Asset Allocators: If It’s Hot, They’re Hot

In 1987, such tactical asset allocation formulas sounded alarm bells that stock prices were too high, allowing clients to exit the market before the October crash. Thanks to the timely warnings, the coffers of money management firms using asset allocation strategies have swelled to an estimated $40 billion. “On the surface, tactical asset allocation appears to have worked in 1987 and failed in 1988,” says money-management consultant Budge Collins. Nine of 10 asset allocators followed by Mr. Collins’s Newport Beach, Calif., firm beat the Standard & Poor’s 500 stock index in 1987, while only two did last year. “Everyone, including us, has underperformed in the last two quarters,” says Edgar Peters, head of tactical asset allocation for Boston Co., a unit of Shearson Lehman Hutton Inc. and one of the largest asset allocators. Big investors haven’t soured on the strategy yet, he says. But “now there’s more of a wait-and-see attitude” toward tactical asset allocation compared with 1988, when it was one of Wall Street’s hottest investment recipes.
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By James A. White

Full text: [Wall Street Journal] May 16, 1989

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Stock prices advance on hopes of lower interest rates

U.S. analysts attributed Friday’s 56.82-point surge on Wall Street to a government report of a smaller-than-expected 0.4-per-cent increase in the producer price index of finished goods for April. Yesterday’s movement on the markets was a continuation of Friday’s jump, said Ira Katzin, a Toronto analyst with Merit Investment. In Montreal, 4.24 million shares changed hands, compared with 5.83 million Friday. The mines index rose 18.5 to 1928.27, industrials 9.92 to 1615.41, oils 8.13 to 1612.04, utilities 6.41 to 1519.58 and banks 5.35 to 1895.98 while forest products remained unchanged at 3060.22.
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Full text: [The Gazette] May 16, 1989

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A “melt-up,’ maybe

We mention this because it might help explain the recent big surge of the Dow Jones industrial average. The Dow soared 52.82 points Friday, then another 24.19 points yesterday, to a new post- crash high of 2463.89. So maybe the melt-up has begun. What they have been waiting for is some firm sign that the Federal Reserve Board is succeeding in its months-long effort to cool the economy with high interest rates and thereby curb inflation. When inflation starts easing, the Fed can be expected to let interest rates move lower, too. That is normally a strong stimulus to bond and stock prices.
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Full text: [Telegram & Gazette] May 16, 1989

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Market Place; A Top Strategist Is Turning Bullish

Mr. [Steven G. Einhorn] now believes that the economy will continue to grow slowly and that the Federal Reserve Board can reduce interest rates, a healthy scenario for stock prices. ”We don’t envision money tight enough to deliver a recession,” he said. Such a scenario, popularly known as a ”soft landing,” should make stocks more attractive than short-term investments. Yesterday, Mr. Einhorn told his money management customers to raise the level of stocks in their all-stock accounts to 80 percent from 65 percent and in their balanced accounts to 52 percent from 40 percent. Mr. Einhorn conceded that the market strength this year was a surprise. ”I wouldn’t have thought the market could do what it did,” he said. But he said his change was not induced by the market’s rally. ”I don’t view it as a capitulation because it wasn’t a rising market that forced me to do it,” he said. Behind Mr. Salomon’s change was a recognition that the economy’s slowdown and corporate earnings stronger than he anticipated would provide what he called a ”benign environment” for stocks.
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Wallace, Anise C.

Full text: [New York Times] May 16, 1989

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Reel Life

New World Entertainment (Santa Monica, California) was bought out for the 2nd time in mid-April for $145 million by the Andrews Group. Stock jumped from $2 a share to $8.50. New World was expected to go bankrupt, but Bob Rehme, chief executive officer, and cochairmen Larry Kuppin and Harry Sloan slashed overhead by 65%, cut their film staff from 25 to 2, and started selling off scripts and screenplays to other studios and producers. With New World’s bond restructuring in October 1988, New World cut its debt from $285 million to just under $50 million by buying up debt at 35 cents a share, handing out a new collateralized bond worth 43 cents of every old bond, and selling off Marvel Comics for $89 million. Some $200 million in junk debt was eliminated with only $115 million. By 1988, New World’s video outfit could make money on almost every film in its distribution system. The successful television shows “Wonder Years” and “Santa Barbara” are also assets.
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Wrubel, Robert

