IQBAL,
While I am not a Byron Wein apologist, I happened to read the Aug 8, 1996 issue of Barrons last summer that had the cover story devoted to Mr. Wein. I also caught his act on CNBC that week and decided to see how Byron's choices fared.
Right On The Money
Morgan Stanley's Byron Wien has made good calls recently. Now
he's betting that the market is headed for a 1,000-point tumble.
Andrew Bary
The market turbulence of the past month surprised many investors and Wall Street analysts. But not Byron Wien. As early as January, he predicted that the Dow Jones Industrial Average would rise to 5800 and then slip sharply around mid-year.
It did almost exactly that, peaking at 5778 in late May - just 22 points short of his target - before running into trouble. Such pinpoint accuracy, evident for several years, has made Wien very
much Wall Street's man of the moment.
As Morgan Stanley's chief domestic strategist, Wien tracks a wide variety of market barometers, hobnobs with influential money managers and writes some surprisingly dramatic reports. One of them, issued in late April, called for a 1,000-point drop in the Dow.
During July, the benchmark average did slip under 5200. That's still well above Wien's downside target of 4800, and, in fact, last week, the Dow rallied back to over 5600, aided by favorable economic reports.
But Wien has stuck to his guns. Speaking Friday from his summer home in East Hampton, N.Y., he said that the rally wasn't ``a mind-changing reversal.'' And he added: ``The response to the economic data shows the market's yearning for good news. I think stocks are going to run out of upside soon.''
Ultimately, he sees the bull market reviving. His current bearishness is based primarily on his view that the economy, rather than losing steam as many believe, will continue to gain momentum, prompting a rise in long-term interest rates and a tightening in monetary policy by the Federal Reserve. Unlike some, he feels corporate profits will remain robust. However, he maintains, that won't bail out Wall Street: ``This market is more sensitive to interest rates than to corporate profits.''
Wien also says a host of fundamental and technical factors, including slowing mutual-fund inflows, suggest that the bull's long run is nearing an end. Although some key indicators released last week point to moderating economic growth - a development that could undercut his reasoning - Wien is unconvinced that the slowing trend will last.
At age 63, Wien clearly is riding high after three decades in the investment business. One of the things that separates him from other Wall Street strategists is the two decades he worked as a money manager before joining Morgan Stanley in 1985. This gives him credibility with his clients and a gut feeling for the market that many academic types lack. More important to Wien's burgeoning reputation: He not only has called the market's turns with remarkable accuracy in recent years; he's also been pretty much on the money about their magnitude.
The impish, athletic savant has built a wide following among heavyweights in the investment community, who like him for his market views and independent thinking, and for the lucid and lively column he writes for Morgan Stanley's research weekly. His work is respected by such giants as George Soros, Julian Robertson and Leon Cooperman, who run large hedge funds, as well as George Vanderheiden, the elder
statesman among Fidelity's fund managers, and John Neff, who ran Vanguard's Windsor fund for more than two decades. He's also close to such mutual-fund executives as Dick Strong of the Strong funds and Tom Bailey, chairman of the Janus fund group.
`For the past four or five years, Byron has been uncanny as a market strategist,'' Bailey says. ``What we like about him is that he provokes us and gets us to consider things we hadn't thought of.''
Example: Earlier this year, Wien surprised Janus's managers by bucking the conventional wisdom and predicting that the 30-year Treasury bond's yield, then under 6%, would climb above 7%. By April, this had happened in exactly the fashion he predicted, eroding some of the stock market's underpinnings.
``He's certainly stimulating and challenging,'' adds Soros, who turned to Wien for help with his latest book, Soros on Soros. ``He may not be right on the 1,000-point drop in the Dow, but the Nasdaq dropped [the equivalent of] 1,000 points.''
Art Samberg, president of Dawson-Samberg Capital Management, a Connecticut money manager, has known Wien since they worked together at Weiss Peck & Greer from the mid-1970s to the mid-1980s, when it was one of the hottest firms around. ``He loves the market. It's like a child to him,'' Samberg says. ``He's a great character. There's always a little twinkle in his eye, a devilish grin. You may be talking to him, but you can tell he's thinking about three other things at the same time.''
