Black Monday May End Up Wearing White Hat

JOHN CRUDELE is a financial columnist with New York magazine

Maybe it's simply the holiday spirit. Or maybe Wall Street is just too good at finding silver linings. But some people in the financial community are beginning to think that the October stock market crash may have been a good thing.

"The crash," says Hugh Johnson, chief economist of First Albany Corp., "may have been a blessing in disguise. It's shaken some of the excesses out of the economy and the financial markets, and that could be healthy."

Here's why: The crash seems to have slowed down the nation's economy, as measured by the gross national product, which grew at a brisk 4.3% rate in the quarter before the crash. That's compared to an average quarterly GNP growth of just 2.8% in the past three years. At 4.3% growth, the nation's economy may have been growing too rapidly and could have been moving toward inflationary times and an inevitable recession.

Moreover, the economy seems to have slowed because consumers are spending less and saving more in fear of rainy days ahead. But companies have increased their capital spending. If this trend continues, companies will be able to expand their businesses without feeding inflation.

The crash could also aid the U.S. trade imbalance. Businesses will expand in response to an increase in export demands. This will occur at the same time U.S. consumers are spending less on imported goods. "You'll get better trade numbers in the months ahead," Johnson contends.

Lead to Reforms

Francis Schott, chief economist at Equitable Life Assurance Society, says the crash also "loosened up previous hard-line attitudes about economic cooperation."

First of all, it brought about more cooperation between leading foreign countries and the United States," says Schott, pointing out that Japan, West Germany and other countries helped out the United States by lowering their interest rates and giving a boost to their economies.

Schott and others point out that an intransigent Congress also suddenly became cooperative on things like the federal budget deficit, even though its effort was felt to be too little and too late. "At least we had some action," Schott says.

And the crash could also lead to reform in such things as portfolio insurance, programmed trading and other newfangled investment techniques. While no one knows yet what caused the crash (and no one probably ever will), it is generally believed that these new investments contributed to the panic.

Investors may be less inclined to speculate on takeovers or get involved in other risky investments because of the crash. And they may choose their investment advisers more carefully and monitor more diligently how their money is being handled.

Not everyone, of course, agrees that the market crash was beneficial. "Nothing has been learned," one trader says. "A few people might have been straightened out."

Adds Michael Metz of Oppenheimer & Co.: "The only good thing about (the crash) would have been if it had given religion to the political powers to be. And it obviously had no impact whatsoever."

Did we learn anything from 1987? Here's what some people say were the lessons they learned in what was arguably their most trying year ever:

- Alan C. Greenberg, chairman of Bear, Stearns & Co.: "Common stocks were created to fluctuate."

- Kenneth Leibler, president of the American Stock Exchange: "I learned that the unthinkable can happen and that we can survive it."

- Donald Selkin, Prudential-Bache Securities' head of stock index futures research: "What we thought could never happen, can happen. That sums up the year."

- Mid-town Manhattan stockbroker: "What did I learn? What everyone learned. The sky is not the limit."

- Jonathan Dodd, technical analyst at E. F. Hutton: "That up-cycles end, just as down-cycles end."

- An arbitrageur: "We relearned what the word 'risk' means in the phrase 'risk arbitrage.' "

- Jack Baker, head trader at Shearson Lehman Bros.: "The one lesson I learned was not to make plans for '88. I found myself making grandiose plans based on a continuing bull market."

- Howard Pordy, a furrier and investor: "Buy quality (stocks). Quality comes back when junk stays down."

The Japanese may again be getting a yearning (oh, let's not say yen) for American investments, including, of all things, ultra-risky U.S. stocks.

That, at least, is the opinion of Jack Conlon, executive vice president in charge of equities at Nikko Securities, after his recent trip to Nikko's parent company in Tokyo, "I think the inclination is strong," says Conlon, who predicts that Japanese capital will flow back into the United States "certainly in the first quarter of 1988 . . . likely in the first month of '88."

What the Japanese want to see, says Conlon, is a stable dollar. The dollar doesn't have to rise, he explains, it just has to stop falling. Then Japanese investors can be assured that the money they have here won't be a victim of the dollar's dip.

Once that stability returns, Conlon thinks that the Japanese "will be back in a significant fashion. They still view this market as the cheapest in the world."

If Conlon's notion is correct, it could be very good news for the U.S. stock market, which stopped attracting Japanese money about two months ago. Stock prices here have been rising for the past few weeks, but experts think that the rally has been feeble and needs a good kick in the Dow like the one the Japanese could provide.

"Dig for oil on Wall Street." That was the oft-repeated motto of the oil industry a few years back, and it didn't mean that Exxon was planning to drill a well at the corner of Wall and Broad streets. What it meant, of course, was that it was cheaper for an oil company to buy another oil company's stock on Wall Street than it was for it to explore for crude.

Well the slogan, as with most catchy lines, is making a comeback and already some industry experts are predicting that 1988 will go down as the "year of the oil company mergers."

Some Are Skeptical

The rumors that have been circulating the past few weeks are tempting. Someone, maybe Pennzoil or the Bass brothers, according to one rumor, is accumulating Phillips Petroleum stock. Or, was it Unocal's shares that they've been accumulating?

Texaco, the rumors say, is vulnerable because it lost a lawsuit to Pennzoil and has to pay $3 billion. Pennzoil, on the other hand, is vulnerable because it will receive the $3 billion. Watch out for someone raiding that company, the rumors say. Raiders, raiders everywhere.

While all of this may make for exciting reading, there are some experts who are skeptical of all this takeover talk. "Very few of these (companies) will be taken over, if any," said Alan Gaines, whose firm, Gaines Berland, has been following and investing in the oil stocks for years.

Why won't there be a slew of takeovers? Gaines and others say companies like Phillips and Unocal, which both borrowed heavily in successful takeover fights a few years ago, probably aren't healthy enough to attract a buyer. And Texaco's $3-billion legal bill might discourage even the most stouthearted suitor.

But the most potent deterrent, the experts say, is the unpredictability of the oil markets--where a barrel of crude over the last year has sunk below $10, risen above $18, and dropped again to near $15. "What you need for another round of mergers is confidence in oil prices," says Frank P. Knuettel, the oil analyst with Prudential-Bache Securities.

If raiders can find the financing, they may try to go after a few of the oil industry's weaker links. But the experts warn that unlike in years gone by, healthier major oil companies may not be quick in coming to the rescue.

Investment bankers for the past few weeks have been telling me that corporate takeovers, in general, were about to come back into vogue after a hiatus of several months. If you don't believe that, here's what Joseph H. Flom, one of the nation's key takeover lawyers has to say:

"We're quite busy, and we anticipate a very high level of activity next year," says Flom, whose firm, Skadden, Arps, Slate, Meagher & Flom, has been involved in dozens of takeovers over the years. "After Black Monday, everyone pulled in their horns to see what the world was all about."

Now that the financial world has settled down a bit, companies that once wanted to buy other companies for strategic reasons now find that the crash permits them to do so at a much cheaper price.

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