Psychology of War and Market,,
March 29, 1999
Gunboat Rally
By Alan Abelson
As it demonstrated so resolutely last week, Wall Street is nothing if not patriotic. Hardly had the rain of missiles and bombs begun to fall on Kosovo than the stock market struck the colors with a blazing rally.
The spirited response was all the more stirring because the market had been sagging like a weary old nag under the weight of a myriad of real and imagined aches.
But once it heard the music and saw the flag, it tossed aside those petty cares with alacrity and sent up its own inspiring barrage of flares and rockets. And the stars of this rousing display were, fittingly, those mighty pyrotechnic performers, the 'Nets and the techs.
True patriots that they are, Street people rushed to participate in the rally even though, like most of us ordinary civilians, they were far from sure where Serbia is or why NATO is so mad at it. We must confess we're still a tad hazy on the location part even after following the President's urging and getting down our atlas. Trouble is, all we have at hand is a road atlas, courtesy of the AAA, and, it turns out, not all roads lead to Kosovo.
Mr. Clinton made a gallant try at explaining the reason for the attack. The reason, it appears, is a nasty piece of work named Slobodan ("Slob" to his intimates) Milosevic, Serbia's big cheese, who has been beating up on his country's Albanian minority (but a majority in the Serbian province of Kosovo). The bombing is aimed at forcing Mr. Milosevic to make nice so the Serbs and Albanians can live together happily ever after.
There's not much disagreement that Mr. Milosevic was asking for it. But even if the punishment fits the crime, there's lots and lots of doubt as to whether the bombing will bring Slobodan the Heel to heel. Still, the virtual unanimity among "experts" that air strikes alone won't do the trick is a powerful argument that they might.
We're not unmindful that even smart bombs can do dumb things or that there's no such thing as a wholly antiseptic military engagement. We can only hope that the country that produced the Yugo is just as inept at armaments as it was at autos.
As to the investment impact of the attack on the Serbs, Paul Kasriel, who, despite being a card-carrying economist (he practices his subversive profession at the Northern Trust Co.) is a very bright and clear-eyed observer, has some interesting comments on war and the stock market. The nub of them is that war is undeniably hell, but it can provide a shot in the arm for share prices.
More specifically, Paul notes that in 1942, blue-chip stocks posted a total return of 20.3%, and in the 1942-45 stretch, that return compounded at a 25.4% rate. In 1950, when the Korean War started, big-cap stocks had a return of 31.7%, which, through the end of 1953, grew at a 17.6% annual rate. In 1964 and 1965, as the Vietnam War was heating up, large-cap stocks returned, respectively, 16.5% and 12.5%.
An exception was the Gulf War early in this decade, when blue chips suffered a loss of 3.2%. That could be the exception that proves the rule. Or, conceivably, the war ended so quickly that stocks didn't have time to get their act together. Or maybe the 'Nineties market really is different.
Paul enters a proper disclaimer to the effect that war is tragic, but markets continue to trade. "And for the most part," he sums up, "U.S. stock markets have traded up in the early years of major wars fought in foreign territories." He thoughtfully adds, "Of course, stock prices in this century have never been as highly valued at the outset of war as they are now."
You can say that again, brother.
For all the hoopla over Dow 10,000, the sad truth is that for a good many investors, 1999 has been nothing to cheer about. Merrill Lynch's master technician and font of investment information, Bob Farrell, tells us that as of a week or so ago, 63% of Big Board stocks, 47% of the S&P and 55% of Nasdaq issues had lost ground since the turn of the year.
Those rather melancholy figures merely confirm what even a casual observer of the investment scene intuitively knows. Someone, after all, owns the new lows that in so many sessions this year have handily outnumbered the new highs, and someone also owns the declining stocks, whose ranks, too, have been consistently larger than those of advancers.
Indeed, even while the markets were legging it to new highs, the advance/decline lines were sinking to new lows. That sort of schizo behavior is not, in case you wondered, an everyday phenomenon. Indeed, as Gary Kaltbaum, of JW Genesis/CSG, rather diffidently points out, the last time it happened was in 1929. But hey, who's superstitious?
That this has been a two-tiered market for quite a spell, with the top tier running wild and the bottom tier (or should we say "tear") running down, is no secret. We've lamented many times and oft its bad breadth and thin leadership. The failure to invite so many deserving stocks to the party occasioned a sad little note to us from a broker in the boondocks describing its effects in quotidian terms.
Our rustic rep relates that he arose from his slumbers in his cozy farmhouse one recent morning, slipped on his copper bracelet made by Phelps Dodge (whose shares are down 29% from their 12-month high), gazed on the field groomed by his tractor, a product of Deere (off 40%), and fertilized by DuPont (off 33%).
For breakfast, he consumed toast (bread by Interstate Bakeries, off 38%) and coffee cake from Tasty Baking (off 49%), after which he fed his horses on grain processed by Archer-Daniels-Midland (off 32%).