Byron's Barometer
Wien has relied heavily on this model in recent years, coming up with remarkably accurate predictions. The model now suggests that, with long-term interest rates around 7% and projected 1996 S&P earnings at $41, the S&P should be at 663, some 10 points above its recent levels. But Wien isn't relying fully on his model now because he expects the economy to heat up, boosting interest rates.
1996
Long-Term Interest Rates
S&P 500
Earnings
6.0%
6.5%
7.0%
7.5%
8.0%
$38.00
741
679
625
577
535
39.00
757
693
638
589
545
40.00
772
707
650
600
556
41.00
788
721
663
611
566
42.00
803
735
675
623
576
43.00
818
749
688
634
587
44.00
834
763
701
646
597
Source:Morgan Stanley
Wien was in his element last week when he held two of his periodic dinners for portfolio managers at his seven-room Park Avenue co-op. The market strategist played the roles of host, moderator and provocateur for his guests, who included hedge-fund honchos Cooperman, Mark Kingdon and Stanley Shopkorn. After a brief cocktail hour, the
managers - about 16 of them each evening - sat down to an appetizer of cold lobster and then rack of lamb, while Wien briefly gave his own views on the markets. He then went around the room, calling on each person for three investment ideas, and sparking a free-wheeling, 2 1/2-hour discussion.
Unlike some of his compatriots on Wall Street, whose changing views make them tough to pin down, Wien minces no words, usually sticking with a blueprint laid out at the onset of each year.
Of course, there's the danger that the bull may trample him, just as it has run over other bears in the past several years. Then, too, there's the possibility that today's Street genius will become tomorrow's nowhere man, a la Joe Granville. But it's worth noting
that the stock and bond markets are pretty much following the script that Wien outlined in early January, when he unveiled his ``10 Surprises for 1996,'' an annual compendium of market, economic and political predictions and observations that forms the foundation of his investment outlook.
His clairvoyance this year followed a great 1995 call; he said the year's surprises would be major rallies in both the stock and bond markets. By the summer of '95, the Dow's surge from 3800 to 4500 had already matched his full-year target, but he raised the bar to 5000. And when the Dow hit 5000 in November, he told Barron's there was still another 10% left.
He was right.
Like other Wall Street strategists, Wien is guided by a quantitative model that projects the stock market's level based on factors such as expected corporate profits and interest rates. Wien's trusty model, which buttressed his bullish outlook last year, actually suggests that the S&P 500 index, now at 662, has more room to rise, based on the recent 7% yield on the 30-year T-bond and projected operating profits of $41 for the companies in the S&P 500 this year.
WIEN'S PICKS
Company
Recent
Price
1996
P/E
1997 P/E
12-month
Price Target
Allied Signal
60 3/4
17
15
65
Restructured industrial company. Has three solid divisions.
AT&T
53 3/4
11
10
62
Competitive pressures depress shares. But 'great American franchise' sells for modest P/E.
Cisco Systems
56
37
28
73
Rich P/E deserved because of dominant position in networking business.
Citicorp
86
11
10
98
Simple story: 'Preeminent global bank' trading at 11 times profits.
Intel
79
18
15
85
Another market leader available at reasonable multiple. King of chips.
UAL
52
7
7
65
'People think UAL's profits aren't sustainable. I think they're wrong.'
United Technologies
112 3/4
17
15
130
Another industrial restructuring story. Has strong units in Pratt & Whitney, Otis Elevator.
Warner-Lambert
565/8
21
18
64
Drug firm trading in line with industry multiples. Has promising drugs for diabetes, cholesterol.
Price/earnings ratios based on profits as projected by Morgan Stanley.
Unlike strategists like Elaine Garzarelli, who rely heavily on their models, Wien isn't a
slave to his, and is ignoring it now for several reasons. For starters, he thinks
accelerating economic growth will propel long-term Treasury yields to 7.5% by
year-end and 8% in 1997, driving down the equilibrium level of stock prices.
The concept underlying Wien's model is pretty simple: Higher rates make bonds more
attractive relative to stocks, and lower rates make stocks more alluring. What's tough is
getting the correlation between stocks, bonds and profits. Wien, for instance, assumes
that the risk premium of stocks relative to bonds is less than many maintain. This biases
his model in favor of stocks.
What are Wien's worries? Declining mutual-fund inflows, a heavy supply of new issues
on the underwriting calendar, and what he calls the market's weakening internal
dynamics. ``This is a bull market that has gone on since October 1990 without a 10%
correction. It's getting tired,'' he observes.
