Contd from previous post
SO YOU WANNA BE CONAN THE CONTRARIAN...
Amid the last great bear market, the 1973-74 fiesta that sent stocks halfway to oblivion, there was one guy couldn't stop buying. Even as other investors dumped their shares of such companies as Ford, Dean Witter, and Ogilvy & Mather, he snapped them up, using not just the cash he had saved but raising $20 million more to keep going. It was pure contrarian bravura--and it worked for Warren E. Buffett.
Is today another such moment? That's debatable. But if you're intent on being a buyer right now, you're going to need the same raw material--cash--that the legendary investor could hardly get enough of 25 years back. And if you do your investing through mutual funds, consider focusing on those that went into the summer sell-off sitting atop tidy piles of the green stuff.
With stock prices 18% lower than they were just seven weeks ago, mutual-fund managers who are armed with plenty of cash have the means to make the most of the new market. ''If you are looking to get into a fund,'' notes Kevin McDevitt, an analyst at Morningstar Inc., ''you want someone who has cash on the sidelines and can take advantage of opportunities.''
PICKING AND CHOOSING. To spot such funds within the 4,500 U.S. stock mutuals, BUSINESS WEEK searched Morningstar's Principia database and came up with a list of possibilities. We stuck to funds that are open to new investors for initial stakes of no more than $5,000 and those that held at least 25% of their assets in cash before the market plunge.
What have these funds been doing with all that dough? In a word, buying. ''We're getting a chance to buy things more on our terms,'' says Mark O. Robertson, a manager of Vontobel U.S. Value Fund. Its cash level early this summer ran at 33%. Now, it's closer to 20%, as the fund has bought blocks of McDonald's, Sherwin-Williams, Coca-Cola, and American International Group. Robertson now hopes to pick through the wreckage among big bank stocks such as J.P. Morgan & Co., down from its high. ''It would be nice if we don't have a spike back up in the market and have the time to evaluate things,'' he says.
''FUSSY.'' Berger Select's Patrick S. Adams closed August with 38% of his fund in cash and swiftly cut that to 28% on Sept. 1 as he loaded up on technology, financial, and consumer stocks. ''It's just extraordinary, the carnage that has occurred,'' Adams says. ''The bargains are much more prevalent now than in 1987.''
Not everyone is so enthusiastic. ''We're being fussy buyers,'' says Michael Sandler, Clipper's co-manager. He aims to buy stocks in companies at 60% to 70% of their underlying value and reports finding few of those gems, even now. ''I'm nibbling,'' says Oppenheimer Growth's manager, Robert C. Doll Jr.
Clipper and other cash-rich funds have suffered under loads of greenbacks that earned money-market rates while rivals, carried by the bull's long run, charged past. But if the market rallies again, these funds will have a turn to show what they can make of capitalism's most basic building block.
By Robert Barker in Melbourne Beach, Fla.
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They've Got the Cash
FUND CASH POSITION TOTAL RETURN*
BERGER SELECT 28.00% 24.30%
CLIPPER 40.00 0.20
FRANKLIN GROWTH I 33.40 -0.11
OPPENHEIMER GRTH. 30.00 -10.00
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WALL STREET RECORKS THE BUBBLY
After a seven-year securities-industry bonanza, the party's over
For almost seven straight years, Wall Street has been raking in the big bucks. Contractors from Connecticut to the Hamptons are scrambling to build handsome stone mansions, while New York-area car dealers can't keep enough BMW convertibles in stock to meet demand. All this courtesy of a cascade of fees and commissions. The question now: Is this party over?
The answer is a resounding yes. The stock market's drop has crushed brokerage stocks, with the biggest firms down 25% to 45% from their 1998 highs. And many of Wall Street's biggest firms are more than 30% owned by employees. Driving those stocks down is the fear that more losses from Russia and other emerging markets may be announced.
Equally worrisome is that another Wall Street engine--the debt- and equity-underwriting markets--has ground to a halt in response to market volatility. Only one IPO has been launched since Aug. 24, and 10 were withdrawn in the past month, says analyst Randall Roth of the IPO Plus Aftermarket Fund. ''There is underwriter rubbernecking. Everyone is stopping to look at the carnage,'' he says.
