IMPACT OF THE GULF WAR : Cool Heads Prevail During a Heated Day on Wall Street
Nobody overreacts like Wall Street overreacts. But that didn’t happen Thursday. The rational thinkers ruled, and that may be laying an important base for stock prices.
If the word “rational” doesn’t quite sound right--for a seemingly panicked day when the Dow Jones industrial average jumped 114.60 points, or 4.6%--just take a look at the math.
Through Wednesday, the Dow had dropped nearly 500 points from its July, 1990, peak of 2,999.75. If Saddam Hussein was the market’s only real problem, chances are we would have made up many more of those lost points in the wake of the initial successful American strikes on Iraq.
There isn’t much question that investors felt good about the war’s progress. But the Thursday rally was controlled euphoria, if it was indeed euphoria. One night of air raids may have dealt Iraq a massive blow, but it didn’t automatically erase the recession, inflation, corporate debt, banking crisis and other evils still left over from 1990.
So to the rational investor, Saddam’s potential passage into history isn’t necessarily reason enough to buy. But forced to look around, investors are finding more fundamental reasons to feel better. The buyers see companies that are proving they can still turn a decent profit, which is a reminder that business will go on--long after this war becomes a made-for-TV movie, and long after this recession is just a shaded bar on economists’ charts.
If there’s any doubt that investors are focusing on the fundamentals, look at how they treated two high-tech stocks Thursday. IBM, reporting better-than-expected fourth-quarter earnings of $4.30 a share, rocketed $6.625 to $115.75 a share.
But Motorola, which reported that quarterly earnings dropped 19% to 82 cents a share, plunged $3.75 to $45.875. The lesson seems to be that any war celebration won’t be a tide that will lift all boats.
Certainly, IBM could give back some or all of its gain if the war starts to go badly. A turn in Iraq’s favor could even quickly send IBM to new lows. We’ll see how buyers react today, after Iraq’s attack on Israel last night.
Still, the message in the market should be clear: Long-term, many companies will continue to succeed, and that always attracts investors back, no matter how jaded they may temporarily become. You can’t keep good stocks down forever.
“What people are saying is that, it (the war) certainly is not over,” says Mitchell Meisler, executive vice president for worldwide equities at Lehman Bros. in New York. “But there’s a tone you can’t ignore in this market,” he says.
To the average investor, a stock market move like Thursday’s is a wake-up call. It basically demands that you ask yourself once again: What do I do with my money in the ‘90s?
In Costa Mesa, money manager Steven Check of Check Capital Management knows where he wants to invest his clients’ $21 million. Check was a big buyer of blue chip food and drug stocks in 1990. Thursday, he was buying more of the same--names such as American Home Products, Ralston Purina and McDonald’s.
Check knows that some analysts believe the food and drug stocks have led the market for too long--that it’s time for industrial stocks and other downtrodden issues to attract investors’ attention. But to Check, the fundamentals say the food and drug stocks still are the place to be.
Looking at the companies’ earnings prospects--and at prospects for alternative investments, such as bonds--Check says that “my numbers are showing that the stocks are at the same valuations as they were after the 1987 market crash.” That was a time to be buying, Check notes, and “that’s why I’m not afraid to go in there and buy now.”
Other investors saw far better long-term opportunities on Thursday in such industrial stocks as International Paper, United Technologies and General Electric. Indeed, the accompanying list of the Dow index’s 10 biggest percentage gainers shows Wall Street’s split opinion. Some buyers want to stick with old consumer favorites such as Coca-Cola, but others see a turn coming in the industrial groups.
Lehman’s Meisler is in the latter group. But beyond the argument over which specific stocks to buy, Meisler says investors who are afraid of stocks in general have to consider whether they’re being, well, rational.
“You know what they really have to worry about?” he asks rhetorically. “The average individual has most of his assets locked up in real estate or in bank CDs,” he says. The Federal Reserve seems bent on continuing to lower short-term interest rates over the next several months, to revive the economy, Meisler says. And that means that “many of those people who have been relying on their CD income are going to find that income seriously eroded,” as they roll over the CDs at lower rates.
“People are going to be forced to look into the (stock) market for better yields and better (total) returns,” Meisler contends.
