Market changes and uncertainties prompt a perusal of the `what ifs'

Lower oil prices. Okay, maybe this wasn't the topic on Wall Street. But, then it's hard to say what piqued investors' interest this past week.

Certainly stock buying was not a high priority. The new year was ushered in with light trading -- and a penchant for selling. The Dow Jones industrial average finished four sessions down 19.21 points, closing at 1184.96. One can't really blame investors for this unenthusiastic start.

Home sales sputtered, federal deficit estimates swelled, and -- according to the consensus of 24 economists surveyed by the Wall Street Journal -- interest rates will rise in 1985.

In the spirit of true contrarianism, W. Samuel Kerlin debunks the interest-rate forecast. ``In all my years on Wall Street [12], I've never found a consensus of economists that was not wrong,'' says the president of Douglas Stewart, a New York brokerage house.

But let's backtrack to lower oil prices and consider the implications for interest rates and stocks.

The sheikhs and oil ministers headed home from the last OPEC meeting with little to show for their efforts. Supply continues to exceed demand. Thus Britain and Norway are expected to cut crude prices sometime this month. This in turn, may support Mr. Kerlin's belief that interest rates are headed down, not up.

If oil prices tumble, the Federal Reserve has a good reason to keep a lid on interest rates. If the Fed allows rates to climb while oil falls, poor nations could find it hard to pay their debts, straining the international financial system (not to mention a few United States banks). By this logic, the Fed will keep interest rates from rising as long as it doesn't ignite inflation.

A lower-interest-rate outlook bodes well for the bond market, and, in theory, the stock market piggybacks on bond activity. But in the last six months, bonds surged with little follow-through from stocks.

Norman G. Fosback, publisher of the Market Logic newsletter, says that although ``you could see the market back away over the next three to four weeks, investors should use any correction as an opportunity to buy stocks.'' His advice is based on the 70-year ``near infallible Two Tumbles and a Jump Rule.'' When the Federal Reserve cuts the discount rate two times in succession (Nov. 21 and Dec. 21) the monetary climate is favorable for a jump in stock prices.

When asked about the past record of the ``Two Tumbles'' signal, he admits it flashed seven months ahead of the 1982 bull market. Nonetheless, Market Logic was fully invested two months before the 1982 bull and came the closest to timing the rally, reports the Hulbert Financial Digest Annual Review of Investment Newsletters. Some 70 financial newsletters were followed.

Fosback is recommending brokerage stocks and notes recent insider buying in real estate investment trusts, banking, and energy issues.

Even if the whole market doesn't perform spectacularly, lower oil prices may boost transportation stocks. Jet fuel accounts for about 25 percent of airline operating expenses. When Britain and Norway last cut prices in October, airline stocks took off.

``The airlines did phenomenally well in the fourth quarter. They were up 20 to 25 percent relative to the market,'' says Paul R. Schlesinger at Donaldson, Lufkin & Jenrette securities.

Are airline stocks the ticket for a profitable 1985? Well, you won't find Alfred Norling at the ticket counter. The airline analyst for Kidder, Peabody & Co. expects lower earnings for the first half of '85. ``Most analysts and the market have not agreed with me,'' says Norling. But as he sees it, equating lower crude prices with higher earnings is too simplistic. Competition is resulting in heavy discounting. As a result, industrywide revenue yields are down 3 percent from a year ago. ``They've deteriorated quarter by quarter through 1984,'' says Norling. In 1985 the continued expansion of discount carriers, such as People Express and Continental, and lower fuel prices will further depress ticket prices and earnings, he says.

At Douglas Stewart, Samuel Kerlin just added People Express to balance his holdings of Pan Am. Pan Am, with as much as 40 percent of its sales overseas, is a hedge against a drop in the dollar.