Full text: [Financial World] May 16, 1989

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Hired Hangar

Common stock in AAR Corp. (Elk Grove, Illinois), the only pure play in aircraft maintenance, was up 32% in 1988, and the stock is up another 13% so far in 1989. AAR’s price-earnings multiple of 18.5 is at a 50% premium to market. With airlines operating at capacity, rather than build workforces that could be a burden in a downturn, they are relying on companies like AAR. Over 60% of AAR’s sales come from the sale or lease of aircraft components. Five years ago, AAR started leasing aircraft and can now claim over 30% margins renting out $100 million worth of aircraft. With debt down to 15% of capitalization as net worth doubled in the past 5 years, the company could make a major move into aircraft service or related fields. With so little debt, however, AAR could attract a raider. Chairman and Chief Executive Officer Ira A. Eichner has instituted a shareholder rights plan as a poison pill and increased the number of authorized shares by 50%, only a quarter of which are outstanding.
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Dubashi, Jagannath

Full text: [Financial World] May 16, 1989

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Consolidated Papers: Family Knows Best

Despite record profits of $150 million in 1988, stock prices for Consolidated Papers have dropped 15% since July of that year. Fears of the cyclical nature of the paper industry are apparently to blame, but Consolidated makes coated paper, which is a more profitable and steady business than commodity paper. The company and its financial situation are briefly examined.
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McGough, Robert

Full text: [Financial World] May 16, 1989

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Optimism reigns as stocks race to post-crash high

Stock prices surged again Monday, as traders cited growing confidence that the economy can achieve a so-called soft landing, avoiding a recession and worsening inflation while interest rates decline. Not even a selloff in Hewlett-Packard, sparked by a disappointing quarterly earnings forecast, dimmed the market’s optimism as the Dow Jones industrial average climbed 24.19 to 2463.89, another post-crash high. In the last two sessions, the Dow has gained more than 81 points. The Fed’s policymaking committee, the Federal Open Market Committee, is scheduled to meet Tuesday, and many believe it will confirm a lower federal funds target rate, analysts said. The federal funds rate, at which banks lend each other money overnight, is a key gauge of the direction of interest rates.
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Chicago Tribune wires.

Full text: [Chicago Tribune (pre-1997 Fulltext)] May 16, 1989

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Dividend Indicator Yields Crop of Critics — They Say Figure Ignores Buy-Backs

This indicator is the market’s dividend yield. It’s a percentage figure, computed by dividing a market index into the average annual cash dividend paid by companies in that index. The market’s yield sinks as stock prices climb. When the dividend yield on stocks is low — especially compared with yields on alternative investments such as bonds and Treasury bills — it’s a bad sign for the market. From this traditional viewpoint, the current dividend yield on Standard & Poor’s 500-stock index of about 3.5% makes the market look vulnerable to a downturn. “Current dividend yields are misleading because there is some buy-back activity making that average dividend appear too low,” says Gary Brinson, president of First Chicago Investment Advisors. In theory, stock buy-backs affect investors in the same way as extraordinary dividends. The only difference is the form of the payment, he says: Dividends give investors cash in hand, while buy-backs boost share prices by reducing the amount of a company’s stock outstanding.
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By Barbara Donnelly

Full text: [Wall Street Journal] May 17, 1989

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Japanese company pays after deal with Pickens

Some Japanese saw Mr. [T. Boone Pickens]‘ move as an attempt to manipulate [Koito]‘s stock price. Mr. Pickens has claimed his purchase of Koito stock was purely a long-term investment, and the difficulties he has faced since becoming the company’s largest shareholder are now an issue in U.S.- Japanese trade relations.
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Full text: [The Globe and Mail] May 17, 1989

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New, Improved Auditor’s Letter May Hide Cautionary Red Flags