The result? Expect the securities industry to shift into retrenchment mode, with cuts in bonuses and layoffs. ''It's a reasonable thing to get prepared for a tough environment,'' says James Dimon, co-chief executive officer of Salomon Smith Barney, which just announced a $150 million net loss from its Russian and emerging-markets businesses.
London will get hit first. ''You won't see layoffs here for a bit because U.S. staffs are relatively lean,'' says headhunter Joan Zimmerman at G.Z. Stephens. Still, at 289,300, the securities industry's 1998 head count has passed its 1987 high of 260,000. As a harbinger of tough times in the U.S., local securities firms from Moscow to Jakarta are cutting jobs. Rumors are rife that Credit Suisse First Boston will shrink its 320-employee Moscow office.
Fears about Russian debt have already hurt prices in larger fixed-income markets, including corporate and mortgage-backed bonds. So despite the rally in treasuries, the value of investment houses' bond inventories has fallen. ''It will be very difficult for firms to make money in fixed income,'' says Salomon Smith Barney brokerage analyst Guy Moszkowski, who just cut target prices for Merrill Lynch & Co. and Morgan Stanley Dean Witter by roughly 15%.
The industry's two bellwether deals are also in question. One rumor is that the Travelers-Citicorp deal may fall through. Travelers' stock has plummeted to $44.50 a share from $73 when the deal was announced on Apr. 6, while Citicorp has dropped from $180 to $108. And the market correction could force Goldman, Sachs & Co. to postpone its IPO of part of the firm. Goldman, Travelers, and Citicorp say they have not changed their plans.
HE WHO HESITATES. Certainly, Goldman fiddled while Rome burned. After years of deliberation, the firm finally decided to go public in June. At the time, competitors Morgan Stanley Dean Witter and Merrill Lynch were trading at more than 3.5 times book value. But with today's lower valuations, Goldman's price tag drops from $22 billion to $17.4 billion, ''reducing Goldman's IPO price and the take of Goldman partners,'' says Michael Flanagan, an analyst at Financial Service Analytics.
There are bright spots. Some 50% of Charles Schwab & Co.'s revenues come from mutual-fund fees, not to mention trading commissions. Chairman Charles R. Schwab expects trading volume to come down 15% to 30%, but even so, ''the third quarter is looking quite robust'' for his firm, he says. The M&A businesses should stay strong, too--but some deals could fall apart. For example, Proffitt's Inc. agreed to buy Saks Fifth Avenue for stock, but now Saks can walk away since Proffitt's stock has fallen to $23 a share, below the deal's collar of $30.52. Proffitt's says the deal will close in September.
It's unlikely that seven fat years will be followed by seven lean ones. But contractors and car dealers beware.
By Leah Nathans Spiro in New York, with bureau reports
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Brokerage Stocks Get Creamed
CURRENT PRICE* 1998 HIGH PERCENT
CHANGE
BEAR STEARNS 39 7/16 61 5/8 -36
LEHMAN BROS. 42 1/8 85 -47
MERRILL LYNCH 67 7/8 107 15/16 -37
MORGAN STANLEY 59 1/16 96 7/8 -39
CHARLES SCHWAB 31 1/4 42 7/8 -27
TRAVELERS** 44 1/2 73 -39
*As of 9/2/98
**Owns Salomon Smith Barney
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How Currency Contagion Might Spread
-- Russia defaults on its foreign debt and suspends payment on currency hedges
-- A hedge fund manager who used Russian treasury bills as collateral to get financing to buy more Russian T-bills receives a margin call from his U.S. bank
-- The hedge fund manager sells whatever possible--say, collateralized bonds in Latin America--to meet the call
-- Forced selling by the hedge fund manager and other overleveraged investors helps depress the value of those bonds
-- The hedge fund goes bust and the bank learns of another loan gone sour--and perhaps lower values for its holdings of emerging-market debt
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THE WALLS GO UP ALL OVER ASIA (int'l edition)
In Asia, country after country retreats from the global economy
The Asian crisis is entering a new stage when beleaguered nations erect walls between themselves and the dangerous forces of world markets. Malaysia Prime Minister Mahathir Mohamad imposes sweeping capital controls, fixes the exchange rate--and sacks his reformist Deputy Prime Minister. The Hong Kong government pumps $12 billion into its stock market to foil speculators and plans capital controls of its own. Taiwanese officials make it more expensive to short stocks. South Korea cancels the sale of Kia Motors Corp. rather than accept low but realistic bids for the bankrupt carmaker. And Japan refuses to let its biggest banks fail.
