Three Wall Street sages wax uneasy over the bull market

The auditorium is packed. Prim, youthful alumni of Columbia University's business school are hanging on every word. ``It is my feeling that this is not a terrific time to invest in stocks,'' says a bespectacled Michael Steinhardt. ``The next important question should be when to sell.''

An alumnus calls out: ``How do you suggest we conserve capital?''

``Mattresses. Money funds. One or the other,'' Mr. Steinhardt responds.``These days there's not much difference in returns.''

Steinhardt Partners, formed in 1967, manages some $500 million in private investments. Through bull market and bear, Steinhardt has accrued an astonishing annual compound rate of return of more than 30 percent.

His penchant for investing was nurtured in boyhood. He bought his first stock with a bar mitzvah gift of $200. His after-school hangout was a brokerage office in Brooklyn.

Last week, Steinhardt joined two other noted sages of the Street -- Roy Neuberger and Robert Mnuchin -- at the ``Great Wall Street Traders'' seminar sponsored by the Columbia school.

Mr. Neuberger's career opened in the infamous year of 1929. Today he heads Neuberger & Berman, a $5 billion money-management firm. Seated next to him is Mr. Mnuchin, co-head of trading and arbitrage at Goldman, Sachs & Co., one of the premier investment banking houses.

The following excerpts are from a 1-hour discussion moderated by noted trader James Rogers, a Columbia professor.

Neuberger: ``We are developing a two-tier market right now. Certain stocks have gone up and up and up, where they are 10 or 20 or 30 times the '82 bottom or the '74 bottom, and then there's a whole bunch of stocks that haven't gotten even to first base. . . .

``In 1961 the multiple on the Dow Jones got to 22.5 times earnings. That was very high. In 1961 we had a very bad break which corrected that. We got a 19.1 multiple on the Dow about a month ago. I'm a bear at heart. I'm a chastened bear in a few cases.''

Steinhardt: ``There are two major factors that have accounted for the stock market rise. First, there's a clear relationship between interest rates and stock prices, and interest rates have declined dramatically in this period of time.

``Second is what I like to call the `leveraging of America,' the extraordinary explosion in use of debt on all levels of society. I think that will be the key issue in the economic future of the Western world.

``Growth in stock prices since 1983, I think, relates more than anything else to a new use of debt. Since 1983, for the first time in modern history, an actual decline in the level and magnitude of equity levels that exist in the United States [has occurred] because of record levels of corporate repurchases of their own shares; record levels of mergers and acquisitions; leveraged buyouts, which are a phenomenon and phase that really only came into existence in the 1980s.

``All these have reduced the supply of equities in a period where the demand for equities has increased at least moderately. All of these transactions . . . are associated with debt.

``However, this mechanism has its self-correcting aspects. No longer are as many companies buying their own shares, because they're not as cheap. No longer is there much merger and acquisition activity.

``Interest rates are already down a great deal, and I don't think there's very much more there.

``If one is a trader, one looks for imbalance to create opportunity in some sense, and I think that the imbalance that has resulted in this extraordinary move has largely come to an end. There are times when one should seek to grow in the stock market. There are times when one should seek to conserve. I think this is one of those times.''

Mnuchin: ``You have to factor volatility into all of this. Astonishing things have happened. How long ago was it that the long bond was bumping 14 percent -- 1981?

``We live in a world where cycles are compressed very, very dramatically. In the short term, at least, I would be a little more optimistic . . . .''

Steinhardt: ``We probably can keep leveraging America for a while. [There are] those of us over the last 15 or 20 years who have invariably thought that the end of the world was near -- whether it was with the Penn Central and Chase Manhattan Bank crisis, or the New York City crisis, or that federal deficit crisis. One has to be humble in the longer-term thinking one does.''

But, he says, ``if we're going to be undone, it's probably debt that is going to undo us.'' A booming week

The financial markets were closed on Monday for Memorial Day. Last week, however, the Dow Jones industrial average scored some remarkable gains, closing at 1823.29 on Friday. That was a 63.49-point increase in five trading sessions.

Investors last week appeared to move strongly into retail issues that may benefit from tax reform. Many investors also appeared encouraged by a slump in interest rates and a fall in oil prices.

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