The TSC Streetside Chat: Morgan
Stanley U.S. Investment Strategist
Byron R. Wien
By Brett D. Fromson
Chief Markets Writer
5/21/00 8:00 AM ET
Byron R. Wien, Morgan Stanley Dean Witter's top
U.S. stock market strategist, broke bread recently with
TSC's chief market writer Brett D. Fromson. They
talked about the market, presidential politics and
America's entrepreneurial culture. Wien also reviewed
his 10 Surprises of 2000 forecast, which he wrote in
December of last year.
To see how well prognosticator Wien has done so far,
read on.
Fromson: Byron, you recently subtitled one of your
reports to clients "Too Much Complacency." Explain
please.
Wien: I believe that there is too much complacency.
People say they are worried, but nobody's doing
anything about it. People are concerned that the market
isn't going up anymore, that it's getting harder, that you
can lose money. You know, it is a stock market. You
can lose money, but most people have forgotten that.
Well, if you bought a lot of technology stocks on March
10, you lost a lot of money -- a lot of money. Very few
people bought on March 10, but they may have bought
on February 10, so they're still losing some money.
The important thing is, this thing went down and it isn't
coming back up again. There's a lot of lore on this. If you
have a 90% down day -- that means that 90% of the
volume of the New York Stock Exchange is down, as
it was on April 14, then usually, in four to seven days,
you have a 90% up day as you did, for example, on
October 19, 1987. Now that makes sense. If you had a
real selling climax, you would expect it to be followed by
a day of great buying enthusiasm. But if you don't get a
90% up day, it usually means you're going to test that
old low and go lower because you have unfinished
business. That's where we are right now.
"We have to reintroduce the concept of risk
to investors."
The most ominous thing about the market right now is
the low volume. That means that people have suffered;
they don't want to sell because every dip is a "buying
opportunity" and don't want to look foolish selling now if
this is going to turn out to be another buying
opportunity. But as the evidence rolls in, it doesn't look
like another buying opportunity. It looks like it's
dangerous. And that would be the thing. We have to
reintroduce the concept of risk to investors.
Fromson: Well, now the notion that they don't want to
sell is not because they have losses, but that they are
afraid of seeming to be foolish?
Wien: They're afraid of being out. Everybody wants to
be fully invested. They don't view cash as a constructive
place to be.
Fromson: What's your current recommendation to your
institutional clients? What's your allocation?
Wien: Well, I have 85% stocks, 15% cash. The most
cash I ever would have would be 30%. So I'm almost
halfway there. I've been to 20 and I'm at 15 now.
Fromson: OK, how do you square 85% -- I sort of know
the answer but I'm going to ask you anyway -- how do
you square 85% equities with ...
Wien: ... with a cautious view? Well, I don't think it's a
bear market. I think it's a severe correction. And also,
I'm advising institutional investors whose mandate is to
basically fully invest. So 15% ... believe me, 15% is
more cash than anybody has.
Fromson: Or they'd want to have?
Wien: Right. I mean, every place I go and tell everybody
to have 15% cash, and I get a fight. I don't get anybody
asking me, "Why don't you recommend 30%? I already
got 15%." That doesn't happen.
Fromson: So, how have you been doing on your 10
surprises for 2000?
Wien: The first one is that interest rates are going to go
up. I said that at the beginning of the year. Most people
thought interest rates were going to go down because
they thought inflation was dead, the budget was
balanced and we were in a disinflationary environment
for sure. They thought that long bond yields should
come down further, and they did. But now they've gone
up the last three weeks. The 10-year bond has gone
from 6% to 6.5%.
Fromson: When was the last time we saw a 6 1/2 on
the 10-year?
Wien: I don't know, but it's going higher. So that's the
first surprise.
Fromson: Before we get too far into this: Is this is a
correction or a bear market?
Wien: It may go down more than 20%, but it's not a
bear market because it isn't the precursor of a
recession. Earnings are still going to be up year over
year. It's a valuation correction; the stock market was
overpriced.
Fromson: So you don't see a recession down the road?
