Of interest NY Post Business Section (08/23/98): <QUOTE>
NEW PESSIMISTS DEBATE: IS IT 1929 ALL OVER AGAIN?
By JAMES KELLEHER
Blame it on the Dow Jones industrial average's 10 percent decline since July or the persistent Asian crisis or the problems unfolding in Russia and spreading to Venezuela and other parts of Latin America.
But as the summer of 1998 winds down, investor sentiment is souring.
Euphoria is out. Pessimism is in.
Even Jeremy Siegel, the Wharton finance professor who helped champion the idea that a new financial era has dawned where the old rules no longer apply, is sounding downright glum.
"There's no question that the market is at a very high valuation," Siegel told The Post. "We may be heading for a bear market."
Signs of the shift are everywhere. There was Ralph Acampora, the normally upbeat Prudential Securities analyst, who earlier this month defected to the bear camp, saying the Dow might fall as much as 20 percent.
There's been the stampede of investors out of stocks and into money funds. Since mid-July, when the Dow reached its high of 9,337 and then tumbled back, investors have pumped five times as much money into short-term money funds as stock funds, according to the Investment Company Institute.
But the most telling sign of the New Pessimism has been the debate now raging on trading floors and in magazine columns exploring the same critical question: Could the Great Crash of 1929 happen again?
The question isn't new. But in previous years, it was only entertained by Wall Street's grumpiest bears, holdovers from the days when people believed that dividend yields and price-to-earnings ratios mattered.
Now it's a question that more and more investors are asking themselves.
According to John Cassidy, who penned a piece on the subject in The New Yorker this month, there are eerie similarities between the financial landscape today and in 1929, in the days right before the Dow plunged more than 80 percent and ushered in the Great Depression.
Supporters of this view, including Nobel Prize-winning economist Milton Friedman, focus primarily on stock valuations. Whether measured by p/e ratios or dividend yield, stocks today are selling at prices way above anything seen since, well, the days preceding the Crash of 1929, they say.
Then, as now, Federal Reseve officials expressed concern about the prices and the rampant speculation in equity markets.
Then, as now, benign inflation and slow but steady growth lulled investors into the false belief that the good times would never end.
"Nobody who has money in the stock market likes to hear comparisons between today and 1929, but the parallels are striking," Cassidy wrote in the magazine.
Naturally, not everyone's convinced the end of the world is near.
Siegel, for one, told the Post a repeat of 1929 is "impossible."
"Whenever the stock market is high," he said, "people bring up 1929. But the decline never comes."
The reason, says Siegel, is that the Federal Reserve has greater monetary control than it had in the past to prevent stock market declines from cascading into economic catastrophe. And its chief, Alan Greenspan, demonstrated in the 1987 market crash that he would step in to prevent a repeat of 1929.
In fact, some market mavens, like Abby Joseph Cohen, the chief investment strategist at Goldman Sachs & Co., are convinced the market can go higher still. In an Aug. 13 market comment, Cohen wrote "stocks are undervalued based on our expectations for U.S. profits, cash flow and inflation over the next year.
"By year end," she wrote, "we expect the following to be achieved easily: Dow Jones industrial average at 9,300, S&P 500 at 1,150."
Siegel doesn't buy that. Another 1929 may be impossible, he says, but a 20 to 30 percent decline in stock prices could very well be in the cards.
"In the short run," Siegel told The Post, "I am not optimistic mainly because of the earnings slowdown. I think the high we saw in July will stand as the high for a really long time."
The problem is that U.S. corporate earnings growth is slowing. In the second quarter, profits rose an average 3.6 percent, the worst quarterly performance in seven years. And some people, like veteran business commentator Don Bauder, think the situation may be much, much worse.
"If you got rid of the accounting gimmicks, the abuse of one-time charges, stock options and merger and acquisition accounting, U.S. corporate earnings are probably declining." said Bauder, a long-time skeptic who's happy to have the new company.
"On a price-earnings basis, stocks are colossally overpriced, maybe by as much as 50 percent."
So will the coming reckoning be a sharp decline like 1929 and 1987?
"It's going to be a long, slow, water torture thing," Bauder told The Post.
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