A student of stocks sees a bull market charge
Boston — Philip F. McLellan, a private investor from Dublin, N.H., sees a ''blockbuster situation'' in today's stock market.
Mixing his metaphors, he adds: ''We have the raw resources for a rocketing market. Once it gets started, it will stampede.''
Mr. McLellan, who has a background in the securities business but has been looking after his own portfolio, among other things, in recent years, offers this explanation for his market optimism:
First, there are huge amounts of cash available for moving fast into stocks. There is some $220 billion in money market funds which could shift rapidly into a bull market. Pension funds have tens of billions more that could jump in.
Second, new money moving into stocks shoves up prices by not merely that amount; it has enormous leverage.
Here's Mr. McLellan's method of calculating that. The volume on the New York Stock Exchange since the turnaround in the market Aug. 13 to the close of trading Wednesday, Aug. 26, was about 842 million shares. The average price of a New York Stock Exchange share is running about $35. So dollar volume was some $ 29 billion.
Stock prices rose some 14 percent in that short time, as measured by the Dow Jones industrial average. Most of the trading, however, has gone on in stocks that have climbed, he guesses, some 20 percent. So the extra money that has been put into the market is about 20 percent of $29 billion total volume, or $5.8 billion.
The total value of all shares listed on the Big Board at the start of this bull market was about $1 trillion. So the 14 percent average price gain has boosted the value of those stocks by about $140 billion.
Thus, Mr. McLellan would conclude, some $5.8 billion of new money has increased the paper value of all New York Stock Exchange stocks by $140 billion. So the leverage is about 24 to 1. Each new dollar boosts total stock values by $ 24, or if you prefer, each $1 billion produces $24 billion in extra value, or $ 100 billion adds $2.4 trillion.
Those are pretty risky calculations, Mr. McLellan admits. After all, the stock market is an auction market, where it is uncertain what price change will prompt some investor to sell his stock. But it does perhaps give some idea of the explosive leverage that new money pouring into the market could have on values.
Mr. McLellan spent two months this spring and early summer interviewing some of the nation's leading investment managers, and some of the comments he collected are relevant to today's market action.
For instance, Michael Granito, who helps manage billions at the Morgan Guaranty Trust Company, said: ''Institutional accounts are low in equity holdings . . . and if T (Treasury) bill rates go down dramatically, I could see down sharply.)
Mr. McLellan asked these experts to estimate the impact of new money on stock prices. But the uniform answer was, ''We don't know.'' Thus he made his own calculations.
One clue, however, came from a young college professor at Stanford University taking a year off to do research in ''quantitative financial analysis.'' Looking at commodity prices, he calculated that for each net new dollar put into a commodity market, the overall value of the commodity rose about $5. So here there was a 5-to-1 leverage.
If that applied to the stock market, an addition of $100 billion would raise the Dow to the 1200 range, or about a 50 percent gain for the average share of stock, McLellan calculates. His own calculation of the leverage puts stock prices even higher.
One reason for the relevance of such calculations is that institutional investors, such as pension funds, mutual funds, and insurance companies, rely much more today on computer-assisted research and modern theories of investment in making investment choices.
McLellan states: ''Across the nation, these mathematically oriented investors tend to share remarkably similar opinions of the market. This could be a development of considerable significance in light of the unprecedented magnitude of the bond market's moves. Could the stock market become as volatile?''
In other words, McLellan is saying that these investment managers tend to listen to the same professors, are using computer models that are often similar, and may end up with similar advice as to the choice, for instance, between bonds and stocks. With interest rates having plunged sharply, the computers are now likely saying that the anticipated appreciation of stocks should be a better deal than the return on bonds or other interest-bearing investments.
The stock market boom shows that investment managers are listening to their computers.