Wien: No.
Fromson: Because?
Wien: The Fed is going to steepen the yield curve, but
that's to slow the pace of the economy. The economy is
too strong. The Fed can heighten interest rates to slow
the economy, but it doesn't necessarily mean that it'll
throw it into a recession. We have more people working
than ever before. The U.S. is spending money on
productive things. We are not spending money on
defense. The budget is balanced. The U.S. is the
political, economic and military leader of the world. So, I
just don't see us going into a recession. The excesses
in the economy are in stock market valuation. There isn't
a big inventory hang. There haven't been excesses in
capital spending. The things that usually produce a
recession just aren't in place.
Fromson: But you're not ruling out the business cycle
as a phenomenon, are you?
Wien: No. I still believe we'll have business cycles. I
just don't think we're on the brink of a recession.
Fromson: OK, let's get back to these surprises.
Wien: The second one is: The Fed tightens a lot more
in the beginning of the year. Everybody thought the Fed
might do 25 or 50 basis points. My feeling was that was
crazy. The economy was hot as hell in the beginning of
the year, and there's never been a cycle in which the
economy got really strong where it didn't take 200 or
300 basis points to slow it down. So I was saying that
they'd do at least 100. I really thought more than that,
but that was the number. I thought the Fed would do a
lot more tightening.
Fromson: What is your view going forward?
Wien: [The May 16 hike] isn't the end of it. They're
going to do more after. I think rates are going up 100
basis points from here.
Fromson: What would be the meaning of that for both
stocks and the companies that underlie the stocks?
Wien: Well, so far the linkage between interest rates
and the stock market has been pretty loose. The stock
market has gone up when rates are going up; it's gone
up when rates are going down. There's no correlation.
But right now, I think if 10-year rates go to 7%, which I
think they will, then the stock market will crumble.
Fromson: Because?
Wien: Well, interest rates do matter. Higher interest
rates mean you discount long duration stocks by those
higher rates. Therefore, if you have a 7% long bond,
you're taking the future earnings of, say, an Internet
company, which isn't going to earn anything until 2003,
2004 or 2005. You're discounting them back by a higher
number, so the present value should be lower.
Fromson: Greenspan. What kind of marks do you give
him?
Wien: Good. I think Greenspan's done a great job. His
job is to do the right thing and not reveal his hand before
he does it. He's done a good job.
Fromson: Do you think he's behind the curve in raising
rates?
Wien: Maybe he should have moved a little earlier, but I
think he wants to see more evidence. So, he was
probably looking for more evidence. I don't know. It's
easy to say that he was behind the curve. He should
have acted earlier. But to some extent, he had the
prevailing view -- that we're in a perfect world. And he
was already getting a of lot political heat because he
was thinking about raising rates. People were arguing he
didn't need to. Some would say he's politically
independent, but I think he doesn't want people to storm
the building.
Fromson: Particularly our senators.
Wien: Yeah, so therefore I think he wanted the news to
be more inside, and so perhaps waited. It looks like he
waited longer than he should have.
"People don't matter to Wall Street.
Numbers matter."
Fromson: What would happen if the market lost
confidence in Greenspan's ability to engineer a soft
landing?
Wien: People don't matter to Wall Street. Numbers
matter. It's an invention of journalists that the market
cares that much about Greenspan. I've lived through lots
of Federal Reserve chairmen and every one of them was
"indispensable." For the first, I don't know, 12 years of
my career, there was a guy named William
McChesney Martin who was chairman of the Federal
Reserve. I thought he had been chairman of the Fed
since 1913. It just seemed like he was always there.
And then one day it was clear that he wasn't going to be
Federal Reserve chairman. And it did not really matter. If
you look back into history ... I don't know how many
Federal Reserve chairmen we've had in the past 35
years, but every one of them has been "indispensable" --
except for one, a guy named G. William Miller. He
was an idiot. Arthur Burns, I remember when he was --
"Oh God, what if Arthur Burns leaves?" He left. People
leave. Paul Volcker, you all remember -- "Oh God! The
world would come to an end if Paul Volcker left."
