Markets march into '85 to a slower beat
As Wall Street's savants gather around the punch bowl New Year's Eve, no doubt the exploits of 1984 will be vividly recalled. The chit-chat is sure to include how Mickey, Pluto, and the rest of the Wonderful World of Disney danced to Saul Steinberg's tune. Or the relative absence of fun and games when Hasbro and Milton Bradley got hitched. And perhaps a cup of hot chocolate will be raised in honor of Nestle's union with Carnation.
But before breaking into ''Auld Lang Syne,'' a few will tip their 10-gallon hats to T. Boone Pickens, who gave oil industry executives (and arbitragers) a year of sleepless nights.
Yes, mergers and aquisitions held the floor in 1984. The now infamous second leg of the bull market failed to materialize. With one trading day left in the year, last Friday the Dow Jones industrial average closed at 1,204.17, up 5.19 points but short of 1983's closing of 1,258.64. Of course, there were some heady moments in August, but mostly the stock market bounced around, ping-ponging between 1,250 and 1,150.
And a similar scenario is being painted for next year.
''I think '85 will be somewhat like the last half of '84, in that it will not be a market dominated by earnings momentum,'' opines Oppenheimer & Co.'s portfolio strategist Michael Metz.
He expects many firms to be reporting lower earnings than in 1984. And institutions will be minor players next year while takeovers, buy-backs, and arbitrage will be the forces fostering market activity.
Says Mr. Metz: ''It will be a value-oriented market vs. an earnings-oriented market. By that I mean such factors as cash flow, book value, and value to a prospective buyer will be important. You have to look at stocks from a businessman's viewpoint.''
The institutions will largely be out of the picture, says Metz, because most have moved toward ''dedicated bond portfolios.'' Real returns are historically high, and with the stock market's less-than-glowing performance, it's a logical decision to go the bond route, he says. And cash reserves are low.
The result is that ''the top-of-the-line stocks, the IBMs of this world, cannot do well in the absence of institutional demand,'' says Metz.
Where then should the avid investor turn to uncover a solid investment? ''I wouldn't want to look at the garbage but somewhere in the middle.''
Michael Metz finds support for his views from a West Coast colleague, Eugene E. Peroni Jr. at Bateman Eichler, Hill, Richards in Los Angeles. ''I agree. Earnings won't drive this market.'' He points to the one-day seven-point plummet of Toys R Us (a widely recommended stock) when it reported lower-than-expected Christmas sales. Sales were up 17 percent, but, Mr. Peroni says, ''that fell short of expectations.''
The Bateman Eichler director of technical research says investors will have to dig to find the undervalued stocks. ''The blue chips will be lackluster relative to less-capitalized quality second-tier stocks.'' Mr. Peroni doesn't see any decisive leadership coming from any particular industry in 1985 but he ''prefers'' food, defense, publishing, and broadcasting stocks.
Yet a third prognosticator adds his support to the weak-earnings, no-clear-choices scenario in '85. Says research director Monte Gordon of the Dreyfus Group: ''It will be a difficult year, a relatively unforgiving year for companies that stall or fall short of expectations.''
Overall, expectations for corporate earnings are not all that high. Most growth estimates fall in the 5 to 10 percent range. Standard & Poor's released its annual survey of eight bellwether industries last week. It showed real gross national product, up 6.5 percent this year, would rise 2 to 3 percent next. Company income, as measured by the S&P 500 stock index, rose 25 percent this year and may be ''relatively flat'' in '85.
The stock market, Mr. Gordon says (and Mr. Peroni agrees) will ''do better in the first half of '85 than in the second.'' The problem is that the economy has some ''basic economic vulnerabilities,'' says Mr. Gordon. He cites the federal deficit and the strong dollar (which is pumping up the trade deficit).
The dollar hit record highs last week against the British pound and the French franc, and the government reported Fridaythe merchandise trade deficit so far this year has passed $100 billion.
Mr. Gordon allows that stock repurchasing, as well as takeovers and mergers, will continue in '85 - especially with interest rates coming down, since it's easier to raise capital today. But he adds, ''You always have merger and aquisition activity. The question is where?''
Oppenheimer's Mr. Metz has some ideas. ''I see a wave of conglomerations or takeovers in the high-tech sector, which has been struggling.'' Venture capital is scarcer now, and technology is cheaper to buy than to start from scratch, explains Metz. He also expects mergers in the consumer nondurable and paper sectors.
Fishing for such candidates and buying only for potential takeover gains is a specialized and risky endeavor, warn advisers. Andrew Clapp, editor of the Ipswich, Mass., newsletter, Mergers and Corporate Policy, says, ''You're doing something one level below that of an arbitrager. The likelihood of scoring is relatively low. But the risk of making a bad investment can be relatively low if you're looking at a company with good fundamentals.''
So, one shouldn't buy a company primarily because it's a takeover prospect but because it is a sound investment. And patience is important, says Clapp. ''People will identify a candidate, and nothing could happen for one or two years. Often they sell out too early.''