IF YOU WANT TO KNOW WHERE AMERICA'S STOCK MARKET MAY BE HEADED, BRUSH UP ON YOUR
RECENT JAPANESE HISTORY.
Less than a decade ago, we heard the refrain "Why can't Americans be more like the Japanese?" They worked harder and
took fewer vacations so that they could overpay for Rockefeller Center, Columbia Pictures, Barney's, and the Pebble Beach
golf course. Meanwhile, their stock prices reached the ozone of valuations, 60 times earnings and 4.81 times book value,
defying the financial gravity that kept ours earthbound at 15 times earnings and two times book.
When their Nikkei 225 (not a camera but the index) hit a giddy height of 25,000 yen in 1988, there was so much crash talk
from skeptical U.S. observers that this magazine published five pages of reassurance entitled "Tokyo's Stock Market: Stronger
Than You Think." It turned out to be stronger than anybody thought, as Japanese prices broke through several levels of
resistance on their way to a 38,915 Nikkei. At that point, a large following grew up around the theory that no price was too
silly for a Japanese equity. Paying 60 times earnings was seen as a cultural trait, like eating soup without a spoon.
In fact, the Japanese were more bullish at the top than they had been on the slope. What they were saying about their own
market will strike a familiar chord:
"There may be some volatility, but prices will keep climbing" --the president of Nomura Securities, quoted in Business Week.
"Stocks are ready to rise across the board" --a spokesman at Dai-Ichi Mutual Life, in Business Week.
"There are no negatives for Japanese stock prices" --the director of YTB Investment Management Co., quoted in the Wall
Street Journal.
The cultural-trait theory was dealt a severe blow in late December 1989, when the Japanese suddenly lost their appetite for silly
prices, and the Nikkei and Dow Jones proceeded in opposite directions. While U.S. investors have doubled their money on
Wall Street in the 1990s, Japanese investors have suffered a 55% markdown in Tokyo.
Today it is Dow Jones's turn to sell at silly prices, to wit: four times book value and 20 times earnings. Although 20 times
earnings is no threat to the Nikkei record, it gives rise to a new refrain: "Are we more Japanese than the Japanese?" Surely the
latest news from Nasdaq indicates a growing sensitivity to the cultural trait of paying silly prices for stocks in this "new era,"
when wormy concepts such as book value and earnings are dismissed as old hat.
We've been through these "new eras" before--during the early 1970s, for example--and we are taught to think of them as
symptoms of the extraordinary madness of crowds. But in the late, great Japanese market and in our market today, it isn't the
mad crowds doing the buying. An interesting detail emerges from the news clips about Japan: Throughout its boom in the
1980s, the percentage of shares owned by individuals declined, while Japanese companies (particularly the banks) owned
about 70%. They weren't allowed to buy their own stock, so they bought large quantities of everybody else's, and price was no
object.
In the U.S. today, mutual funds are playing the role of Japanese companies in the 1980s. It's not the misguided baby-boomers
who are paying too much for stocks, as we've recently been led to believe--it's the fund managers who are acting on the
baby-boomers' behalf. Joe Blow has money to invest and no head for numbers--what does he know, except he's a long-term
investor and stocks are an eternal safe bet? So he ships his cash to a stock fund, where the manager uses it to add to his
overpriced holdings. After all, mutual funds aren't judged on value, they're judged on performance. "The Winningest Mutual
Funds" make headlines all the time. How often have you seen "Ten Funds With Low P/E Stocks"?
Like the Japanese banker in 1989, the U.S. fund manager in 1996 doesn't have the luxury of not buying stocks--look what
happened to Jeff Vinik when he missed a quarter's worth of gains by playing it safe in bonds. He was banished from his
Bloomberg and practically run out of town. He can't afford to ask whether stocks are selling for silly prices. His is not to
wonder why, his is just to make the buy.
Long-suffering bear Bill Fleckenstein, the manager of a Seattle hedge fund, puts it this way: "People are getting at least as much
speculation from the pros as they'd get on their own," especially from the pros who are buying on momentum.
An overvalued stock market is like a cartoon character who flies off the cliff and stays suspended in air until he looks down and
realizes he's supposed to be falling. In 1989 the Nikkei bulls argued that the banks and corporations that took the market to
silly prices would never let it drop. But then they looked down and crashed. Today the Dow bulls argue that the mutual funds
and their baby-boomer clients will continue to buy shares forever and never let the market drop. When the fund managers will
look down, nobody knows.
At the top of the Nikkei in 1989, foreigners were net sellers. So what's the Japanese take on U.S. stocks in 1996? "Scared
shitless," says Jeff Uscher, editor of Grant's Asia Observer. They've been net sellers as well.
Copyright ¸ 1996, Time Inc., all rights reserved.
library.northernlight.com
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1996 and the author was pessimistic.
Jack |