These are just the kind of moves that U.S. and International Monetary Fund officials deplore. They signal a retreat from the global economy and a collective repudiation of the Western doctrine that only deep structural reform and a total commitment to free markets can provide a way out of Asia's mess. It's a big change of heart: Earlier this year Asia's leaders swore they would stay the course. Even the acerbic Mahathir, who despises hedge-fund managers, supported an IMF-style workout.
But after seeing their currencies pounded by speculators and their economies grind to a halt, Asian leaders are having second thoughts. Never mind that the region's rotten banks created the crisis in the first place. Right now, all the Asians feel is the pain of high interest rates, record bankruptcies, and rising social tension. Reform sounds good in principle, but recovery--perhaps even survival--comes first. In these parlous times, few have the stomach for a U.S.-style workout in which ruthless bank examiners shut down insolvent lenders, sell off assets to the highest bidder, sack inept managers, and cut off corporate deadbeats. To their credit, the Indonesians and Thais still seem to be pressing ahead with reforms. But other nations are signalling they will go for growth and emergency bailouts, no matter what the long-term cost.
BANK HOLIDAY. Japan is the most important player in this new drama. For months, the Japanese have been making noises about a tough cleanup of the banks. But in the last week, the tune has changed. Those backing a radical banking sector overhaul are ''amateurs,'' says Finance Minister Kiichi Miyazawa: They have no idea what chaos will ensue. Nomura Research Institute economist Richard Koo concurs. Japan's banking woes run so deep that a heavy-handed workout favored by Washington would be a disaster, he says. It would set off a chain reaction of bank failures and huge corporate bankruptcies that would cripple Japan for years. ''If you close down the banks, you also kill a lot of good borrowers,'' he warns.
The Japanese point out that even U.S. authorities balked at shutting down some regional banks in Texas and New England when property markets crashed in the late 1980s and early 1990s. And when Hokkaido Takushoku Bank Ltd. failed last November, it did grievous economic harm to Japan's northernmost island.
So Prime Minister Keizo Obuchi and the ruling Liberal Democratic Party are trying a variation of the old convoy system. Regulators will not force any more big banks to shut, however much they deserve that fate. And a rapid sell-off of loans at cut-rate prices doesn't seem in the cards: It would force too many massive write-offs too fast. Instead, Tokyo will merge weak banks with strong ones, unwind bad loans slowly, and use taxpayer money to refloat the system. Hence, the frantic efforts by the LDP to stage-manage a merger between the ailing Long Term Credit Bank of Japan Ltd. and a stronger Sumitomo Trust & Banking Co.
TREADING WATER. The big question is whether this soft-landing approach will be too soft. The government's current ''Total Plan'' to set aside $214 billion to protect depositors and shore up the capital bases of the banks might just keep the whole rickety structure in place. Politically favored borrowers may end up getting new credit regardless of the viability of their businesses. Nor is Japan interested in telling global investors the true level of bad debt in the nation by publicly releasing new audits of the top 19 banks. None of this constitutes a strong sign to global investors that Japan will get back on track fast.
Yet the Asians have fallen so far from grace that it's easy to sympathize with their position. Even the Thais, who have tried to play by the IMF book, think there is something amiss when short-term capital flows can cause such havoc. ''I sympathize with Hong Kong, which has been a model of free trade and is still under attack just because every other place is under attack,'' says Thai Deputy Finance Minister Pisit Leeahtam. Many Asians think that Mahathir has a point when he states that controls are the only way to keep capital in the country to rebuild the financial system. For a devastated Asia, the temptation to opt out of the international economy is starting to look a lot more attractive than anybody in the West realizes
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