Salomon Shrinks; Small Stocks Grow

THE spotlight on Salomon Brothers Inc. has now shifted away from the investment house's government-securities trading desk to other key Salomon ventures, including its foreign-exchange operations and its bond arbitrage desk.One reason for investigators to take a broader view is that Paul Mozer, who ran the government trading desk, also managed the foreign-exchange desk. Last week Salomon concluded its own internal investigation of its government desk, but only after finding another possible bidding-auction violation - the company's eighth. Assuming that no additional serious violations are found, Salomon is expected to survive its current trading scandal, unlike E. F. Hutton & Co. and Drexel Burnham Lambert Inc. Hutton and Drexel disappeared in recent years following highly publicized scandals. Hutton was bought out by Shearson Lehman Brothers. Drexel bit the dust altogether. Salomon is far stronger than Hutton and Drexel. And Salomon's new chief executive officer, Warren Buffett, is given high marks for integrity. Still, Salomon has lost substantial underwriting business and lots of goodwill. It didn't help the investment house when the chairman of American Telephone & Telegraph Company recently said in public what many others have been privately saying: that Salomon's Treasury-auction violations showed "arrogant disregard" for ethical standards, and that AT&T was not inclined to give Salomon much business these days. Not unexpectedly, Salomon's stock has tumbled sharply. It's down from around $37 a share a year ago to the current $23 range. But the stock appears to be inching back up. Some industry analysts, such as Perrin Long Jr. of First of Michigan Corporation, see a much smaller Salomon. But other investment houses are also expected to be smaller, given the restructuring now under way on Wall Street. Salomon will release its third-quarter revenue and earnings results late this month, which are expected to underscore how badly the auction-bidding scandal has affected the company. Finally, will federal investigators give Salomon a clean bill regarding its non-Treasury bidding business? Anything less than an affirmative answer means new troubles for Salomon, and new pressures on its stock. On a happier note for Wall Street, small stocks have been looking good of late. Generally traded on the NASDAQ market, shares of smaller companies have consistently beaten both the Standard & Poor's 500 index and the Dow Jones industrial average this year. In a slow-growth economy, earnings and revenues of a small firm can jump far higher than comparable results for a huge company. Many small firms in specialized businesses - certain high-tech areas or health care - have enjoyed husky sales. The small stock/big-ticket stock differential may not end soon, even with a further easing of interest rates by the Federal Reserve Board and the historical market volatility of smaller stocks. Big consumer companies have a significant hurdle to growth: the unwillingness - or inability - of the consumer to open his or her pocketbook. Consumer nervousness is clearly linked to concerns about jobs and income. Personal income rose 0.5 percent in August, according to the Commerce Department. Still, many families were not sharing in the income gains. According to new analysis by Donaldson, Lufkin & Jenrette, the drop in the number of two-income families during the recent recession rivals the drops recorded in the downturns of 1980 and 1981-82. Consumers could theoretically be bailed out of the loss of income, or the perception of less weal th, by a new bull market in housing or a big jump in employment prospects. However, neither is expected to occur, concludes Donaldson, Lufkin & Jenrette. The bottom-line: given skittish consumers, many big blue-chip stocks face major hurdles for earnings growth. And that makes the smaller stocks very attractive, analysts say.

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