SO MUCH FOR THE EXPERTS...
Lots of high-priced seers were glaringly wrong in '98--so extra kudos go to
the prescient
Who knew that 1998 would bring what it did? That the Dow Jones Industrial Average
would take a stomach-churning ride from 9338 down to 7539, then back up to 9734,
between July and November? That the economies of Asia, Russia, and Brazil would
all crater? That Japan would sink deeper into the abyss and Malaysia would slam the
door on foreign investors? That Bill Clinton's lying about sex would threaten the
Presidency? It was easy to make a bad investment call and hellishly difficult to make
the right one. And some folks were right for the wrong reasons--like those who
predicted low interest rates but figured the economy would be on a stretcher.
Herewith, BUSINESS WEEK's picks for the worst bloopers and best calls of 1998:
HALL OF SHAME
BETTING ON CONVERGENCE. A year ago, Long-Term Capital Management,
the elite investment firm based in Greenwich, Conn., was turning away investors
eager for mouth-watering returns. In September, on the verge of ruin, the company
had to be salvaged by a group of Wall Street firms.
Former Salomon Brothers Inc. executive John W. Meriwether and the other finance
whizzes who owned and ran LTCM had figured that over time, global interest rates
had to converge--that is, the differences between them had to narrow--and they had
leveraged the firm's assets to the hilt betting on convergence. What these refugees
from Wall Street and academe didn't anticipate: a marked and prolonged flight to
quality among investors as Asian, Russian, and Latin markets tanked, which widened
spreads and kept them wide. How to unwind such positions? Very carefully.
BETTING ON RUSSIA. Boris Yeltsin's government liberalized the economy but
never really had regulatory or supervisory control. The reformers appointed by
Yeltsin were no match for the oligarchs and the gangs, and by last summer, the
fissures in the economy were deepening as taxes went unpaid and capital kept fleeing.
Some pretty smart money thought the picture could improve, though: Goldman,
Sachs & Co., in a prospectus for a $6.4 billion Russian Eurobond deal it was
lead-managing, averred that ''significant progress'' had been made in Russia's
economic-reform program. Financier George Soros, who in 1997 had sunk new
money into Russia through his eight investment funds, last summer argued that a
modest devaluation and fresh international assistance could help the shaky economy.
And in July, the International Monetary Fund approved yet another
multibillion-dollar bailout and lent the Russians the first $4.8 billion installment.
Everybody should have known better. In August, the Russian government said it was
suspending debt repayments, and the economy went into free fall.
BETTING ON ASIAN MARKETS. There's no question that the Asian
economies looked wretched enough a year ago, and a number of observers figured
they were ripe for a turnaround. In December, 1997, Barton M. Biggs, the global
strategist for Morgan Stanley Dean Witter, boldly predicted in a BUSINESS WEEK
survey that ''Tokyo and Hong Kong could have substantial rallies in 1998'' because
most of the bad news had been discounted.
No dice. The bad news just kept coming as Japanese banks staggered under delinquent
debts, Hong Kong battled speculators, and the markets got hammered. Instead of
climbing to 18,000, as
Biggs figured, the Nikkei 225 got as high as 17,264 in March, then plunged to a low
of 12,879 in October. As of mid-December, it had recovered to 14,000. Meanwhile,
the Hong Kong index hit a low of 6660 in August and as of mid-December traded
around 10,000--well shy of the 14,000 mark Biggs had predicted.
BETTING AGAINST THE YEN. Julian Robertson Jr. had been having a great
year--his $20 billion hedge-fund group, Tiger Management Corp., was up 17%, after
fees, through Sept. 30. Then a big bet on the dollar and against the yen pummeled his
funds. According to publicly available figures for the offshore Jaguar Fund, which
mirrors the performance of Tiger's other funds, the yen trade helped push the fund's
value down 18% in October and an additional 3% in November. Earlier in the year,
this bet might have made sense. But lower rates weakened the dollar against other
major currencies in October. As of Dec. 10, Robertson's funds were off 7.5% for the
year.
STROKES OF GENIUS
TIMING MONETARY EASE. Credit Federal Reserve Board Chairman Alan
Greenspan with getting it just right in the autumn when he cut short-term interest
rates for a second time on Oct. 15 to calm markets. Coming as it did between
meetings of the Fed's rate-setting body, the Federal Open Market Committee, the
quarter-point move was a big surprise to the markets--and a welcome one.
Some people groused that the first rate cut should have been a half-percentage point
rather than a quarter-percentage point, and that the Fed could have sent the markets a
message in one fell swoop. But splitting the action into two steps proved savvy. The
ability to confound expectations should be part of every central banker's tool kit, and
Greenspan has honed that skill to a fine art. The Fed's one-two punch, followed by a
third cut on Nov. 17, demonstrated a strong commitment to ease and helped pave the
way for other central banks to lower rates.
BETTING ON STOCKS. Abby Joseph Cohen got a well-deserved elevation to
partner at Goldman, Sachs & Co. in October, but her real reward was being
vindicated by the stock market's recent rebound. Throughout the late summer and
early fall debacle in the market, she stuck to her guns, insisting that the Dow Jones
industrial average would reach 9300 by yearend and increasing her recommended
stock allocation to 72% from 65% when the market was at its nadir in September.
Cohen likens the U.S. economy to a large, steady ship that has remained stable in
rough seas and whose long-term economic prospects are very good. Taking the
longer view, she says, ''allows us to ignore some of the shorter-term noise in the
marketplace.'' A stickler for thoroughgoing and reasoned analysis, she has shown
herself to be the best of the bulls.
BETTING ON CHEAPER OIL. Truth be told, almost nobody figured oil could
go as low as $11 a barrel. A year ago, no less knowledgeable a person than Sheikh
Ahmed Zaki Yamani, former Saudi oil minister and chairman of the London-based
Center for Global Energy Studies, predicted $18 as a benchmark price for 1998, with
$15-$16 as an extreme low. But consulting group Cambridge Energy Research
Associates started the year saying that at the extreme, oil could crash to as little as $8
a barrel in 1998. And Ann-Louise Hittle, director for world oil studies at CERA,
predicted last February that oil prices could sink to $12.50 a barrel if the world
financial crisis worsened.
DOING NOTHING. Sometimes, inertia really is the best policy. Consider this: The
odds are that you, like millions of other Americans, were worried by the summer's
bad economic news. But not worried enough--or nimble enough--to do anything
about it. So that 401(k) money kept sitting in the index fund, and when you looked at
those poor third-quarter results, you thought: ''Gee, maybe I ought to do something
about this.'' But inertia got the better of you. Well, with hindsight, go ahead and call
it wisdom. Because today, with the market back up, doing nothing turns out to have
been one of the best calls of all. |
