Hold More Stocks! Hold Fewer Stocks! Strategists Don't Agree


Wall Street's major brokerages, whose advice guides many well-heeled U.S. investors, have fallen into two distinct camps as the stock market has slumped since midsummer.

On one side are Merrill Lynch and Salomon Smith Barney, the two largest retail-investor firms, which are both urging caution with regard to U.S. stocks.

On the other side are Goldman Sachs; Donaldson, Lufkin & Jenrette; Lehman Bros.; and PaineWebber, which cater to many higher-end retail clients and institutional investors. This camp is very bullish, arguing that U.S. blue-chip stocks are big bargains now and that the domestic economy is unlikely to be knocked off track by the financial crises overseas.

The stakes are high, because making the right market call--or the wrong one--could conceivably result in significant client shifts among the brokerages.

"This is a difficult time because we're at an inflection point," said Charles M. Vincent, a brokerage industry analyst for PNC Institutional Investments in Philadelphia. "We've had a correction, and you have to make the call where we go from here. This is when you really have to get it right."

Charles I. Clough Jr., chief investment strategist at Merrill Lynch, is looking a lot more right today than he did a year ago.

Clough, the reigning bear among Wall Street strategists, has been pessimistic on stocks for more than two years, sticking to a recommended asset allocation of 40% stocks, 55% bonds and 5% cash.

So far this year, as he forecast, high-quality bonds have outperformed stocks. He expects more of the same in 1999 as a "profits recession" spreads though corporate America.

Making negative calls can be tough for a strategist because falling stock prices can mean falling profits for the brokerages themselves.


What's more, when bad news arrives, there's a tendency to blame the messenger. Economist A. Gary Shilling knows the feeling. About 30 years ago, he got fired for being right.

Merrill Lynch's then-chairman, Donald T. Regan, who went on to become Treasury secretary under President Reagan, dismissed Shilling for his gloomy but ultimately correct prediction of a recession in 1969-70, according to Shilling.

"He thought I wasn't being bullish on America," quipped Shilling, referring to Merrill Lynch's longtime advertising slogan.

That Clough has support within the firm despite his wary outlook for stocks "tells you that Wall Street has come a long way," Shilling said.

Merrill Lynch Chairman David Komansky has personally been underlining Clough's cautious message. He said last week that stocks may head lower, making it "a little dangerous to be bottom-fishing."

Meanwhile, plenty of bulls have their tackle out and their hooks baited.

Sept. 1, the day after the Dow Jones industrial average took a 512-point tumble, Goldman Sachs' Abby Joseph Cohen raised her recommended portfolio mix to 72% stocks from 65%, saying the plunge had left the Standard & Poor's 500 blue-chip stocks "12% to 15% undervalued."

The nearly 8-year-old bull market, which has made Cohen a star as she has continually predicted more gains, lately has turned to her for reassurance. She has provided it by reiterating her forecast that the Dow, now at 7,933, will close the year at 9,300.

An equally bullish Thomas M. Galvin at Donaldson, Lufkin & Jenrette also has repeated his prediction that the Dow will be well above 10,000 within a year and a half--which would be a gain of more than 27% from this point.

Galvin, whose recommended allocation is 75% stocks, 20% bonds and 5% cash, said the U.S. economy remains strong.

In terms of asset allocation, Jeffrey M. Applegate, Lehman Bros.' strategist, may be the most bullish market gazer on Wall Street.

Applegate acknowledged somewhat ruefully that he raised his recommended portfolio allocation to 80% stocks from 75% in mid-July, just as blue-chip stocks peaked. Nevertheless, he still sees a 20% total return from stocks over the next 12 months--a much bigger gain than most pros expect.

"The key call is that despite a lot of forecasts that the next stop is global recession and a cyclical bear market, the recession is not going to extend to Europe, the United States and the rest of Latin America," Applegate said.

With Merrill Lynch in the more gloomy camp is A. Marshall Acuff, equity strategist for Salomon Smith Barney. He has flatly called the current environment a bear market. Acuff believes that with corporate earnings growth falling to the low single digits this year, stock prices will slide still further.

Salomon Smith Barney's strategy committee recommends only 55% stocks in its model portfolio.

Somewhere in the middle are strategists such as Peter J. Canelo at Morgan Stanley, Dean Witter, Discover & Co., who described himself last week as "long-term bullish, short-term neutral."

Canelo feels the Dow could dip to 7,000 before rallying.

In a sense, Morgan Stanley is of two minds on the current outlook. Whereas Canelo and fellow U.S. strategist Byron Wien are basically positive long-term, strategist Barton Biggs at affiliate Morgan Stanley Asset Management is one of Wall Street's gloomiest voices.

Biggs recently was advising money managers to sell into any market rallies. He asserts that central bankers around the world need to coordinate interest rate cuts to cope with crises in Asia and Latin America, but he doubts that such coordination will occur.

Experts say it is probably coincidental that the two biggest retail brokerages--whose armies of thousands of brokers have the ears of tens of thousands of individual investors--are bearish while the institutionally oriented firms are more bullish.

Roy C. Smith, a finance professor at New York University's Stern School of Business and a former Goldman Sachs managing partner, noted that although brokerage strategists' market calls get widespread publicity, whether they are followed by their firms' brokers--or clients--is tough to ascertain.

"If the analyst is bearish, does the rest of the firm pay attention? Do the traders lower their exposure?" Smith asked.

Still, "you're ultimately held accountable for your record," Shilling said. "But if you're right, you do get credit. It's a no-guts, no-glory kind of business."


Wall Street's Split Opinions

Wall Street's major investment houses differ markedly in recommending how investors split their portfolios among stocks, bonds and cash (money market) accounts. A sampling:

Recommended portfolio


Brokerage Strategist Stocks Bonds Cash Lehman Bros. Jeffrey M. Applegate 80% 20% 0% Donaldson, Lufkin & Jenrette Thomas M. Galvin 75 20 5 Goldman Sachs Abby Joseph Cohen 72 25 0* Morgan Stanley Dean Witter Peter J. Canelo 70 20 10 PaineWebber Edward M. Kerschner 67 19 14 Bear Stearns Elizabeth MacKay 60 35 5 J.P. Morgan Douglas R. Cliggott 60 25 15 Prudential Securities Greg A. Smith 55 45 0 Salomon Smith Barney Strategy committee 55 40 5 Merrill Lynch Charles I. Clough Jr. 40 55 5


* Goldman Sachs recommends a 3% allocation in commodities.

Sources: The companies

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