Taking stock

Entrepreneur, Sept, 1998 by Lorayne Fiorillo

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.

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 Shakeout 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.