And he adds: ``Last year, $130 billion went into equity mutual funds and it moved the
market 35%. This year, about the same amount of money has already gone into funds,
and the market is up about 5%. Maybe you don't have to know more than that. It has
taken a lot of money to move the market a short distance.
Wien thinks the psychology of buying market dips will have to be broken before the
market bottoms. While no chartist, he considers some technical indicators to be useful,
particularly one that shows the performance of stocks relative to their average price
over the past 200 days. He points out that the number of stocks trading above their
200-day average, an indicator of whether a stock is in good technical condition,
declined recently to about 50% from a high of 80%. Historically, the market hasn't
bottomed until this reading hits 30%.
While he manages no money, Wien oversees Morgan Stanley's model portfolio, a list of
80 stocks, as well as his favorites of the moment, called the Fresh Money Buys. The
Fresh Money Buys, a list of 10 stocks, appeal to portfolio managers who want a few
good ideas, rather than the blizzard of recommendations emanating from Wall Street.
Some see an inconsistency in Wien's maintaining an 80-stock buy list while predicting a
sharp market fall. The cash position in his model portfolio is just 20%, up from 2% at
the start of 1996, but hardly defensive by real-world standards.
Wien defends his approach, saying that most money managers don't have the luxury of
carrying huge cash positions - clients want their money to be invested, not sitting on the
sidelines - and that he aims to identify stocks that will emerge from a rocky period
relatively unscathed.
Moreover, Wien has most of his own wealth tied up in the market, with investments in
such companies as Intel, Cisco Systems and First Data Corp., as well as a long-time
holding in MCI Communications, which Samberg, Wien's colleague at Weiss Peck &
Greer, got excited about in the late 1970s, when it was a tiny upstart taking on the
telephone monopoly American Telephone & Telegraph.
Both the model portfolio and the Fresh Money Buys list boast solid, market-beating
performance. The model portfolio gained 43% last year and was up about 5% through
the middle of July, slightly better than the S&P 500. The Fresh Money Buys have done
even better, gaining 27.4% in 1994, 55.5% in 1995, and 23.5% this year. (A table
accompanying this article lists eight of Wien's favorites, mostly culled from the current
Fresh Money Buys.)
Helping Wien stand out from the crowd is his ability to write well and turn a phrase.
Born in Chicago and orphaned at 14, Wien went to Harvard, where he has since
endowed a scholarship for orphans. Then, it was on to that university's storied business
school and to jobs in advertising and management consulting. His first Wall Street
position was as a portfolio manager for a firm called Brokaw Schaenen Clancy & Co.,
which merged into Weiss Peck & Greer. With an ex-adman's showmanship, Wien
knew when he issued his bearish pronouncement in April that a 1,000-point drop in the
Dow sounds more gut-wrenching than a 10% or 20% ``correction.''
And it was nearly a year ago that he caused a stir in Europe when he returned a call to a
reporter from The Wall Street Journal from a pay phone at New York's JFK Airport en
route to London. He said that if European economic competitiveness didn't improve, the
Old World stood in danger of becoming ``a vast open-air museum'' within 20 years.
This didn't sit well with many Europeans, but Wien says it had the constructive effect of
goading some European corporate executives on the competitiveness issue.
One of his favorite essays, ``Weather Wonderings and Other Ruminations,'' written in
March 1995, began with Wien recalling the ocean-going sailing trips of his youth and
then arguing that the widespread assumption of global warming may be false, and that
cooler and wetter weather may be in store, with important implications for commodity
markets. Given the cool, rainy summer on the East Coast this year after a cold winter,
Wien may be on to something.
As Wien frankly tells it, his annual list of 10 surprises was conceived as an
attention-getter. ``After I had been here less than a year, I was building my reputation,
but I said to myself: `Gee, if I am ever going to break out of this, I have to do something
that nobody else does.' So I got this idea that I would write these 10 surprises - 10
investment-related events that I thought were likely, that most people thought were
unlikely. I knew I would get a certain number right and a certain number wrong. But it
would allow me to position the events of the year, and it would be fascinating to see
how well I did.''
``It's my own experience that all the big important money that I have made came from
having a non-consensus idea that turned out to be right.''
