Greenspan Bites Tongue and Bulls Romp

We now can safely add the Federal Reserve Board chairman to the fastest-growing unofficial association in America: people who believe that if you don’t have something nice to say about the U.S. stock market, you shouldn’t say anything at all about it.

Fed chief Alan Greenspan on Tuesday sent stock and bond markets soaring, lifting the Dow Jones industrial average 154.93 points, or 2%, to a record 8,061.65, perhaps as much because of what he didn’t say to Congress as what he did.

In his testimony on the economy, Greenspan had the chance to raise cautionary flags about potential excessive speculation in stocks, as he did in December and again in March.

But the chairman refrained. And by strongly hinting that he doesn’t expect to raise short-term interest rates in the immediate future, he effectively waved a red cape at the bulls.

Nobody thinks Greenspan is actually trying to encourage more people to buy stocks, of course. But unless he’s saving his warnings about the dangers of stock market bubbles for today’s testimony, it would seem that he has decided to give up lecturing investors about the risk in overpaying for equities.

And why fight the market, anyway? That has been a loser’s game for the last seven years--for most of the last 15 years, in fact. The few true bears left on Wall Street feel all but hopeless as stock prices climb ever higher.

Now the leveraged players are really beginning to swarm: The New York Stock Exchange says margin debt, the sum loaned by NYSE member brokerages to customers who want to buy stocks on credit, zoomed 15% just between April and June, to a record $113.4 billion. Market Trim Tabs, a market letter in Santa Rosa, Calif., figures that’s the biggest two-month rise since 1987.

But who’s to say how high is too high for stock prices, leveraged or otherwise? Indeed, there are many, many good reasons for this raging bull market, and Greenspan enunciated several on Tuesday: Inflation is very low and there are few signs of it reviving; economic growth is moderating; and worker productivity gains appear to have been significant in recent years, which is positive for corporate earnings trends.

“Greenspan was just saying everything that everybody else knows” about the economy, said James Solloway, research chief at investment firm Argus Research Corp. in New York. “But it seems so much more real when the Fed chairman says it.”

Yet with each additional advance in share prices, even the biggest bulls are growing, well, cowed. It’s hard to find a veteran analyst on Wall Street who will say something, anything positive about stocks from a purely fundamental point of view.

More typical is Arnold Kaufman, editor of Standard & Poor’s Outlook newsletter in New York, who has seen more than a few stock market cycles in his lifetime.

“This has to be more than a bull market now,” he says. “This is a speculative binge, a buying panic.”

But to shout that out publicly, let alone to suggest staying away from the stock market or bailing out, is bad for most Wall Street careers. It’s easier to say nothing, and just go with the mighty flow of money that is carrying stocks up.

Should Gillette Co. shares sell for 38 times estimated 1997 earnings per share, when the company is growing 15% a year? No, most veteran investors say. But some people thought 25 times earnings was too much for Gillette. Some thought 30 times was too much. They all left money on the table.

“We’re in that zone where stocks’ [gains] are feeding on themselves,” Kaufman says. “It’s pretty sad when you have to use that for justification to buy.”

Dan Sullivan, editor of the Chartist investment newsletter in Seal Beach, puts it another way: “Right now we’re trading pieces of paper,” as opposed to investing rationally in businesses, he says.

Yet like millions of other investors who sense that plenty of stocks are overpriced today, Sullivan isn’t selling, nonetheless. “I have no doubt that we are in a bubble, and that it’s going to be disastrous when it bursts. But when, that’s the question,” he says. “You have to stay in until your indicators tell you to get out.”

Not surprisingly, many pros now are comparing the U.S. market’s surge to what happened in the Japanese market in 1988-89. Japanese stocks were widely viewed as overvalued by mid-1988, at 27,800 on the Nikkei-225 index. But that didn’t stop the market from climbing 19% to 32,948 by mid-1989, and another 18% to 38,915 by Dec. 30, 1989. Wasn’t Japan going to rule the world in the 1990s?

As it turned out, the great Japanese bull market peaked, conveniently, on that last trading day of 1989. The Nikkei plunged 50% in 1990, and has yet to recover.

Is it fair to suggest that the U.S. market is developing into a Japanese-style bubble? Solloway doesn’t think so--not yet anyway.

The average U.S. stock’s price-to-earnings ratio is about 22, a far cry from the 80 to 90 P/Es of Japan in 1989, he notes. In addition, he doesn’t see the kind of bubble in real estate values that accompanied the Japanese stock bubble, and which made the excesses in the Japanese economy that much greater--and the subsequent economic crash that much worse.

“If anything, the true manic phase of the [U.S.] stock market is still ahead of us,” Solloway says.

If he’s right--and there’s no reason to think otherwise--does it make any sense to sell stocks now? Most investors would probably say no. More money to be made!

But even if Alan Greenspan has given up playing the role of Cassandra, every investor should recognize that the risks aren’t going away. Rather, they’re getting bigger with each trading session. Things won’t stay this wonderful in the economy forever. They can’t. But stocks are priced only for a wonderful life--eternally.

“It would be prudent to start lightening-up” a stock-heavy portfolio, Kaufman says, especially for investors who will need cash for things in the next few years.

“It takes an awful lot of courage to be a seller today,” says Brad Perry, former chairman of investment firm David L. Babson & Co. in Boston and a Wall Street historian. But at the very least, he says, “common sense tells you to stay away” from putting new money into the highest-flying U.S. stocks.

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Buying Stocks on Credit

Is stock market speculation getting out of hand? Analysts who think so point to the recent surge in New York Stock Exchange margin debt--the sum lent by NYSE member brokerages to customers buying securities on credit. It soared 15% between April and June, the biggest two-month gain since 1987, according to the Market Trim Tabs newsletter. NYSE margin debt, in billions of dollars, month-end totals:

$113.4

Source: New York Stock Exchange