He stopped for gas drilled by Schlumberger (off 31%) and sold at retail by Royal Dutch (off 13%), got stuck in traffic behind a Roadway (off 41%) truck, stared idly at a Boeing (off 38%) 747 above, drove past headquarters of Arrow International (off 40%), Dana Corp. (off 42%) and Sovereign Bank (off 44%), finally arriving, a little the worse for wear, at his job (the name of his employer, he insists, must remain a deep, dark secret, but the stock is off 20%).
At current prices, a number of those names seem more than a little intriguing. But if by chance our man, like Peter Lynch, believes in investing in things you've experienced in one way or another and those names represent stocks that he recommended to his customers when they were not quite as depressed (the stocks, not the customers), then we earnestly hope he's an adequate farmer.
That Jane and John Doe, average investors, have not fared as well in the market this year as Jane and John Dough, Internet day traders, does not come under the heading of "startling revelation." So far, in fact, 1999 is turning into more or less a repeat of 1998, when strength in a relatively few shares, all of which had elephantine capitalizations and hence heavily influenced the averages, masked softness in the mass of stocks.
As Peter Cannell points out, over 60% of the 7,200 stocks that make up the amorphous and all-embracing category known as the "broad market" wound up losers last year. Peter is a seasoned and uncommonly sensible investment pro, and the eponymous proprietor of Peter B. Cannell & Co. He's also possessed of a literate and wry pen, as evidenced by his recent letter to friends, family, clients and, we guess, any stray eyeball.
In describing the strange, grandly asymmetrical nature of the bull market of the past few years, he notes that the 10 largest S&P 500 companies weigh in at 20% of that index's market capitalization, and the 10 largest Nasdaq companies make up 40% of the Nasdaq Composite's market cap. In 1998, he relates, only 15 companies accounted for half the gain in the S&P, while 25 big tech outfits accounted for fully 93% of the gain in the Composite.
Meanwhile, the 4,500 issues in the Nasdaq index that don't have the good fortune to be one of those aforementioned 25 big techs might profitably have taken the year off. On average, they were down 4%.
Peter observes that since the end of 1994, on average, price/earnings ratios have doubled from 14 to about 28. However, the 10 biggest names in the S&P boast an average P/E of 48. But even that exalted number pales beside the P/E of 70 averaged by the seven stocks that earn money among Nasdaq's top 10 (the other three, which aren't burdened by profits, are priced to eternity).
This heady expansion of multiples is responsible for a cool 80% of the spectacular rise in stock prices over the past four-plus years.
Peter has not marshalled this trove of data, it won't shock you to learn, as a statistical tribute to the market. Quite the contrary, as an admitted value investor with a bias toward small and medium-sized companies, at the moment he's not very much enamored of the beast. With an admirable minimum of grumbling, he relates that he shunned the high-multiple contingent, gave wide berth to the Internet stuff (the consumer, not the peddler, he's convinced, will be the big winner in Internet commerce) and didn't mess with momentum.
In avoiding such racy and gamy precincts, Peter also, of course, avoided having a big year. As he says with becoming equanimity, "We missed the big party, the champagne, the balloons!"
But there have been parties, champagne and balloons aplenty since his advisory firm opened its doors in 1973, a span in which he has averaged a handsome 15% yearly return. And, he reflects, "over the sweep of 75 years, history demonstrates prolonged periods of underperformance by 'value stocks' are followed by long periods of overperformance."
So, we asked him Friday, just what kind of stocks are likely to be overperformers when the long-delayed day of the value stock finally dawns? (We don't really talk that way, but that's the gist of our query.) Stocks, Peter said, like Chemfab Corp., which he owns a pot of, and another holding, Ag Services of America. Both are on the Big Board, both untainted by interest among the heavy-breathers.
Chemfab is a classy specialty chemical company that turns out a wealth of polymer-based engineered products. Its stuff is ideal for "hostile environments" (read: extremely cold or extremely hot). We'll spare you a catalogue of product lines and applications, but it's big in architectural uses, notably roofing (look up next time you're in the Denver airport, and you'll see some of Chemfab's nifty handiwork).
The company's got a sweet record of growth, stretching back to the early 'Nineties, averaging some 15% a year. Sales now are running about $120 million a year. Nice balance sheet, unblemished by debt. And earnings, Peter reckons, should come in this fiscal year around $1.55 a share (up from $1.33) and, of course, more next year.
The stock, he sighs, is stuck around 16-17. But, he's firmly convinced, come the revolution in investor preference, it'll get its due and sell a lot higher.
Ag Services, an odd duck of a company, supplies farmers with just about everything they need from seed and fertilizer to crop insurance and credit (of which farmers never have enough). Mention "farming" and most investors grimace, but, Peter points out, the company has been growing steadily, about 20% a year, ever since it went public about 10 years ago.
Sales are closing in on $200 million, while earnings are extending a long winning streak and should total $1.44 a share in calendar '99. The stock, though, closed Friday below 14, down from a high last year of 20.
Since solid growth and straight-up earnings can't get it much respect in the Street, maybe it could slip a .com into its moniker. Look pretty good after the "America."
Return to top of page | Format for printing
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
|
