Market Watch : Bears, Bulls Duke It Out

Wall Street's bears keep looking for more reasons stocks should go lower. The bulls, meanwhile, look at those reasons and find ways to discredit them all. During the past few weeks, the bulls have been winning the battle.

The latest bear concern: A jump in short-term interest rates. Earlier this year, while long-term rates soared here and abroad, short-term rates were stable. Now, they, too, are rising--partly a result of attempts by world central banks to stop the dollar's rise, said Edward Yardeni, economist at Prudential-Bache Securities.

The banks are selling Treasury bills to raise dollars, so they can dump the currency and depress its value. As more T-bills are sold, it becomes a buyer's market, and yields rise.

Short rates also are rising because of continued pressure on foreign rates and because of concerns that the U.S. economy is strengthening, Yardeni said. Those concerns were heightened by Friday's healthy February employment report, which sent long rates up anew.

Yet even after Friday's jump in rates, the Dow Jones industrials lost just 12.84 to 2,683.33, for a net gain of 22.97 for the week. The Dow is up 119, or 4.6%, since Feb. 23.

Are the bulls just kidding themselves? Richard Russell, editor of La Jolla-based Dow Theory Letter, insists that the latest rally "is just relieving an oversold condition. It has nothing to do with the fundamentals." Like it or not, we're in a bear market, he said.

Many bears say that disastrous first-quarter profit reports will be the catalyst for another big drop in stocks. But Madhav Dhar, stock strategist at Morgan Stanley & Co., said that while profits may disappoint, interest rates should be headed lower by April. The net result, he said, is that investors will be confident enough about economic growth to keep pushing cash into stocks.

Which brings up another perennial bull argument: Where else is money supposed to go? "The sidelines are crowded with sold-out bears," argues Gene Seagle, technical market analyst for Gruntal & Co. in Stamford, Conn. Seagle, a 40-year market veteran, looks at Eastern Europe's revolution and asks, "How do you get a down market in the face of a restimulation of the world economy?'

While bulls and bears fight it out, the best strategy may be this: If you're buying stocks, just be sure you'd be comfortable holding them for two years minimum. The payoff may take that long.

Being Paid To Wait: You can earn a 7.6% annualized yield from the average money fund nowadays. Or you can earn an 8.4% yield from Chase Manhattan stock--just from the dividends. Assuming that the stock eventually goes up, you'll get a capital gain as well. In the meantime, you're paid a good return to wait.

While investors have been pouring money into selected stocks lately, some issues remain unloved. And some of those stocks sport dividend yields that seem outrageously high. The reason for the high yields is simple math: While the stocks have been dumped, the companies have maintained or increased their dividends.

Of course, Wall Street hasn't battered these stocks for nothing. Wherever you see an alluring yield on a non-utility stock, big investors are assuming there's a strong chance that the dividend could be cut.

In the case of major banks such as Chase or Chemical Banking, the assumption is that larger loan losses are ahead. In the case of savings and loans such as Glenfed Inc. or CalFed Inc., the assumption is that the government may ultimately force the S&Ls; to cut their dividends to boost capital. In the case of auto makers, investors fear that auto sales will slump to a point where company losses will lead to slashed dividends.

Given those concerns, all high-dividend stocks are by definition high risk. But Wall Street has been skittish about big bank stocks for years, yet most have survived loan problems, maintained their dividends and rallied periodically. Meanwhile, analyst Ronald Glantz at Dean Witter Reynolds rates Ford and GM dividends "98% safe" through 1991. Unlike in the early-'80s slump, Ford and GM are in far better financial shape to weather a downturn.

The S&Ls; may be a tougher call. Glenfed and CalFed both meet U.S. capital rules. But they also must meet rising capital standards over time, and the market clearly is worried on that count.

Still, if these dividends are maintained, investors who buy the stocks don't have to see much capital appreciation to earn a substantial total return. If you earn 8% from the dividend, and the stock goes up only 7% a year, you've earned 15%. Just remember: These aren't bets for your grocery money.

SHORT RATES SURGE

Short-term interest rates, flat for much of this year, have jumped during the past two weeks.

HIGH DIVIDEND YIELDS

Dividend yields on some non-utility stocks approach or exceed the 7.6% average yield of money market funds.

Friday Annual Div. Stock close div. yield Chem. Bank $26 1/4 $2.72 10.4% Occidental 27 1/2 2.50 9.1 Chase 29 3/8 2.48 8.4 Glenfed 14 3/4 1.20 8.1 CalFed 17 1/2 1.40 8.0 Chrysler 18 1/4 1.20 6.6 GM 46 1/4 3.00 6.5 Citicorp 25 1/8 1.62 6.4 Ford 47 3/8 3.00 6.3

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