A “subject to” auditor’s letter was considered a qualified opinion of the financial results. It often led to negative comments from securities analysts and sometimes sent a company’s stock price tumbling. But last year, the Auditing Standards Board, the chief audit rule-making body, rocked the world of accountants and securities analysts by enacting changes. The board dropped the “subject to” opinion and now permits an auditor simply to disclose the company’s problems in the letter. Consider the opinion of Deloitte Haskins & Sells on the 1987 financial statements of Armco, a steel and insurance company. Deloitte’s opinion questioned whether Armco could recover its investment in a property and casualty insurance company that it intended to sell. The 1987 opinion said that “subject to” any adjustments in profit after the sale, the financial statements “present fairly the financial position of Armco.” This was considered a qualified opinion.
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By Lee Berton

Full text: [Wall Street Journal] May 17, 1989

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Mutual Shares to Pull In the Welcome Mat as Stock Prices Rise

The $3 billion Mutual Shares Fund, along with its $1.3 billion sister fund, Mutual Qualified, will be closed to new accounts June 1. Both funds will continue to accept money from existing shareholders. And the $291 million Mutual Beacon Fund won’t be affected by the move. All three funds are managed by Heine Securities Corp. in Short Hills, N.J. Mutual Shares is the second big fund to take such a step in recent days. Last week, Vanguard Group Inc.’s $7.2 billion Windsor Fund announced it would close to new clients after briefly opening its doors a crack. Earlier in the year, the $188 million FPA Paramount Fund also shut out new investors after a respite.
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By Michael Siconolfi

Full text: [Wall Street Journal] May 17, 1989

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Profit-taking pushes Dow down 10.44

Stock prices fell Tuesday as investors took profits following strong gains of the past two sessions. The Dow Jones industrial average fell 10.44 points to 2453.45. Broader indexes declined slightly. Losers beat gainers by 784 to 702 on the New York Stock Exchange, where volume was 173.1 million shares. Behind the market: Following a two-day surge that took the Dow up 81.01 points (3.4%), the Dow opened lower at the outset, falling 8 points on profit-taking. Selling continued through noon, when the Dow was off nearly 14 points. The Dow rallied by late afternoon, trimming the day’s loss to 6 points by 3 p.m. before dropping a bit in the final hour of trading.
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Patrick Chu

Full text: [USA TODAY (pre-1997 Fulltext)] May 17, 1989

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Deathwatch–The Last Strategy

Occidental Petroleum is one of several companies whose stocks are the target of a “deathwatch.” False rumors that Chairman Armand Hammer is ill sent stock prices up in anticipation of a restructuring or takeover.
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Strauss, Gary

Full text: [USA TODAY] May 17, 1989

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Stocks down on profit-taking Series: business digest

NEW YORK – Stock prices pulled back Tuesday amid selling to collect profits amassed during the previous two strong sessions. The Dow Jones average of 30 industrials, which ran up a gain of nearly 82 points on Monday and Friday, finished with a loss of 10.44 points at 2,453.45. Declining issues outnumbered advances by about 7-to-6 in nationwide trading of New York Stock Exchange- listed stocks. Volume on the floor of the exchange came to 173.1-million shares, down from 179.35-million in the previous session. GAINESVILLE – Florida’s population growth dipped to under 30,000 a month at the end of 1988 for the first time in more than four years, according to University of Florida economists. The university’s Bureau of Economic and Business Research said the latest figures represent a 2.8 percent annual rate of increase, down from 3 percent the previous quarter. Florida’s population growth rate is expected to decline into the next decade, partly due to slower economic growth, economists said. Population growth in the Tampa- St. Petersburg-Clearwater area was 2.4 percent.
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Full text: [St. Petersburg Times] May 17, 1989

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Stock prices decline after climbing 4 straight sessions; Dow off 10.44

Stock prices fell Tuesday after climbing for four consecutive sessions, and the Dow Jones industrial average declined 10.44 to 2,453.45. Traders said the pullback was to be expected after the Dow’s recent run-up, which included Friday’s 56.82-point surge, the Dow’s best one-day move in almost a year. In the four sessions before yesterday’s, the Dow gained 92.56 points, reaching 2,463,89, its highest level since the October 1987 market crash. One technical analyst pointed out that the Dow yesterday “traded within” the range it set on Monday; in other words, the Dow did not fall lower than its low point on the previous day. This analyst said “90 percent of the time that means the Dow will go to new highs” in the next session.
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Full text: [Star Tribune] May 17, 1989

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Cray stock price drops 10% // Wall Street cool to announcement of split into 2 computer companies

Cray Research also will compete in new ways. Yesterday it announced an agreement to work with former archrival Control Data Corp. by furnishing supercomputers for some Control Data government contracts. Control Data recently closed its ETA Systems supercomputer subsidiary after it lost $100 million last year. Control Data said it will include Cray supercomputers along with its own equipment when it bids on some government contracts. Cray Research would act as a subcontractor. At yesterday’s annual meeting at the Lutheran Brotherhood building in Minneapolis, Cray Chairman John Rollwagen told an overflow crowd of more than 500 that the differences between the two companies – Cray Research of Minneapolis and Cray Computer of Colorado Springs, Colo. – will reflect the two corporate cultures that have grown up side by side inside Cray Research. The new company will be headed by Seymour Cray, the founder of Cray Research. Cray Research said Monday that it would spin off its Cray-3 supercomputer development project, a brainchild of Seymour Cray, into a new publicly owned company, Cray Computer. Current shareholders will receive 90 percent of the stock in the new firm, while Cray Research retains 10 percent ownership. The stock distribution plan, which requires government approval, would leave stockholders with the same combined ownership in the two companies that they now have in Cray Research.
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Steve Gross
Anthony Carideo
Staff Writers

Full text: [Star Tribune] May 17, 1989

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Low Stock Prices Make First Fidelity Takeover Bait: CEO

The CEO of First Fidelity Bancorp (Newark, NJ), Robert R. Ferguson Jr., believes that his company may be targeted for a takeover. A fourth-quarter loss of $190 million, due to some problem loans, has made the superregional banking company’s stock price low and therefore attractive. The acquisition price would be approximately $2.5 billion.
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Matthews, Gordon

Full text: [American Banker] May 17, 1989

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Low Stock Prices Make First Fidelity Takeover Bait: CEO Series: 3

Most analysts consider an acquisition of First Fidelity to be unlikely, but not impossible. “The price would be in the neighborhood of $2.5 billion, and there are some foreigners that could do that,” said Nancy A. Bush, regional banking analyst for Dean Witter Reynolds Inc., New York. The tumble was especially dramatic, Mr. [Robert R. Ferguson Jr.] said, because First Fidelity had been until then a “story stock” touted by a number of Wall Street firms following its merger with Fidelcor Inc., Philadelphia. ‘One-Shot Situation’ After the discovery of problem real estate and international loans in the Philadelphia bank last December, Harold W. Pote, the highly regarded 42-year-old chief executive of the merged firm, resigned under fire. Mr. Ferguson, who had been on track to retire, stepped back into the leadership role.
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GORDON MATTHEWS

Full text: [American Banker (pre-1997 Fulltext)] May 17, 1989

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Is the Stock Market Overvalued? Top Regulators Now Aren’t Saying

After the Dow Jones Industrial Average crashed 508 points on Oct. 19, 1987, regulatory heavyweights from Federal Reserve Board Chairman Alan Greenspan on down explained that the market had plunged essentially because it was too high. Take the Fed. In February 1988, Mr. Greenspan told the Senate Banking Committee that, with 1987′s rise in stock prices, “The market plunge was an accident waiting to happen.” But Mr. Greenspan declined, through a spokesman, to apply foresight to the market as he once had hindsight. Then there’s the Treasury Secretary, Nicholas Brady. Back in December 1987, when he was presiding over the presidential task force analyzing the crash, Mr. Brady explained that event by saying that “the stock market was incredibly high, by all the standards that we measure it by.” But Mr. Brady also declined to share his current measurement of the market.
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By Thomas E. Ricks

Full text: [Wall Street Journal] May 18, 1989

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