To Wien, a surprise is something that is widely viewed as having at best a one-in- three
chance of occurring, but that he thinks has odds of at least 50-50. In recent years, the
veteran Wall Streeter has been right on the stuff that matters most to portfolio managers:
the stock and bond markets and the economy. Some of his other calls haven't panned
out, however. He has consistently looked for a breakout in oil prices and an
acceleration of inflation. His biggest blunder: missing the 1987 Crash. Of that, he says:
``I didn't listen to my model, which suggeseted the market was 25% overvalued. I
thought the liquidity-driven rise would continue.''
Wien's bond calls have been especially sharp. He foresaw a debt-market rally in 1993,
a sharp selloff in 1994, a sizable advance in 1995 and then disaster this year. All
contrary calls. All correct.
In his January surprises article, conceived after retailers' disastrous Christmas season
had many people talking recession and when Treasury yields were under 6%, he laid
out what appeared to be an unlikely scenario:
``The U.S. economy gathers positive momentum late in the first quarter. Real gross
domestic product exceeds 3%, and the labor market tightens. The consumer price index
threatens to move above 4% as food and industrial commodity prices rise. The Federal
Reserve becomes worried and increases short-term rates in spite of the upcoming
election. The long U.S. Treasury bond climbs above 7%.''
In January, this was outlandish. By mid-year, this was history.
Wien also hasn't been afraid to tangle publicly with his colleagues, something that would
be taboo elsewhere on the Street. A year ago, he locked horns with Barton Biggs,
Morgan Stanley's influential global strategist and the man who brought Wien to the firm,
over the outlook for technology stocks. Biggs was bearish on the techs; Wien, bullish.
Biggs was uncomfortable when the spat made The Wall Street Journal, but Wien didn't
mind, joking that the disagreement offered clients ``one-stop shopping.''
As for stocks, his preference generally runs to well-known companies selling at
reasonable multiples of earnings, although he has a weakness for some tech highflyers,
particularly Cisco Systems.
Running down his current favorites, AlliedSignal and United Technologies, both are
restructured industrial companies that don't get much attention on Wall Street because
of their diverse businesses. ``I like the fact that a lot of people don't understand them
well,'' Wien says, noting Allied's strength in aerospace and engineered materials. United
Technologies is best known for its Pratt & Whitney division, which makes jet engines,
and Otis Elevator. Both companies trade at about 17 times projected 1996 profits.
``My taste usually doesn't run to high P/E stocks, but Cisco is an exception. It's the
unquestioned leader in data networking equipment, and it's continually regenerating its
product line.'' Cisco, at 54, trades at 37 times projected 1996 profits, and at 27 times
estimated '97 earnings. With his contrarian streak, Wien admits he's a bit worried
because Cisco was very popular with many of the portfolio managers he dined with last
week. He also likes Citicorp. ``It's a pre-eminent global financial institution available for
a little over 11 times earnings,'' Wien says.
Intel, he observes, is another example of a market leader trading at a reasonable
multiple, although its shares became richer last week after a sharp rise. (To learn what
insiders in that stock have been doing, turn to Inside, Not Out.) ``People are worried
about overcapacity in the semiconductor industry, but Intel makes a non-commodity
product. Their competitive position has only been enhanced,'' Wien says, pointing to the
woes of two of the company's rivals, Advanced Micro Devices and Cyrix.
AT&T is another inexpensive industry leader, Wien believes.``The knock against
AT&T is that its costs are high, and that independents and the Baby Bells will cut into its
long-distance business. But here you've got one of the great American franchises,''
trading at a cheap multiple.
Wien admits a long-standing weakness for the airlines, which generally haven't delivered
for investors in the past decade. He favors UAL, the parent of United Air Lines, saying
its stock, at 50, is attractive at less than seven times estimated 1996 net. ``People are
worried that the earnings won't be sustainable and that bookings will drop in the wake
of the TWA crash. I don't think so.''
Warner-Lambert is a solid pharmaceutical company, trading in line with industry
multiples. What excites Wien are two drugs the company is testing: one for diabetics,
the other for those with high cholesterol.
While bearish for now, Wien is bullish long-term. ``I still believe stocks are the place to
be. When the 1,000-point decline ends, the market will go to a higher high. This is a
long economic cycle with no real excesses. There's no recession in sight.'' Spoken like a
man confident in his predictions. And with good reason to be. |