There are still many bears who disagree, of course. Henry Van der Eb, who runs the $320-million Mathers Fund in Bannockburn, Ill., has 91% of the fund’s assets in cash. He looks at the stock market and sees too much trouble ahead--most significantly, continuing shrapnel from the explosion of the 1980s’ debt bomb. To Van der Eb, why buy stocks when you can earn 7% to 8% yields in two- to seven-year Treasury notes?
The fact that investors “can’t wait to buy stocks every time they go down” just makes him more nervous, he says. He’ll wait for a big blow-off.
Steven Einhorn, veteran market strategist at Goldman, Sachs & Co., also thinks it may be premature to jump into stocks just yet, given the war. But he, like Meisler, looks at the likelihood of lower interest rates over the next few months and sees the spark for a healthy rally in stocks that are fundamentally strong.
“People say we all sinned in the 1980s and now have to repent,” he says. The penance is supposed to be a relentlessly painful recession, Einhorn says. But he doesn’t buy it. The economy will recover, as always, and well-run companies that can grow earnings consistently at a good pace will see their stocks rise over time, Einhorn says.
The war could mean much more trouble ahead for the market near-term. Prices could swing wildly. The only thing the rational investor can do is view the situation logically, remember that it won’t last forever and invest not for next week but for next year and beyond.
Remember Joe Granville? Program trading? A 21% prime lending rate? The market weathered all those and much more over the past decade. This too shall pass--and maybe that’s all that Thursday’s buyers were reminding us.
OIL’S BIGGEST DAYS Nine of the 10 largest daily changes in the price of oil have occurred since Iraq invaded Kuwait on Aug. 2.
dollars per barrel Date -$10.56 to $21.44 Jan. 17, 1991 -5.41 Oct. 22, 1990 -4.06 Nov. 30, 1990 3.56 Aug. 6, 1990 3.49 Jan. 14, 1991 -3.37 Dec. 12, 1990 3.37 Oct. 3, 1990 -3.33 April 21, 1990 3.17 Oct. 25, 1990
Source: PaineWebber Energy TOP DOW POINT GAINS
Gain/Date Close % Chg. 1. 186.84 2,027.85 10.15 Oct. 21, 1987 2. 114.60 2,623.52 4.57 Jan. 17, 1991 3. 102.27 1,841.01 5.88 Oct. 20, 1987 4. 91.51 1,938.33 4.96 Oct. 29, 1987 5. 88.12 2,657.38 3.43 Oct. 16, 1989 6. 78.71 2,611.63 3.11 Aug. 27, 1990 7. 76.42 2,015.25 3.94 Jan. 4, 1988 8. 75.23 2,568.05 3.02 Sept. 22, 1987 9. 74.68 2,031.12 3.82 May 31, 1988 10. 69.89 2,390.34 3.01 April 3, 1987
TOP 10 VOLUME DAYS ON THE NYSE BIG BOARD New York Stock Exchange Volume of nearly 319 million shares was the eighth-largest in history. The following table lists the 10 days with the heaviest share trading volume on the New York Stock Exchange:
Date Shares traded 1. Oct. 20, 1987 608,120,000 2. Oct. 19, 1987 604,330,000 3. Oct. 21, 1987 449,350,000 4. Oct. 16, 1989 416,396,000 5. Oct. 22, 1987 392,160,000 6. Jun. 17, 1988 343,949,000 7. Oct. 16, 1987 338,480,000 8. Jan. 17, 1991 318,890,000 9. Oct. 26, 1987 308,820,000 10. Oct. 30, 1987 303,360,000
LEADING THE DOW These 10 stocks in the 30-stock Dow average were up the most in Thursday’s rally. The mix shows investors’ varying bets on which will lead the next bull market: industrial versus consumer issues.
Thurs. Point Pct Stock close change change Union Carbide 16 3/4 +1 1/4 +8.1% Allied Signal 28 3/8 +1 7/8 +7.1% United Technologies 47 5/8 +3 1/8 +7.0% McDonald’s 28 3/4 +1 3/4 +6.5% Coca-Cola 47 3/4 +2 7/8 +6.4% Boeing 48 1/4 +2 7/8 +6.3% General Electric 58 +3 3/8 +6.2% IBM 115 3/4 +6 5/8 +6.1% Intl. Paper 56 1/2 +3 1/4 +6.1% Woolworth 28 7/8 +1 5/8 +6.0% Dow average 2,623.51 +114.60 +4.6%
