URL: http://www.entrepreneur.com/article/26224
Let's face it: The stock market is on everyone's mind.
From cocktail parties to barber shops, around coffee machines and
on the Internet, people are looking for more than just facts.
Whether you're a devotee of talk radio or prefer your news
straight from the bull's mouth, what you don't know
can hurt you. There's information galore out there. The
problem becomes interpretation, although it's sometimes couched
in terms only a financial analyst can understand. So what are you
going to do?
For many investors, the answers to their financial prayers come
from a man known as the "Voice of Wall Street." Larry
Wachtel, a senior vice president and market analyst at Prudential
Securities Inc. for more than 30 years, has offered daily market
commentary on both Prudential's internal radio system and
all-news WINS radio in New York City. He is widely quoted on
investment trends in publications ranging from The Wall Street
Journal to The Christian Science Monitor, and he frequently
provides market commentary on CNBC.
Wachtel's background is in journalism-he received a degree from
New York's Long Island University-but he's best known for
his serious financial analysis delivered in terms beginners can
understand. He combines data from analysts, news wires and other
sources and adds a bit of his trademark humor. He informs listeners
in his patented "New Yawk" accent that "the rambling
wreck from high tech" is at the root of all evil in a recent
market pullback or suggests that investors "break out the
punch bowl and celebrate the activities of 'El Toro,' the
bull." He believes humor helps audiences understand and
remember the information he provides. In light of the market's
recent escapades-and with concern over the situation in Asia
increasing investor nervousness-we talked with Wachtel to get some
insight into the market and find out how investors can make the
most of what's happening in the world of investing.
Q&A Part 1
Entrepreneur: The stock market has been on a roll for a long
time. Do you think this bull magic will continue?
Larry Wachtel: I think it may slow down. Remember, we've
been doing this since November of 1994. In the process, close to $8
trillion of value has been placed in equities in the United States.
A so-called "bubble" or "mania" has taken place
in terms of equities. At this point, we're at a valuation level
that's the most extreme in history. That is, using the S&P
500 Index as your measuring stick, you're selling at
approximately 26 times trailing and 23 times projected earnings.
Those are the highest valuations in history, at least for the big
blue-chip stocks.
It's hard for me to believe that if you annualize this year,
which has gone up 16 percent in the first quarter, you come up to
60 percent. Since we're not going to do 60 percent, we have to
progress at a slower rate. The Dow has sojourned above 9,000-this
has been the fourth occasion [at press time]; it's been smacked
back three times. I think this region-the 9,000 area-is going to be
the trading range for a while.
Entrepreneur: Do you think there's some hope that the
Dow will reach 10,000?
Wachtel: I think that it will occur over time. We are at
such an extreme valuation that I would prefer to see the market
grind away a little bit and prepare for the future because the
higher you go without proper preparation, when the shake-out takes
place, it's even more vicious.
Entrepreneur: The crisis in Asia has made the U.S. market
fall in the past. Do you expect it to affect our market in the
short or long term, or is it completely taken care of now?
Wachtel: When it first took place in 1997, the first order
of business was to look at the banking system in several areas,
particularly in Hong Kong. If those banks were having difficulty,
that would have reverberated around the globe. But a combination of
IMF funding and some rational thinking on the part of financial and
political leaders has assuaged that particular problem. Then it was
a matter of how much their slowdown was going to affect their
economies and thereby affect their relationships with the United
States. It turns out that about one-third of our foreign trade is
done with Asia. On that margin, the crisis might be hurtful to some
companies.
Asia needs another year; I don't think it's out of the
woods by any means. I think Asia is still floundering, and there
are areas, such as Indonesia, that are really in turmoil. So I
wouldn't go rushing into Asia.
I think the impact of the Asian economic crisis on the U.S. economy
will be felt for several quarters to come. In a perverse way, that
will help, because the Asian problem has kept the Federal Reserve
Bank from tightening money against a surging domestic
economy.
My argument is that if it weren't for Asia, the Federal Reserve
would have raised rates last November when our economy showed signs
of improving significantly. Recognizing that Asia would affect our
domestic economy sooner or later, they refrained. Moreover, if they
had raised rates here, that would have weakened currencies in Asia
and exacerbated the problems there.
Q&A Part 2
Entrepreneur: What sectors of the U.S. market do you like
for the next few months?
Wachtel: The boom in the stock market has created excess
buying power, and it's certainly being reflected in sales
across the United States. I like computer stocks and some of the
real estate investment trusts.
Now, in a market as elevated as this one is, to a certain degree,
you should have defensive strategies. Real estate investment
trusts, with their high yields and rather limited volatility, are
one category.
Entrepreneur: What would you avoid?
Wachtel: I would avoid excess. For example, Internet stocks:
I think for average investors, these are simply too volatile. Also,
they should avoid stocks that have been involved in the recent
tremendous price increases. I would also be leery of interest
rate-sensitive stocks, like banks, because with this vigorous
economy and the threat of the Federal Reserve tightening, I think
these stocks have some vulnerability.
Entrepreneur: Some people are concerned that the market is
going to come down fast. Do you think it will?
Wachtel: One-third of this year's trading sessions have
seen the Dow move plus or minus 100 points, so right now you have
to live with the fact that the market, namely the Dow Jones
Industrial Average, is a wild and crazy thing. If it can fall 300
points in three days and rally 300 points in three days, then
it's conceivable that it can fall 700 points in a short period
of time.
I think people have realized these swings in the Dow are now the
norm rather than the exception, and they tend to buy on these dips.
