Bullish investors shake off insider jitters
The Praetorian Guard has been closing ranks in the White House around an embattled President. The elite of Wall Street are also closing ranks - around an embattled institution. Scarcely two weeks after disclosures of massive insider-trading abuse, the Dow Jones industrial average is near an all-time record level. It closed last Friday at 1,914.23, a gain of 20.67 points in four trading sessions, up more than 100 points since the Ivan Boesky scandal caused the market to slip steeply.
Even the takeover machine has shifted back into high gear, notwithstanding the aspersions cast on such raid-financing institutions as Drexel Burnham Lambert. Chesebrough-Pond, Borg-Warner, and Carter Hawley Hale are all newly under attack. The First Interstate pursuit of BankAmerica is still on the table. Goodyear and Gillette have just shelled out millions to stave off takeover. There have been rumors involving Colgate-Palmolive and Lockheed.
In other words, it's business as usual for the takeover-oriented bull market we've known since August 1982.
This may sound like a cynical question, but it is worth asking if only because it must have flitted across the minds of many investors in recent days: Is this for real? Or are the big-money boys pumping up the market, forging ahead with takeovers, in order to reassure investors who otherwise might have lost faith in the system?
Perish the thought, say most Wall Street hands. Nobody plays with money like that. The rally has been for real.
``It's a big country, a big world,'' says Richard Strong, head of the Milwaukee-based Strong Fund. ``Everybody makes decisions for himself. Inflation's under control. It's the era of the financial instrument. In other words, the fundamentals look good.''
Mr. Strong says his mutual fund portfolios are close to fully invested, although he has some cash in reserve for buying opportunities - which he expects to emerge if more names are dragged into the Boesky affair.
This last point is one heard frequently on the Street: Mr. Boesky is not the end of the line; the scandal will widen.
``Common sense tells you that the SEC didn't strike that kind of deal with Boesky without there being other shoes to drop,'' Mr. Strong says of Boesky's $100 million settlement with the Securities and Exchange Commission.
As those shoes drop, the market is going to shudder, just as it did on the days following the Boesky news, says Joseph Barthel, director of technical strategy at Butcher & Singer, a Philadelphia brokerage.
``In the long term, we've seen the seeds planted for major problems on Wall Street,'' Mr. Barthel says. ``There's an awful lot for Wall Street to be concerned with.''
And that, he says, means that 1987 will be a period of ``extreme volatility'' for the market. He notes that Sen. William Proxmire (D) of Wisconsin, who is slated to head the Senate Banking Committee, will probably subpoena Boesky and take other actions that make Wall Street very anxious. President Reagan's problems over the Iranian arms deal also remain a negative for the market.
Still, like Strong, Barthel says each money manager he deals with has so far indicated that these down days will present buying opportunities. And he says he gets no sense that Big Money is acting en masse simply to try to bolster confidence in the system.
Notable names in money management have given their endorsement to the rally in recent days, however. At separate forums in New York last week, mutual fund mavens Peter Lynch (Fidelity Magellan) and John Templeton (Templeton Group) indicated they see continued progress in the US stock market in the year ahead. Both of these internationally oriented fund managers have moved strongly into US equities.
Eric Miller, chief investment officer at Donaldson, Lufkin & Jenrette Securities, says the failure of the market to decline significantly after Boesky ``rallied people round the wagon, and they said, `Hey, this shows how strong the market really is.'''
He thinks cleaning up inside trading should also help the market in the long run by bolstering investor confidence.
Like many other observers, Norman Fosback, president of the Institute for Econometric Research in Fort Lauderdale, Fla., detects underlying strength in the market. In analyzing the Dow for Nov. 13, the day before the Boesky affair broke, Mr. Fosback says Boesky's dumping of stock accounted for much of the 31.50-point drop. Then on Nov. 17 and 18, the market reacted to the scandal, falling a total of 56.38 points.
``But the decline precipitated by Boesky was an aberration,'' Fosback says, ``and it was unrelated to the long-term fundamentals.''
The most bullish underlying factor, he notes, is the high level of cash that institutions such as mutual funds are holding. The inside-trading scandal, he says, will probably accelerate the migration of individual investors into mutual funds to take advantage of the professional expertise and connections of professional money managers.
Fosback also notes that buying by legitimate insiders - executives trading the stock of their own corporations and duly reporting those trades to the SEC - is at high levels. Most such insiders, he says, buy because they see bullish indications involving their own companies - sales orders might be building up, for instance - and these insiders have investment time frames of a year or two.
Taken as a whole, he says, the high level of corporate inside buying right now is a good sign for the market.
Indeed, there's scarcely a negative word about the fundamentals. But as Strong in Milwaukee notes, ``There's still a terrible feeling about Ivan Boesky.'' The inevitability of further prominent characters being linked to him is giving this bull market an edgy feeling.