Investors Are Adopting Bush’s Catch Phrase: Let’s Be Prudent
Mort Brown, an investment analyst with Edward D. Jones & Co., a St. Louis-based brokerage that caters to individual investors, borrows words from politics to describe the current economic climate: “I think it’s moving to the right, becoming more conservative after the ‘80s,” he says. “Leverage is out, crime is out.”
Oddly put, but he’s on to something about the new decade. The mood has changed, with serious consequences for business and finance.
There’s less tolerance for the likes of Salomon Bros.’ top management, caught rigging the government securities market, or Charles H. Keating, whose American Continental Corp. pulled a fast shuffle on elderly pensioners. Also, both Keating and the Salomon brass, led by Chairman John Gutfreund, added insult to injury by blaming the wrongdoing on underlings--saying in effect, “I never gave the orders.” Bad guys in the old movies had more pride; Cagney and Bogart went to prison with a snarl, not a squeal.
Corporate borrowing is out of fashion. Tenneco, the Houston-based company that grew via debt and acquisitions, announced last week that it would cut its dividend and make a start on paying off its $10 billion-plus in debt.
Creditors are getting nasty. Equitable Life said last week that it would foreclose on a mortgage it holds on Los Angeles’ Bonaventure Hotel--while Citicorp foreclosed on a Chicago office building owned by Equitable. In the 1980s, lenders rolled over loans as they came due. But now everybody is scrambling for cash and asking for payment of principal.
To some it’s an atmosphere reminiscent of the 1930s.
But emphatically this is not the 1930s. The strength of stock prices, on the major exchanges and over-the-counter, is no fluke. Stocks are attracting investment because there’s money out there.
Keep in mind that more than crooks got rich in the 1980s. People who sold businesses, or residential properties, at premium prices have money to invest today. A lot of ordinary shareholders benefited simply because their stock was bought out in a takeover, or they enjoyed high yields on bond investments--and got out before the fall.
Now we’re living in the aftermath of that time. It has been described as debt-crazy, but mostly it borrowed from the future. Income and depreciation from past investments were not reinvested but paid out to deal makers, managers and shareholders. Money was borrowed to buy back stock or increase dividends, enhancing present stock values.
The world of finance was like a kid who takes a three-week advance on his allowance. The time comes when he has to stay home on Saturday night.
That’s happening now. Tenneco began in the 1940s as a pipeline company, bringing natural gas from Texas to the Middle West. The government ruled that the pipeline was a public utility and regulated its rate of return. So Tenneco’s late chairman, Gardiner Symonds, borrowed against the pipeline’s assured revenues to get into other, unregulated businesses. Ultimately, he and his successor, current Chairman James Ketelsen, built a conglomerate with $14.5 billion in annual revenue from farm tractors, auto parts, shipbuilding, packaging, oil and gas and chemicals--along with the original pipeline.
But the markets have cooled on the concept. Tenneco’s credit rating is low, making its borrowing expensive, and analysts say its stock price is less than half the company’s breakup value. Ketelsen, 60, has announced his retirement, and new boss Michael Walsh has begun to restructure and trim back.
How times have changed. In the 1980s, Tenneco’s many businesses would have been split up and sold at premium prices. But today there are no lenders for such deals and few buyers coming forward. So companies are painfully cutting back by laying off staff and postponing capital investments.
John Kenneth Galbraith caught the spirit in his book “The Great Crash, 1929,” commenting on the contrast between the 1920s and ‘30s: “Far more important than rate of interest and the supply of credit is the mood. Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich.”
But, he added, “when people are cautious, questioning, suspicious or mean, they are immune to speculative enthusiasms.”
It’s a time when prudence is valued over daring. Growth-oriented American Airlines last week announced a cutback in its ambitious expansion plans for the next five years and Wall Street added points to its stock.
What are investors to do in such a climate? Don’t expect ‘80s-style returns, but recognize that 7% in a five-year Treasury bond might not be bad in a non-inflationary period.
In mutual funds, look for those that do well in both rising and falling markets--and that keep their annual management fees under 1%. Among individual companies, it will be a time when industry leaders pull away, and also-rans fail; a time when newcomers in fields such as biotechnology may do very well. (Young companies seldom have debt, there’s an eager market for new issues today.)
But whatever the investment don’t be put off by gloomy forecasts of market crashes. The times are steadier than that. The mood and spirit is one of reform, of rebuilding values.
To be sure there is nothing automatic about reform. A country that has allowed its math students to finish last in international comparisons needs to do a lot more to create an environment in which its young people--and business--can thrive.
Without that effort all the finance in the world won’t mean a thing.
