Forum Archive Index - April 2000

["Ben Dutton" <bendutton@sharechat.co.nz>]

Here's an interesting article from http://www.thestreet.com




Wall Streeters Warn Against 1987 Comparisons
By Brett D. Fromson
Chief Markets Writer
4/17/00 10:11 AM ET

Let's all take a deep breath and try to get a few things straight at a
confusing moment.

First, longtime Wall Streeters say that no matter what you read, view or
hear from the media, this is not October 1987. Yes, investors have lost
trillions of dollars in the past weeks and stand to lose more. And some of
those losses will be permanent - i.e., in stocks that have already seen
their all-time highs.

But the financial system is not in danger of collapse. That is a key
difference between today and 1987.

A leading bank stock investor, who declined to be identified, said, "The
banks are in very good shape going into this crisis. Real estate loans are
not bad. Their inventories of bonds have held up, unlike '87 when bonds were
declining for six months before the crash. Look, at the end of the day,
Chase Manhattan (CMB:NYSE - news - boards) may wake up and discover that the
venture investment business is not a profitable one for them, but failures
there will not put the bank under."

On the Tuesday after 1987's Friday crash and Black Monday, there were
legitimate fears that the financial system -- our banks, brokerages,
exchanges and other financial intermediaries -- were in danger. Banks and
brokerages carried far less capital than today. Risk management systems were
more primitive. The NYSE and the Nasdaq markets were far less able to handle
the volume of trading.

On the Tuesday after the crash, stocks opened sickeningly lower before
rallying. If the Tuesday rally had not come then, according to the then-CEO
of one of the top U.S. brokerages, "My firm and a lot of others would have
been out of business."

That is how close disaster was in 1987. That is why the New York Fed brought
the big commercial banks together to convince them not to pull their loans
to the brokerages. That is not the case today.

Today, we are seeing heavy losses in Asia and smaller but still significant
declines in Europe. The carnage is greatest is the tech sectors that
previously enjoyed the greatest run-ups. That is always the case. Less
speculative shares are in better shape and investors should not worry that
real companies are going to zero.

What will today bring? No one knows.

But one hard-core value investor based in Boston who has entered this
decline laden with cash and puts on the S&P doubts an '87 redux -- meaning a
sudden collapse.

"Valuations are ridiculous in much of the market. Most in tech but also in
some of the big cap stocks like [General Electric] (GE:NYSE - news -
boards), in my opinion. But the public wants to buy the dip so I expect this
decline to be longer than in '87," he said.

Another investment manager who was a young trader at Goldman Sachs in 1987
says, "The speculation in tech stocks far exceeds anything we saw in '87.
But many other stocks have been in a bear market for almost two years.

And corporate balance sheets are in far better shape than they were in '87.
And interest rates are lower than they were then."

The consensus of these grizzled investors? "Old Economy" stocks will ride
this out to the extent the shares are fairly-valued and new economy stocks
will remain vulnerable to steady declines for some time. To the extent the
old economy stocks run their businesses well and the economy does not tank
anytime soon -- and there are few signs of that -- they should be OK.

The ex-Goldman trader advised that investors take a step back and ask, "'How
much of my money should I have in stocks?' If you work and have $30,000 in
the market, even if you have already lost $10,000, ask yourself, 'Can I
afford to lose another $10,000?'"

If not, take some off the table in those shares in which you have the least
confidence.

(Later today, TSC will present a real portfolio of stocks held by a real
person to give readers some idea how a defensive portfolio of
meat-and-potatoes companies has ridden out the current downdraft.)




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