Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.forbes From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: STOCK TRENDS - MONEY & INVESTMENT Date: Wed, 18 Nov 92 14:52:03 EST Message-ID: "Copyright 1992 Forbes, Inc. Any further reproduction or redistribution without the express written permission of Forbes and ACC is prohibited." STOCK TRENDS - MONEY & INVESTMENT Good news for Clinton A strengthening economy, higher corporate profits and better dividend growth spell an improving stock market in spite of the election results. BY R.S. SALOMON JR. R.S. Salomon Jr. is chairman and chief executive of Salomon Brothers Asset Management Inc. and portfolio manager of Salomon Brothers Capital Fund Inc. Research assistant: Caroline Davenport. ALTHOUGH I started this column be- fore election day, I wrote it on the expectation that Clinton would be our next president. Thus his victory does nothing to change my view that 1993 will be a good year for investors. Even without the election uncer- tainties, gauges of sentiment suggest that investors are deeply troubled about matters economic, financial and political. With confidence at low ebb, prices of many issues have been hammered down by 30% to 40% at the merest whisper of disappointment. What has spooked investors? The economy is giving everyone some- thing to complain about. The now- realized prospect of a Democratic vic- tory was a major worry. Triple-dip- pers worry that we are headed back into recession. Consumer confidence is low and banks are reluctant to lend. Commercial real estate is in a depres- sion. Unemployment remains high. Then there are problems in the capital markets to fret about. Long- term interest rates have backed up. Global interest rate differentials are destabilizing the currency markets. Stocks do not appear particularly cheap by such traditional measures as price/earnings or market/book value ratios or dividend yields. The supply of new equity is great. Finally, the political situation here and abroad is unsettling. It is by no means yet clear what Clinton will do as President, but there isn't a lot he can do that would change economic prospects for the next several months. Amidst the prevailing gloom, it is worth remembering that periods of extreme sentiment typically repre- sent opportunities for those willing to swim against the tide for a time. The market is much more vulnera- ble when investors are bubbling over with optimism than when they are mired in despair. Today there is a strong case to be made for buying stocks. First, there is the economy. A reces- sion appears quite unlikely, but growth will be slow. The pace will likely be frustrating to all participants in the real economy. Such a gradual expansion, however, will also extend the horizon of the recovery. Con- straints on capacity--whether physi- cal or human--will not be reached anytime soon, and investors can look forward to several years of growth in place of a few dramatic quarters. Eco- nomic expansion, combined with the double-barreled beneficial impact of lower borrowing costs and reduced debt levels on corporate income state- ments, as well as improved productiv- ity, will produce a much more impres- sive rate of growth in corporate profits than most forecasters now predict. These factors will effectively turn 2 into 12: Despite real economic growth of about 2%, I expect aggre- gate earnings to rise by 12% to 15% in 1993 and 1994. Within the equity market, there are no obvious signs of speculative excess. Investors are responding viciously to earnings disappointments. Initial pub- lic offerings are being done--but not easily. Only 34% of investment news- letters are bullish--a low reading by historical standards. Finally, short in- terest is at record levels, both in abso- lute terms and in relation to daily trading volume. Cash in equity mutual funds is close to 10%, and rising. Short interest and cash levels are indicators of bearish sentiment--they are also mea- sures of potential buying power. What about all those new stock issues? It is true that they are swelling supply, but they are also producing much stronger corporate balance sheets. Companies are reversing the trend of the 1980s, when leverage was used in such spectacular excess. This massive debt-for-equity swap is much needed and long overdue. Moreover, the level of issuance is accommodat- ing those people who are no longer satisfied with the 3% yield offered them in money market funds. Corporate dividends payments have been stagnant for several years, but the ability to pay dividends is now improving substantially. Cor- porate balance sheets are stronger, and the outlook for earnings is im- proving. I expect the combination of these factors to boost annual divi- dend growth to 8% to 10% over the next several years. The presidential election will re- move rather than heighten uncertain- ty. In this sense, the election will be a stabilizing influence on the market. As uncertainties begin to dissipate and investors realize that fundamen- tals are improving, the market is more likely to break out of its trading range on the upside. I expect the market to provide a return of 10% to 12% over the next 12 months, push- ing the Dow to 3500 or 3600. A stronger economy, higher corporate profits and better dividend growth will all contribute to the upswing. Stocks I particularly like are Tam- brands (66), Jostens (29), Corning Glass (37) and ITT (66). 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