Fromson: Volcker still is viewed on Wall Street as the
most heroic Fed chairman.
Wien: I agree with that. But anyway, Greenspan has a
shot at being viewed as the best ever simply because he
presided over the Federal Reserve during the greatest
period of prosperity. You can make the argument that
Volcker was really the greatest because he came in at
the most difficult time, did the courageous thing, raised
interest rates severely, slowed the economy down and
broke the back of inflation. While he put the economy
into the worst recession since the 1930s, that was the
price he paid for doing the right thing.
Fromson: Let's continue on.
"The right thing always happens on Wall
Street. There's no politics. Wall Street is
pure talent."
Wien: OK, so the third one is on politics, I think that
one was naive. What happened was that the Republican
and Democratic national committees said, "Look, we
can't let these mavericks get too far because they're
tearing apart our candidates." The Republican national
committee called every senator, congressmen, governor
and said, "Don't support McCain. If McCain is still a
candidate when we get to the convention, McCain will
have so damaged Bush that he'll never beat Gore. So
the only way we can win in November is to get McCain
out of the race early, so for godsakes don't support
him." And they didn't.
Fromson: Just to restate, your prediction of surprises
was that the Democrats would nominate Bradley, and
the Republicans McCain. You feel that you were
perhaps a bit naive. Why was that? You're not typically
idealistic when it comes to the workings of Wall Street.
Wien: No, we are idealistic, the right thing always
happens on Wall Street. There's no politics. Wall Street
is pure talent. Your stupidity and brilliance is measured
by eighths and quarters all day long. I mean, this isn't
the real estate business where you build a building, it
takes three years and it's either filled or not. This is
something where you know right away whether a guy's
any good. And the right thing always happens because
there is one definition of the right thing: Are you worth
your money or not?
The right thing is defined by what works. So I thought
that McCain was a better guy than Bush. If he were a
stock, McCain would have sold at a higher price. But he
isn't a stock, he's a person in the political process. He
challenged the establishment, so he ended up selling at
a lower price. But if he were a stock, he would have
been Intel (INTC:Nasdaq - news - boards) or Cisco
(CSCO:Nasdaq - news - boards).
Fromson: And Bradley?
Wien: I gave money to both these guys. Bradley
thought that since he was the better man everyone
would recognize the better man and he would be
nominated. But that doesn't work. He had to really fight
for it. When I select people for jobs, they have to want
the job. They have to really convince people that they
really want this job. People who want a job -- who want
to do well at a job if they have reasonable talent -- will
succeed. Bradley didn't convince people that he really
wanted it all that much. He wasn't enthusiastic about it.
Then the heart thing happened, and I think that hurt him.
Look, I make a political prediction every year and it's
almost always wrong. The one thing I think I do have
right is that the Democrats will take the House [of
Representatives]. That's number three.
Fromson: We'll give you partial credit on that.
Wien: Well, they haven't taken the House yet. And
that's the only one that matters from a stock-market
standpoint.
Fromson: Here is something near and dear to the
hearts and pocketbooks of many TheStreet.com
readers, and that would be number four.
Wien: Number four was a great insight. It was a gutsy
thing to say. I mean, to say that the Internet meets its
Waterloo and that stocks are going to be down 50%. I
mean, I can't tell you the grief that I took internally about
that one.
Fromson: Why don't you tell us about the grief you took
internally, without naming names?
Wien: You know Internet stocks were soaring, and I
was saying, "Look, they're going to get into terrible
trouble," and they did.
Fromson: And your logic there was?
Wien: Valuations didn't make sense. It's not over yet.
Fromson: Why don't you talk to us a little bit about
what has happened and what will ...
Wien: First of all, Internet stocks went even higher, and
now they've come down a lot, but they're still expensive.
Fromson: And can you break them down?
Wien: I break them down into e-tailing and content
stocks; those stocks are in terrible shape. Even
personal computers and hardware companies only
declined 25%. Cisco, Intel and others suffered but not
as much. The Internet is the most powerful business
phenomenon in our lifetime, but the stock prices were
discounting a profitability that was unlikely to come true.