So, sure, there could be shakeouts along the way. I think it's
part of the game we play here. But the bull market will continue
until fundamental factors make it end; namely, the profits dive in
a recessionary environment or inflation suddenly gets out of
control and interest rates rise, thereby creating an alternative to
stocks. But if you talk about week-to-week swings in the Dow,
welcome to the club-that's the way it's going to be.
Q&A Part 3
Entrepreneur: We've been talking about large-company
stocks so far. Do you expect small- and medium-company stocks to
rise?
Wachtel: They have. When people say the market has been all
big caps, they're missing the fact that the Dow has been all
big caps because it's a big-cap index. But there have been
movements in midcap stocks; there have been movements in small-cap
stocks. I have been on Wall Street many, many years. If you build a
better mousetrap, Wall Street will find a way to your door. There
have been great stories in small-cap mutual funds. So it's
foolhardy to believe this is a big-cap market. There are 9,000
stocks out there, and if you find one that's exciting with an
authentic growth story, you'll be rewarded.
Entrepreneur: You mentioned that if interest rates go up,
people might move money out of markets into other things. Is this a
good time to buy bonds?
Wachtel: I think it's marginal. I'm not a big fan of
bonds. On one hand, given the vigor of the economy, it's hard
for me to believe that bond yields are going to come down
dramatically from the current low bond level of around 6 percent.
On the other hand, given the modest inflation involved and the
reluctance of the Federal Reserve to tighten, I doubt a long bond
yield is going to rally up and hurt bonds. So you have the coupon
and a fairly safe investment, but it certainly isn't a very
dramatic investment.
Entrepreneur: Would you recommend that people stay with a
good- quality U.S. corporate or government bond as opposed to
high-yield or junk bonds?
Wachtel: They call them "junk bonds," and
that's a residue of the past, but these are usually fairly
decent companies that the rating services don't rate on a
quality standard. You often get returns 200 basis points above
treasuries. I would certainly not turn away from this so-called
junk bond market. I think there are excellent yield opportunities.
The junk bond people call it the "high-yield market," and
it is a high-yield market. Only if you get into a recessionary
environment can you make the case that high-yield bonds, or junk
bonds, could be dangerous. But we're far from that.
Entrepreneur: Why would a recession make junk bonds
dangerous?
Wachtel: Well, the reason they didn't get the high
ratings from the rating services is that they have marginal balance
sheets. If the economy falls away, those balance sheets would look
worse. If the economy remains vigorous, however, there would be no
problem investing there. These are economically vulnerable
corporations; that's why the rating services don't rank
them too high.
Entrepreneur: Do you think interest rates are going to stay
put?
Wachtel: I think so. I see a very narrow range for rates.
Maybe on the long bond yield down to 5.85 to 5.9, maximum 6.15 to
6.2 on the upside. I think the trading range will remain narrow, as
it has been for most of the year.
Entrepreneur: A lot of people invest in mutual funds instead
of buying individual stocks. Is that generally a good thing to do,
or should people who have a certain amount of money look toward
individual stocks?
Wachtel: The mutual fund technique is fine. There are 8,000
mutual funds. The problem is not appraising what you're after.
There are all types of funds; you have to decide which ones suit
you the best given your age, your conservative or aggressive nature
and what you want in the future.
Of course, funds have professional managers. When you deal with
individual stocks, there are so many surprises that come along on a
corporate level. If you plan to invest time and energy to try to
anticipate or adjust to those surprises, fine. But if you're
buying individual stocks without a warm body helping you, surprises
come along and suddenly you're down to 10 points.
The money manager in charge of each mutual fund has a staff to
address those problems and avoid those surprises. Hypothetically,
all investments look great, but in the real world where you
actually put your money on the line and you get emotionally
involved, it's not so easy.
Entrepreneur: It seems as though you can get all the
information you need on the Web.
Wachtel: Before there was a Web, there was a library, you
know. You could have gone to the library and gotten all the
information you wanted, right? Maybe you can get the information
more easily now, but you still have to assimilate it and decide
what investment conclusions to draw. You can read an annual report
and say "this is a great company" and not be aware of the
potential danger in terms of competition or obsolescence.
What you really need is someone who has been doing this for a
while. That's why the advice of individual brokers is so
important. Here at Prudential, we spend approximately $70 million
on research. And this has not just been thrown to the winds. It
means I have someone I can turn to who can assimilate all this
material and come to an investment conclusion and warn me if things
are going sour.
Entrepreneur: Tell us a little bit about load vs. no-load
funds. The chairman of the Securities and Exchange Commission has
said that load funds aren't a good investment, yet many no-load
funds are coming out with load fund alternatives. Which are
better?
Wachtel: You know, you're talking here about
commissions. You're not talking about investments. The most
important things are the manager of the fund and whether or not his
or her outlook correlates with what you're thinking. How has
his or her track record been through the bad times as well as the
good times? How have his or her investments resonated with your
philosophy? You've got to identify with the performance and the
manager, and then whether you pay a little more for the commission
is immaterial as far as I'm concerned.
Entrepreneur: People often invest in index funds because
they think the S&P 500 Index is the standard to beat.
What's the upside or downside of investing in an index
fund?
Wachtel: When you invest in the index, it's like betting
on all the horses in a race, and it's worked for the last
several years. The reason these funds can charge such low
commissions and low loads is that they really don't have to
have anyone monitoring these stocks. You simply buy the 30 stocks
in the Dow or the 500 stocks in the S&P, and that's it. The
day will come, however, when the market will turn down-and suddenly
you'll be sitting there with all these particular market
stocks, vulnerable to the overall market trend.