Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Tue, Mar 10 1992 Date: Tue, 10 Mar 92 05:44:45 EST Message-ID: 03-10 0000 BONUS: Infatuated investors spook pros USA TODAY Update March 10, 1992 Source: USA TODAY:Gannett National Information Network It's been five years since the last time silly season took hold in the stock market - a silly season that ended with the October 1987 crash. For years after that crash, investors - especially individual investors - swore off the market. Now, they're infatuated with stocks again. Few things spook market experts as much as increasing interest in the stock market by unchristened individual investors. WHAT'S FUNNY ABOUT SPECULATION NOW? Coming at a time when some key stock measures already look high, the surge of speculation by individuals is an eyebrow raiser. Stocks can continue to rally for months despite a decided move toward speculation. But those rallies can end without warning, as happened in 1987. WHAT'S BEHIND THE CURRENT RALLY? One reason for the current rally is that individuals are abandoning safe investments such as the money market and certificates of deposit and moving into the riskier world of stocks. The conservative stuff simply doesn't have appeal when it's paying only 3.5% to 5.9% a year. But the same people jumping into stocks now could jump out if stocks drop and they suddenly realize they can lose some of their principal investment. WHAT EVIDENCE IS THERE THAT INVESTORS ARE FEELING RISKY? Purchases of stock mutual funds continue to rack up at a fevered pace. Fourteen billion dollars rushed into stock funds in December and January, up from $831 million in December and January a year earlier. Meanwhile, the daring souls who buy stocks on their own increasingly are doing so with borrowed money: Investors were in hock with their brokers for $36 billion at the end of January, up from $27 billion a year earlier. HOW ARE COMPANIES TAKING ADVANTAGE OF THE DEMAND? Companies going public can do so with increasing ease, capitalizing on investors' eagerness to buy new stocks. Investors snapped up $4.6 billion in initial public offerinns by 87 companies the first two months this year, up from $870 million sold by 11 companies a year earlier. All sorts of companies are taking advantage of the demand for stock offerings. Evangelist Pat Robertson said last week that he plans to sell stock in his Family Channel television network. ARE STOCKS AT A CRUCIAL LEVEL NOW? Key measures of stock valuation are flirting with extreme levels. Dividend yields are the lowest since 1987, and the price-earnings ratio of the Standard & Poor's 500 index is up to 24 if you look at the most recent 12 months' earnings, 17 if you use rosy estimates of corporate earnings in the 12 months to come. That's the highest P-E based on latest-12-month earnings since 1933. P-Es got close to those levels in 1987 before the crash. HOW ARE SMALL-COMPANY STOCKS DOING? Small-company stocks, often a measure of speculative activity, have been booming. The NASDAQ composite index soared 19% the past six months on record volume, compared to a more modest 7% gain in the Dow Jones industrial average. Trading of small stocks also has jumped - from an average 175 million shares a day on the NASDAQ in February 1991, during the heart of the gulf-war rally, to 222 million shares a day last month. So intense is interest in small-stock mutual funds that Fidelity had to close its Low-Priced Stock fund Thursday. Its portfolio managers simply couldn't find enough small-stock bargains to accommodate all the money coming in. CAN BROKERAGES HANDLE THE RUSH: People are jumping at the chance to be a broker again. Dean Witter spokeswoman Kaye Ramsden says the brokerage has been "blown away" by the number of potential brokers showing up at recruiting sessions this year. "We had two in Atlanta recently that drew over 100 people each," she says. A typical Career Night a year or two ago drew about 20, she says. HOW ARE COMPANIES TAKING ADVANTAGE OF THE RENEWED INTEREST? New products are appearing in response to the rise of interest in investing. Chase has revived the idea of a certificate of deposit linked to the S&P 500 index. The last time it offered that sort of CD was in spring 1987 - about six months before the October 1987 stock market crash. And two magazines - Smart Money and Worth -were launched last month to cater to affluent investors. HOW LONG CAN THE SURGE LAST? Wall Street veterans stress that despite the evidence of emerging speculation, investors shouldn't panic. Even if silly season has finally arrived, it can last for some time, they say. Leslie Quick III of discount brokerage Quick & Reilly says only 52% of his firm's transactions are to purchase stock, and that's no sign of a top in the market. "I think we have at least a five-year window on this thing," he says of the rise in overall stock prices. "I'm not saying the Dow is going to 6000, but I think we're talking about a fundamental change in investors' psyches that says, `The equity market is OK.' " IS THERE A METHOD TO STOCK MADNESS? Quick would be more nervous if he saw customers charging into options trading. But those speculative trades have not been on the increase, he says. Bernard Schaeffer of The Option Advisor newsletter says options speculators are making far more bets that the market will fall than rise - a sign that options traders are not euphoric. "We're not seeing anything in options activity that leads us to believe there's a mania that could make us vulnerable to a crash or minicrash," he says. "We don't have the indicators in place that tell us it is late in the silly season." HAS THE STOCK BOOM PASSED THE CEILING? The froth that has become evident also has been contained, notes Schaeffer. The boom in biotechnology and health-care stocks last year fizzled in January and February, serving as a reminder to investors not to get caught up in future crazes. Even if investors don't learn from the way the biotech craze quickly was snuffed out, we could go from craze to craze for years, says Eveillard, who admits to having been far too conservative about stocks last year. "These things can go beyond the wildest imagination," he says. WHAT SHOULD INVESTORS BEAR IN MIND? But bear in mind that once silly season starts, stocks can fall quickly and without warning. Nobody can guess just when the stretched rubber band is at the snapping point. The first eight months of 1987, the Dow zoomed more than 800 points to 2722 Aug. 25. When the euphoria wore off, the Dow sagged almost 500 points in six weeks, then plunged another 508 points in the October crash. Adds Williams: "Tops are broad, and bottoms are very sharp. So, no way can you say that on a certain date, this whole thing is over." SHOULD INVESTORS STAY COOL? Quick says stocks may not keep jumping the way they did in December and early January, but long-term investors don't need to worry about a disaster. Even if investors are shifting a bit from the highly conservative stance they took after the 1987 crash, it's hardly as if they've gone hog wild, he points out. Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM