Heard on the Street
Wall Street Gurus
See Few Signs of 1987

By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL

Ten years ago, Wall Street was wringing its hands over the overvalued stock market. Same thing today.

Ten years ago, analysts debated whether the old investment rules had somehow ceased to apply. Ditto today.

Ten years ago, the market peaked in August, then crashed in October. And today?

"This is nothing like 1987," insists PaineWebber strategist Edward Kerschner, whose models gave off strong warning signals before the crash.

"I don't see any comparison," concurs quantitative analyst and money manager Elaine Garzarelli, who issued a much-heralded warning to investors on the eve of the crash.

"Ten years ago was different," declares newsletter-writer Francis X. Curzio, who won sudden fame after his October 1987 edition warned of the coming crash.

A look at what market soothsayers were saying 10 years ago yields both insights and embarrassing memories. But one theme dominates: Whether they forecast the crash or missed it, most analysts now see few parallels between today's market, overvalued though it may be, and the 1987 market that was teetering toward the brink.

Goldman Sachs strategist Abby Cohen was at Drexel Burnham Lambert in those days, then as now a prominent bull. She acknowledges that she failed to foresee the crash. In August 1987, she recalls, Drexel warned of a possible 10% decline, but said corporate earnings would be strong and no one should adjust stock portfolios.

"Stocks remain the most attractive financial asset," Drexel advised in August.

On the Friday preceding the Monday crash, the Dow Jones Industrial Average lost 108 points and 4.6% of its value, and Ms. Cohen was quoted as saying, "We've been wrong." The pullback since August already was heavier than she had anticipated.

But, she notes today, "on the Tuesday after the crash, we went out and told people to very aggressively buy equities." Those who listened to her, even during the crash, did far better than skeptics who got out before the crash and stayed out.

She says that today looks nothing like 1987. Back then, interest rates were rising, inflation was heating up and the 30-year Treasury-bond yield was above 10%. These days, inflation is benign and the long-bond yield, although up a bit lately, still is only about 6.65%.

Skeptics say Ms. Cohen is making the same mistake today as in 1987. By measures such as price-earnings ratio or dividend yield, they note, the market today is more expensive than it was then. Some mutual-fund managers fear that this month's heavy market swings signal a severe drop. The most pessimistic analysts worry that the use of borrowed money to invest, together with the use of options and other derivatives, could produce something similar to the events of 1987.

"I think there is a risk of a serious disorderly decline," says longtime bear Michael Metz, chief investment strategist at Oppenheimer & Co. He calls the current situation "extremely dangerous."

Most analysts, however, maintain that the market looks expensive compared with 1987 only if you fail to adjust for today's low interest rates. Once you do that, Ms. Cohen says, her models show the Standard & Poor's 500-stock index fully valued today. By comparison, they show that it was 30% to 40% overvalued in the summer of 1987. Her view: The market may remain choppy for a while as it digests its high prices, but as people start looking ahead to 1998 earnings stocks will move up.

"I don't think the end of the bull market is yet in sight. I think 1998 will be another good year," she says. But she adds, "I don't want to suggest to anyone that I know what the returns are going to be for the next three months."

She favors smaller stocks and some cyclicals, such as auto companies, airlines and certain retailers.

PaineWebber's Mr. Kerschner says that in the summer of 1987, bullish analysts simply ignored normal valuation techniques. They justified high stock prices by pointing to foreign investment inflows or the values companies would command if taken private.

His valuation models, based on corporate earnings and interest rates, then recommended that investors put just 6% of assets in stocks-compared with a normal position of 60%. Yet the market kept gaining.

He finally had to write an internal memo explaining to the firm why his models weren't working. "We said it might be our last memo," he recalls.

Then came the crash.

Today, Mr. Kerschner anticipates falling interest rates and believes that competitive multinational companies still are the place to be. These days, the lowest stock position he ever recommends is 40%. His models currently call for 54% stocks, below average but not the minimum.

Like Ms. Cohen, he thinks the market is fairly valued today. His solution: "We think that bonds at 6 1/2 % are a better risk-reward than stocks."

Perhaps the biggest reputation made by the crash was that of Ms. Garzarelli, then at Shearson Lehman Brothers. In television appearances and phone calls shortly before the crash, she warned investors of trouble coming.

Today she manages money and writes research on her own, through Garzarelli Capital of Boca Raton, Fla. Although she says she has $1 billion under management, she has developed a reputation for making too many bear calls -- notably a much-publicized warning a year ago of a market setback that failed to materialize.

Her mass-market newsletter's circulation has slid and last month her publisher, Phillips Publishing, said it was considering dumping the newsletter. Phillips now won't comment and Ms. Garzarelli says her decision on continuing the newsletter depends on "how busy I get." She has just started a mutual fund and also writes a detailed monthly report for institutional investors.

Ms. Garzarelli, who says her 1996 bear call was a mistake based on flawed data from corporations, now is bullish again, although she lately cut her portfolio recommendation to 65% stock and 35% bonds, from 75-25 in January. She likes technology, drug, banking and insurance companies.

As for today's stock market, "It is a completely different world than it was" in 1987, she says. Aside from interest rates, she notes that the government deficit as a percentage of gross domestic product was far higher then, the Japanese bond market had just crashed, the dollar had been falling sharply, and investment advisers were showing far greater signs of irrational bullishness.

One of those embarrassed in 1987 was Morgan Stanley strategist Byron Wien, who before the crash maintained that foreign liquidity would hold the market up. Now he is forecasting a 20% drop from this month's highs. But he doesn't think that will begin until a resurgent economy forces interest rates up, and he doesn't see any sign of that yet. He, too, has lately been accused of making too many bearish calls. And he, too, sees few parallels with 1987.

Once the market completes the pullback that he foresees, he says, "I still think we are going higher -- ultimately -- but just not as soon as people think."

Someone who had 15 minutes of fame in 1987 was Mr. Curzio, whose small newsletter, F.X.C. Investors Corp. Update, forecast the crash at the start of October. He advised readers to put at least half their money in cash.

"This month's crash could be worse than the prior three crashes combined," he warned.

Mr. Curzio got so much attention that he went into the money-management business, and today looks after about $44 million. Now he thinks the Dow Jones Industrials could fall as much as 1500 points, with fair value around 6500.

But he still has a buy on stocks, with a special preference for those that haven't gained as much, such as General Motors, Ford Motor and USX Corp.

"I don't see another crash now, although I think we are at least 20% overvalued on the Dow," he says. With all the retirement money going into the market, he adds, "We may stay overvalued for many years going out."