slightly different investment paths while the market continues its shakeout. Carret says he is keeping reasonably liquid by holding relatively short-term bonds. He also likes stocks in well-managed industrial companies and some utilities, like water companies, which are essential commodities.
Mr. Prechter - formerly one of the biggest bull market gurus - is remaining 100 percent in cash until four trends signal that the market is turning. ``At the moment, these elements are inadequately in place,'' he says. The list includes a lessening of downside momentum and a clear change of investor psychology. He does, however, expect a buying opportunity in the next 2 months.
Egener says Neuberger & Berman started buying the Tuesday after Black Monday. ``High quality was cheap,'' he claims. ``Every prudent portfolio manager raised cash, and since the fall there have been lots of bargains.''
Of the 11 funds the firm manages, cash positions vary between 7 percent and 30 percent. ``The current levels of stock prices make us more comfortable,'' Egener says. ``Values are easier to find, but I don't see the need to rush out and buy. We pick off stocks as they look good.''