INVESTMENT OUTLOOK: HOW TO GET AHEAD : ASSESSING 1988 : ’88 UPS, DOWNS AND MIGHT<i> -</i> HAVE-BEENS : Soybeans and FCA Fizzled, but Baseball Cards Hit a Homer
If 1987 was the Year of the Crash, 1988 is the Year of Cash.
Sales of certificates of deposit, Treasury securities, short-term bond mutual funds and other cash-equivalent investments soared this year as investors sought safe havens from the stock market.
Fortunately, however, that trend hasn’t hurt investors. Although stocks have performed reasonably well this year, with the Dow Jones industrial average rising tk% through Friday, more conservative investments also have generally done well. Rising interest rates boosted yields on these and other short-term investments.
Investors also got some help from Washington. Lawmakers passed a Taxpayer Bill of Rights that will give taxpayers more protection against enforcement actions by the Internal Revenue Service. The government also passed tougher disclosure rules on home equity loans, credit cards, adjustable rate mortgages and mutual funds.
Nonetheless, the year is ending with some major question marks that threaten to make 1989 a rougher year. Investors have gotten uneasy with high-yield “junk bonds,” worries are mounting over the massive U.S. trade and budget deficits and the dollar is weak. On top of that, the crisis in the savings and loan industry looks as if it could cost taxpayers more than $50 billion.
Here is a somewhat irreverent look at some of the other investment highlights--and lowlights--of 1988:
Big Losers
- Folks who fell off the Forbes 400 list of richest Americans. Twenty-two fell off because their stock holdings declined in the 1987 crash or through other calamities. Among the more familiar names of the fallen: Federal Express Chairman Fred Smith and Dart Group Chairman and corporate raider Herbert H. Haft.
- Stockholders of Financial Corp. of America. Some securities analysts recommended the stock last year on predictions that the ailing Irvine-based parent of American Savings would rebound from its mountain of bad loans and other woes. No such luck. Instead, FCA agreed to sell American Savings to Texas billionaire Robert M. Bass, making FCA a shell company whose stock became virtually worthless.
- Michael Milken. The junk bond king of Drexel Burnham Lambert already has lost some of his luster, thanks to a Securities and Exchange Commission civil suit filed this year charging him with insider trading and other securities sins. If the charges stick, he could lose much more.
Things That Went Up
- Home prices. Spurred by pent-up demand and lower interest rates, the median price of single-family homes shot up around the country but particularly in California. In Orange County, for example, the median price on new and existing homes rose 32.1% to $226,200 between the third quarter of 1987 and the third quarter of this year, according to the National Assn. of Realtors. Prices in Los Angeles ballooned 23.7% in that period, while San Francisco prices jumped 21.5%.
- Baseball cards. Prices of this form of sports memorabilia rose faster than just about any other group of collectibles this year. Cards in mint condition of former New York Yankee slugger Mickey Mantle in his rookie season, 1951, shot up to as much as $5,000 apiece, compared to only $700 five years ago.
- Copper. The hottest commodity toward year-end, copper prices rose to record highs partly because of strikes in mines in Peru, a major producer. But don’t go melting your pennies just yet. Prices are expected to slip back.
- BankAmerica stock. Spurred by the once-ailing bank’s strong turnaround, due in part to improved loan quality and cost cutting, shares have risen xx% this year.
Things That Should Go Up
- Sales of “Cashing In on the American Dream: How to Retire at 35,” by Paul Terhorst. The former accountant, who retired at age 35, appeared on the covers of Money magazine and archrival Changing Times in the same month. The magazines were not happy but Terhorst’s publisher was.
- Credit card fees. More people paid off credit card bills without incurring interest charges this year, due largely to reduced tax breaks for card interest. Banks, seeking to recoup lost revenues, consequently are beginning to boost annual fees, late fees or other charges.
- Sales of Series EE savings bonds. Thanks to a new tax bill, buyers of new bonds can earn interest tax-free, starting in 1990, if proceeds are used for their childrens’ education.
Best Conservative Investments
- Money market funds. Their average yields were as much as two percentage points above archrival bank money market deposit accounts during the year.
- Utility stocks. Their high dividends served as a cushion against stock market volatility. Consequently, mutual funds investing in utilities are among the top performing groups this year.
Dumbest Investment of the Year
- Buying anything sold over the telephone by strangers. Telemarketed investment scams proliferated this year as purveyors of everything from phony gold mines to commodity pools found plenty of suckers willing to part with their money on promises of getting rich quick.
Top Investment Fad to Be Wary Of
- Closed-end bond funds. These funds, a form of mutual fund whose shares trade publicly on stock exchanges, were sold aggressively by brokerage houses that stood to gain as much as 7% in fees and commissions. But investors buying these funds at their initial offerings often saw the value of their investments fall shortly thereafter as the brokerages were no longer pushing sales of these shares on the secondary market.
Attempted Comeback of the Year
- Oops. Five years after defaulting on $2.25 billion of tax-exempt bonds in the biggest such debacle ever, the Washington Public Power Supply System--better known as WPPSS, or Whoops--announced in November that it will sell as much as $2 billion of new bonds in the next three years. Bondholders understandably were skeptical.
Years Most Surprised Investors
- Holders of RJR Nabisco bonds. No way could these bonds, rated AA by Standard & Poor’s, lose 20% of their value in a week. But they did, after the giant food company announced in October a possible management-led leveraged buyout that could load the firm with new debt and increase risks of default.
What Should’ve Gone Up But Didn’t
- Gold. Conventional wisdom held that investors seeking alternatives to stocks after the crash would flock to precious metals. But conventional wisdom didn’t account for increased supplies of gold and lower oil prices, among other things. Consequently, gold gained only tk% so far this year.
Things That Should Go Down
- Diamonds. Prices for top-quality stones have jumped more than 50% in two years. But as the history of precious gems shows, what goes up sharply usually comes down sharply.
- Japanese stocks. They set new all-time highs this November while other markets worldwide still had not made up ground lost in the October, 1987, crash. At what point will the party end?
Year’s Most Unlikely Survivor
- Investment clubs. These organizations, in which investors pool money and knowledge and buy stocks, should have declined following the crash. Instead, 100 new ones are being formed every month.
Things That Went Down
- Stock trading volume, mutual fund sales, subscriptions to stock-market newsletters. All were victims of post-crash malaise among individual and institutional investors. One big institutional investor, Metropolitan Life, said to hell with stocks and sold its entire equity portfolio.
- Program trading. Scared off by negative public opinion and greater controls, the volume of this form of rapid-fire computerized trading fell as several big Wall Street firms stopped the practice for their own accounts.
- Popularity of individual retirement accounts. People with good incomes and pension plans could no longer deduct their contributions. Since they were a main source of IRA sales--not lower-income people who really needed the tax break--sales slumped.
Things That Fizzled Out
- Technology stocks. They started out the year like gangbusters, outperforming the blue chips in the Dow Jones industrial average and Standard & Poor’s 500. But by fall, concerns about disappointing earnings put tech stocks back into a slump.
- Soybean prices. After surging during the summer because of the Midwestern drought, prices settled down into the fall and winter as drought fears washed away.