Fromson: What then do you see going forward with
these stocks?
Wien: There are a few companies in every segment that
will do well, but there are hundreds of companies out
there. I think Mary Meeker, who knows a lot more
about this than I, says that 70% of all Internet IPOs will
sell below their offering price. Of the remaining 30%, she
had said that 20% were overvalued, but now I think she'd
say 20% are undervalued and 10% are overvalued. The
point is the only stocks we're recommending are the
market-dominant stocks -- but that includes Amazon
(AMZN:Nasdaq - news - boards) and eBay
(EBAY:Nasdaq - news - boards) and Ariba
(ARBA:Nasdaq - news - boards) and Broadcom
(BRCM:Nasdaq - news - boards). There are a number of
stocks even in e-retailing, business-to-business -- AOL
(AOL:NYSE - news - boards) and Yahoo!
(YHOO:Nasdaq - news - boards) service providers -- that
we have a lot of conviction in.
Fromson: And the conviction relates to what?
Wien: They will be survivors. They will dominate the
area, and they will eventually profit. But it doesn't mean
they still aren't overvalued. The important message here
is this is not an area where you can buy the stocks
across the board. You have to be very selective.
OK, the next one was the first one I got right, I mean
some of these are working out, but this one is very
specific -- that the price of oil goes up over $30 and
stays there. It hasn't stayed there, but it's stayed pretty
close to it.
Fromson: And do you think it'll hold at that level?
Wien: Above $25. That was very controversial, even
among our oil analysts at the beginning of the year.
Fromson: Well, what were they saying?
Wien: Well, first of all, the price of oil, I think, when I
wrote this, was probably $20.
Wien: Every year I pick some stocks, and as bad a
record as I've had on political calls, I've had a fabulous
record on picking stocks. And among them, six stocks
this year are in the oil service area.
Fromson: And the stocks you have here for oil services
are Halliburton (HAL:NYSE - news - boards),
Schlumberger (SLB:NYSE - news - boards) and Smith
International (SII:NYSE - news - boards). I take it
they've all rallied strongly.
Wien: Some better than others. Smith has done
extremely well.
Fromson: Are they all up?
Wien: Yes, they're all up. Then there are three hospital
management stocks.
Fromson: That's number six on your list.
Wien: Right. Everybody who hated that sector at the
beginning of the year still hates it, and these stocks
have done well.
Fromson: That's Columbia HCA (COL:NYSE - news -
boards), Tenet (THC:NYSE - news - boards) and
Health Management Associates (HMA:NYSE - news -
boards). They're all up this year?
Wien: Yeah.
Fromson: And what was your basic argument here?
Wien: You can't solve the health care problem in the
U.S. without benefiting the hospital management.
Fromson: Because?
Wien: Because you have to allow them ... they're like
utilities. The government has squeezed them too far and
you really need someone to provide the health care
facility.
OK, number seven -- this one I got sold the gold goods.
Fromson: Oh, you were wrong on the euro, Byron.
Wien: I thought -- and still think -- the euro is
undervalued.
Fromson: What have you said more recently about the
euro?
Wien: What I've said more recently about the euro is,
nobody seems to understand why it's so weak, and it's
a bigger deal than people are saying.
Fromson: Explain.
Wien: The euro is gone. It started at 117. It was weak
all year last year, is now 90 cents, and nobody has
come up with an explanation for why it's so weak.
Fromson: Do you have any thoughts?
Wien: There's something wrong in Europe, like maybe
the euro won't work; maybe the European Monetary
Union isn't a good idea. But in a way Europe benefits
from the weak currency of the euro. Europe is becoming
a Latin American republic: Weaken the currency, export
more, provide more jobs and relieve certain social
political pressures. I don't know, but I'm worried there's
something deeper -- that there's something wrong in
Europe. When a Latin American country devalues, it's
usually not a positive step -- it's usually a sign of |
