Some Wall Street analysts hoist red flags

By , Staff writer of The Christian Science Monitor

Wall Street's glory days are nearly over. Maybe not tomorrow, but within a year or so. At least, that's the buzz. Lately, one hears talk of brokerages easing back on the spending throttle, preparing for the ``inevitable downturn.'' So what is the legendary stock picker Gerald Tsai Jr. up to?

Last week, Mr. Tsai, head of Primerica Corporation, clinched a deal to buy Smith Barney Inc. for $750 million. He did get this well-managed, second-string broker at a horse-trader's price. But why did he buy it now?

``When things look bad is when you should open your eyes and run toward them, not run away,'' Tsai was quoted as saying in a New York Times article. Casting aside dour industry forecasts, he added, ``I think the brokerage stocks are cheap today.''

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This purchase triggered anew rumors that E. F. Hutton or PaineWebber would be next on the merger block. And maybe over the long haul Tsai's bullish assessment for the securities industry will be borne out. But in the near term, quite a few technicians are waving red flags.

For the first time this year, the top 10 market timers tracked by Timer Digest swung to a consensus sell signal. Seven out of the 10 timers are now bears. (Robert Prechter, the chief ``Elliott Wave'' advocate, remains one of the three bulls.)

Robert James, editor of Timer Digest, which is based in Fort Lauderdale, Fla., suggests long-term investors go to at least 20 percent cash. Mr. James says the market could be heading into a period of sideways trading, not unlike last year when the timer consensus produced an alternating sell-buy-sell signal pattern.

``The downtrend never developed,'' he notes. ``It cost our clients a few percentage points in performance to follow them.''

But the point of timing, he says, is to avoid the big losses; profitmaking is secondary. ``You never know which sell signal, or which buy signal, for that matter, will carry through. The group has been on a buy signal since last November.''

The Seattle-based Fund Exchange Report, which relies on three technicians to issue a signal, recently reached a consensus on staying out of equity mutual funds. It correctly told readers to stay out of bond funds on March 31. Gold funds are its only current buy recommendation.

Now, the editor of that letter, Paul Merriman says, ``We're very close to getting back into bonds and getting out of gold.'' And he's getting to the end of the equity sell tether. ``If the market moves up another 40 points or so, we may get a buy signal.''

Last week, the Dow Jones industrial average did gain 19.05 points, but volume was light, which indicated to some technicians that this rally lacked sincerity. The Dow closed Friday at 2,291.57.

Airline stocks attracted investors again as the bidding battle for Allegis Corporation heated up. Last week, Coniston Partners disclosed it had a 13 percent stake in Allegis and plans to seek control. Then on Thursday, Allegis countered with a tough anti-takeover ploy.

The travel conglomerate's board tentatively approved giving stockholders a $60 a share cash payment. To do so, it will have to borrow $3 billion. If the move is carried out, Allegis, which owns United Airlines, would become one of the most debt-laden firms in the airline business.

Now, Cabann'e (Cab) Smith does not care much for Allegis as an investment. ``Too much buyout fluff in the price,'' says Mr. Smith, a pension fund manager in Bryn Mawr, Pa. His tastes run more toward AMR Inc.

``Yields are improving. Traffic growth is good. Labor costs are coming down. It's a cheap stock at $55 or less.''

Nor does Smith give much credence to the sell signals of technical analysts. ``Performance is based on stock picking,'' he says. This is not a surprising view, given that Smith entered the business some 20 years ago via John Neff's (Wellington Management) school of valuation analysis.

Smith picks stocks based on a hybrid fundamental formula of low price/earnings and growth. He looks for earnings growing at a rate of 1.3 to 2 times the price/earnings ratio.

For example, Digital Equipment Corporation (DEC) at $160 a share, sells at about 15 times next year's expected earnings per share of $10.90. In the next three years, Smith predicts earnings will grow at about 25 percent a year.

``That gives DEC a growth rate of about 1.6 times the P/E, well within our range,'' he notes.

Contrary to many, Smith thinks the low inflation strategy remains intact. Despite the strong first quarter gross national product figures, he sees the economy slowing. A 1 percent growth rate for the second quarter wouldn't surprise him.

``That would ease pressure on interest rates, the dollar, and the Fed,'' he says, and pave the way for a stronger second half.

``I'm not wildly bullish,'' Smith adds. ``But if the market sees the case building for a strong second half leading into a stronger 1988, we could end the year with the market 7.5 to 10 percent higher than it is now.''

Maybe Cab Smith has been talking to Gerald Tsai.

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