Money: Stock Bust


Just when it looked as though the US stock market was the place to be for the next year or so, the bottom fell out in early January. Though the phenomenon was naively attributed to the omniscient influence of Florida forecaster Joe Granville, it seems clear that the real reason was the evaporation of market confidence painfully built up by Ronald Reagan before and after his election. It was the anticipation of new flows of investment funds generated by tax-rate cuts that had given the stock market the juice to push the Dow over the 1000 mark.

Unfortunately, the mixture of seeming ineptitude in the Reagan transition team and backsliding from those crucial tax-cut promises seem to have quelled market exuberance for the time being. The Dow could easily retrace to 800 temporarily.

At this writing, it's still too early to say for sure whether or not the Reagan administration will renege on its relatively radical fiscal policy strategy and embrace orthodox Republican budget balancing. There's still time to regain the initiative and restore investor enthusiasm by making the tax changes necessary to provide incentives to savings and investment.

It depends on who within the administration and in Congress wins the ideological debate and Reagan's ear. If the Stockmans and Andersons and Kemps prevail over the (Donald) Regans and Greenspans, then the recent slump in blue chip stock prices will prove to have been just a buying opportunity preparatory to a dramatic upturn in US shares—especially those of smaller companies traded on the American Stock Exchange and in the over-the-counter market.

If the GOP opts for the old medicine that has failed repeatedly to generate either noninflationary prosperity or balanced budgets, then investors must once again turn reluctantly to the alternative investments that have been the main thrust of this column.

If, as now seems likely, Reagan follows the course laid out in Senate testimony by his designated Treasury Secretary Don Regan and allows inflationary tax-bracket creep to continue unabated, then the recent depressed precious metals prices will prove to have been the real buying opportunity. Foreign securities could then prove to be more attractive than domestic. And traditionally strong foreign currencies like the mark and Swiss franc could be set for a long overdue bull move, mirroring what has been happening to the Japanese yen.

Because it's so difficult to be sure, it is wise, as always, to have a diversified portfolio. Be in the US stock market, for sure, particularly in second-tier stocks in the high-technology industries. But also, despite the inconveniences associated with buying them, you might consider having a few foreign stocks—for example, those of resource-rich Australia.

South African gold stocks could be another strong consideration, because whatever else the Reagan administration does, it seems likely to take a more congenial approach to that nation. Given the explosive world situation, hold on to, if not add to, your "core holdings" of gold, silver, and platinum, with emphasis on the latter two. You can protect yourself against continued quiescence or weakness in the precious metals by writing call options on your holdings. Gold bulls should keep in mind that even $570 gold (or $15 silver) is very high in historical terms, though considerably down from the highs of a year ago. A period of consolidation of the 1979-80 gains is to be expected.

Consider some speculative purchases of the undervalued "hard currencies." Only futures contracts make much sense there. But don't abandon the dollar. Short-term US interest rates are apt to remain fairly high, so it seems wise to at least have deposits in a money market fund reflecting those rates, if not to lock them in longer-term via Treasury bills or certificates of deposit. Trades in the longterm bond market, though certainly not long-term possession, appear attractive, but they assume falling interest rates—a risky proposition that may not be entirely fulfilled.

There is a growing consensus that the United States and the world are entering a disinflationary period. Few are predicting absolute deflation. But a lessening of the rate of price increase is commonly prophesied. The recent collapse of commodity prices, as well as renewed hope for long-term bonds, seems to confirm this view.

This is to be hoped and prayed for, of course. But if the Reagan administration "hits the ground" crawling and groveling instead of "running" and shies away from bold fiscal policy changes while pumping up military spending, it could soon find itself presiding over $100-billion budget deficits. Hardly disinflationary.

We don't know what will happen. That's why any investment strategy must incorporate a mixture of hope and fear, optimism and pessimism. A good mix of investment vehicles and a willingness to shift weight from one to another will be the most profitable course in what promises to be a very volatile decade in all markets.

MONEY QUESTIONS Q. What are the differences among ADRs, IDRs, South Africa-registered, and United Kingdom-registered when purchasing South African stocks?

A. An ADR, which stands for American Depository Receipt, is a receipt for a like number of shares of foreign stock issued by a custodial bank. An ADR allows an American investor to trade in foreign securities without having to go through foreign brokers and foreign exchange transactions to purchase or transfer them. The disadvantage is that, in the event of foreign exchange controls or hostile relations with South Africa, it might be more desirable to have in hand the actual foreign shares, even though it is not quite as easy to buy and sell or to get delivery of the stock certificate.

As for "IDRs," in all honesty (after checking several sources) I'm not aware that the beasts exist. I can only guess that they might be foreign banks' counterparts to our ADRs.

As for South African- and United Kingdom-registered "kaffirs," the difference seems obvious. There has always been an active market for South African mining stocks in London, and the shares of the same mines and mining finance houses are often traded there as well as in Johannesburg. The difference is that in London they would be priced in terms of pounds instead of South African rands. Investors might find it a little easier to trade through a British bank or broker than through a South African one. For that matter, an American broker should be able to trade on either market, assuming the stock wasn't available in ADR form in the United States.

Steve Beckner is a free-lance financial writer, the editor of Deaknews, and the author of The Hard Money Book.